As European central banker, supervisor and scholar of the law I will be even more forceful: our mandate requires us to be ready. 1. “The looming legal showdown on climate justice”, Financial Times, 10 November 2022. 2. Article 2(1)(a) of the Paris Agreement. 3. Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 (“European Climate Law”) (OJ L 243, 9.7.2021, p. 1). 4. Recital 25 of the European Climate Law. 5. Article 5 of the European Climate Law. 6. Case C-11/00, Commission v ECB, EU:C:2003:395. 7. Article 284(3) TFEU and Article 15.3 of the Protocol on the Statute of the European System of Central Banks and of the European Central Bank. 8. Articles 127(1) and 130 TFEU. 9. “ECB presents action plan to include climate change considerations in its monetary policy strategy”, press release, ECB, 8 July 2021. 10. Currently under revision. See Proposal for a Directive of the European Parliament and of the Council on the energy performance of buildings (recast) COM/2021/802 final. 11. See “ECB Banking Supervision – Assessment of risks and vulnerabilities for 2021”, ECB, 2021. 12. See Guide on climate-related and environmental risks, ECB, November 2020. 13. Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks, and amending Directive 2014/59/EU (COM/2021/663 final). 14. See also Articles 73 and 74 CRD VI.

Norges Bank has therefore devoted considerable resources to developing a suite of models for analysing this interaction. Somewhat simplified, the interplay can be illustrated by developments during the previous banking crisis in the early 1990s in Norway. Households had accumulated excessive debt at that time. They had to tighten spending in order to reduce debt. They increased their financial saving markedly and reduced spending on consumption and housing investment correspondingly. This resulted in a sharp fall in earnings among companies that provided goods and services to households. Banks sustained substantial losses on their loans to these companies. Bankruptcies and lower activity resulted in lower household income and further spillovers to the economy. Such interaction effects are important in explaining that financial crises tend to follow in the wake of imbalances in the property market. It is difficult to determine with certainty when asset prices exceed levels that are not sustainable over time. Nevertheless, a long period of debt-financed increases in house prices seems to be a potent signal of a build-up of risk in the financial system, a signal that should be taken seriously. If we can restrain the build-up of such imbalances, we also reduce the risk of financial instability. The question can be raised as to whether the interest rate should be used to a further extent in preventing the build-up of systemic risk. Higher interest rates can curb the rise in both debt  BIS central bankers’ speeches  3  and house prices during an economic upturn.