34 There are no comparable institutions in Norway – there is only one central bank. The benchmark must be international best practice. The evaluations are generally performed by international central banking experts or economists at other central banks. 30  See for example Bruce Chapman (2003): “Rational Choice and Categorical Reason”, University of Pennsylvania Law Review 151(3), 1169–1210 and Philip Pettit (2001): “Deliberative Democracy and the Discursive Dilemma”, Philosophical Issues (supplement to Noûs) 11, 268–99. 31  See the discussion in Carl Andreas Claussen and Øistein Røisland (2010): “The discursive dilemma in monetary policy”, Norges Bank Working Paper 2010/5. It should be noted that premise-based decisions can be vulnerable to strategic behaviour. It is possible to vote on the premises in such a way as to reach a preferred outcome. 32  The material on which interest rate decisions is based is published on the Norges Bank website. For a more detailed discussion, see “On transparency” in Norges Bank Occasional Paper No. 41 (2010). 33  Reports from Norges Bank Watch are available at: http://www.bi.no/en/Research/Research-Centres/Centrefor-Monetary-Economics-CME/Norges-Bank-Watch/  34  See inter alia David Longworth and Asbjørn Rødseth (2003):“Report on the Decision-Making Process and the Strategy Document”, Hans Genberg, Charles Wyplosz and Andrea Fracasso (2003):“How do central banks write? An Evaluation of Inflation Targeting Central Banks” and Ingimundur Fridriksson (forthcoming): “The Monetary Policy Report Process in Norges Bank”. 8  BIS Review 147/2010  7. Was the decision good?

For the stylised bank, its 50-year best intentions could be invalidated within 24 hours. In that event, amortised cost would be a very misleading valuation convention. The bank’s entire asset portfolio ought really to be valued at market (and potentially fire-sale) prices. For a bank with long-maturity illiquid assets, these differences in valuation convention could have a material impact on solvency. They may even be the difference between solvency and insolvency. Had their loan books been marked to market during the crisis, UK banks would have had significantly negative net worth for a protracted period (Chart 2). Most global banks would have been in a similar position. As the maturity of banks’ liabilities was low and falling during this period, this marked-to-market thought-experiment is not as fanciful as it may sound. Three implications follow. First, it underscores the importance of liquidity regulation. This aims to close any maturity mismatch across the balance sheet. For example, the purpose of the net stable funding ratio, agreed as part of Basel III, is to correct mismatches calculated across the whole balance sheet. Second, there is a debate underway internationally about the appropriate criteria for defining the boundary between banks’ trading books and banking books for regulatory purposes. Currently, the regulatory boundary is based on banks’ trading intent. Yet as the stylised example demonstrates, holding intentions may be an economically incoherent basis for valuation. There is a strong economic case for moving away from the existing intent-based convention for differentiating banking and trading books.