Banks that use the internal rating systems are required to consider longer-term horizons in assigning ratings, and to estimate risk parameters as long-run averages or to reflect downturns. Finally, they are also required to carry out stress tests under conditions of simulated recessions. Following on from this last point, as banks are required to perform a meaningfully conservative credit risk stress test, they will hold capital buffers that make regulatory capital requirements less of a constraint. Pillar 2 will also enhance this precautionary behaviour. At present, actual capital held by most banks is, in general, well above minimum regulatory requirements and there is some empirical evidence of a negative relationship between the capital buffers and the cycle, although the magnitude of this effect is more disputed. By promoting sounder practices for risk assessment, Basel II creates incentives for more forwardlooking capital management through which banks will fully recognise the benefits of a prudent strategy of capital accumulation from an intertemporal perspective. The new framework places capital and risk management at the centre of the bank’s responsibility and strategy, requiring managers to be very mindful of and serious about understanding the drivers of risk through the cycle within a medium-term time horizon. A second idea to bear in mind when considering procyclicality in bank credit is that bank behaviour is inherently procyclical. Regulatory considerations aside, a general fall in returns on investment together with a perception of increased risk are natural ingredients during a recession, thus leading per se to a contraction of credit.

Svein Gjedrem: Dialogue with boundaries Introduction by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the conference “Dialogue without boundaries”, Karlstad, Sweden, 9 March 2005. The  Charts in pdf-format can be found on the Norges Bank’s website. Please note that the text below may differ slightly from the actual presentation. The speech does not contain new assessments of the economic situation or of current interest rate setting. *  *  *  Introduction This year, Norway is commemorating the centenary of the disolution of the union with Sweden. In retrospect, the dissolution was a painless process. Norway’s internal affairs were not affected by the union with Sweden. Historically, a national monetary system and central bank have been an important part of nation-building. The Norwegian Constitution of 17 May 1814 did not provide for a national monetary system. This was first included in the Constitution in November 1814 because of fears that the union with Sweden would bring the work on a national monetary system to a halt1. In 1875, the Storting decided to join the currency union that Denmark and Sweden had established two years earlier. Danish, Swedish and Norwegian notes and coins circulated and were used as legal tender in all three countries. Open financial markets, close trade ties and a common labour market provided then as now opportunities for high economic growth and prosperity. An example is the Norwegian company Norsk Hydro, which was established the same year as the dissolution of the union.