We are not there yet. Banks’ equity capital accounts for 6 per cent of total assets. This is low from a historical perspective, but not compared with banks in other countries. Banks are procyclical. They amplify business fluctuations. During an expansion, loan losses are low and bank earnings increase due to higher turnover. Capital is readily available. During a downturn, bank losses increase, and earnings and access to equity capital may deteriorate, forcing banks to tighten lending. Norwegian banks need more capital in the period ahead to enable them to absorb expected and any unexpected losses and to satisfy tighter counterparty capital requirements. The government’s offer to supply core capital through the Government Finance Fund will now allow banks to improve their financial strength without rationing credit. There must be no doubt that the banks have the capital they need. The measures I have discussed have been implemented to lessen the effects of the financial crisis. Another question is which lessons we can draw. The authorities in many countries are now working towards increasing the robustness of financial markets. Four points stand out. First, for a given risk assessment, banks must be subject to higher equity capital requirements. Banks calculate their capital requirements based on internal risk models. The models capture historical loan performance. The capital requirements are determined by the degree of credit risk exposure as derived from this historical performance. One drawback is that the historical basis for the models, and hence for the risk assessments, is too limited.

In November, they described the turnaround as a “heart attack”. Government authorities worldwide have taken comprehensive measures designed to improve banks’ liquidity and solidity, boost demand for goods and services and restore the smooth functioning of credit markets. In several countries, central bank benchmark rates have been set at close to zero. In Norway, a series of measures have also been implemented to mitigate the impact of the financial crisis. Norges Bank has supplied more liquidity to banks and eased the collateral requirements for loans. We have provided liquidity at longer maturities, introduced foreign exchange swaps involving both the US dollar and the euro in order to supply Norwegian krone liquidity, and loaned US dollars to Norwegian banks, which we ourselves procured from the Federal Reserve. Norges Bank’s key policy rate has been reduced by 4.25 percentage points to 1.5 per cent since 15 October 2008. To facilitate banks’ access to funding, the government has provided banks with access to liquid government securities in exchange for covered bonds issued by mortgage companies. Moreover, the government has increased loans and guarantees for Norwegian exports and raised state bank lending quotas. At the same time, Folketrygdfondet has increased its bond purchases. In order to bolster banks’ solidity, the government plans to supply risk capital to Norwegian banks through the Norwegian State Finance Fund. To restrain the decline in activity in the Norwegian economy, central government expenditure will be increased by 10 per cent this year.