BIS Review 119/2009  3  The winding down of extraordinary measures has started In Norway, it has been appropriate to start winding down the unconventional measures earlier than in other countries. In recent months, liquidity has not been supplied through the currency swap lines or liquidity in foreign currency. Loans at long maturities have not been provided since February – several of the loans have now matured. As the markets are now returning to normal, the supply of liquidity will be adjusted so that the money market rate reflects the key policy rate. We want the banks to redistribute liquidity in the interbank market. The underlying structural liquidity in the banking system, i.e. liquidity excluding Norges Bank’s liquidity provision, has been negative in recent years. Structural liquidity was influenced by ingoing and outgoing payments via the government’s account in Norges Bank and is projected to increase ahead, primarily because the government can partly finance increased lending to state banks, payments from the Government Bond Fund and the State Finance Fund and share subscriptions by drawing on their large deposits in Norges Bank. The banking system’s demand for central bank loans can then decrease considerably. The swap arrangement involving covered bonds in exchange for government securities has made a considerable contribution to securing banks’ long-term funding. This spring we saw that the covered bond market started to reopen. The minimum price in the swap arrangement is thus adjusted to the interest rate forming in the market.

The emphasis here is that a good macro-surveillance framework must balance technical excellence and technical complexity with sound rationale and good qualitative judgment in order to make real contribution to policy decision. The robust framework of risk-based supervision such as Basel II places a strong technical demand on supervisors not only on Pillar I but also for the Supervisory Review work in Pillar II, which requires dynamically assessing on-going risk and changing risk profile of financial institutions. Therefore, macrosurveillance, stress-testing, as well as model validation, will fast become the norm for good risk management. BIS Review 98/2007  1  Macro-surveillance and its parallel policy framework – especially macro-prudential policy – are now exciting fields for central banks and supervisory agencies. But in my view, the needed pioneered framework is yet to be developed. The quantitative models and tools so far are at its early stage of development compared to those more established in monetary policy, such as the inflation targeting framework. The frontier work currently undertaken by central banks of advanced economies are, for example, developing macro-stress testing model which incorporates interlinkages between financial and real sectors. Such work is quite demanding due to the complexity of the evolving linkages and behaviour linked to rapid developments in economic and financial sector, and all the more so with globalisation. In response, community of experts are emerging, and many such experts are now using virtual network such as stress-testing internet platform to share knowledge and experience.