Øystein Olsen: Macroprudential regulation and monetary policy Speech by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the Centre for Monetary Economics (CME)/BI Norwegian Business School, Oslo, 7 October 2013. Please note that the text below may differ slightly from the actual presentation. *  *  *  Accompanying charts can be found at the end of the speech. Original presentation is on Norges Bank (Central Bank of Norway) website. Charts in pdf  International economic developments in recent years have presented a challenge to the economic policy framework. An important lesson from the financial crisis is that regulation of the financial system must be improved and that the macroprudential perspective in particular needs to be strengthened. Development of macroprudential regulatory frameworks is therefore underway in a number of countries, including Norway. Experience shows, however, that financial crises are very difficult to predict and prevent. The aim of macroprudential regulation is to reduce the probability of a crisis and counteract harmful effects in the financial system when a crisis occurs. A related issue is how monetary policy should respond to financial imbalances, and more specifically, what the implications of the new macroprudential policy tools will be for monetary policy. How monetary policy is conducted and communicated is also evolving, both abroad and in Norway. Norges Bank has decided to launch a major research project with a view to further developing the framework for flexible inflation targeting. I will return to this topic towards the end of this address.

The advice will build on the Bank’s professional judgement and take into account factors other than the indicators mentioned. The weight given to different indicators may vary. As we gain experience and insight, the set of indicators can be developed further. 1  http://www.regjeringen.no/en/dep/fin/news/news/2013/systemically-important-credit-institutio.html?id=726797. 2  The trend is estimated using a one-sided Hodrick-Prescott filter (lambda = 400000) extended using a forecast. The mean is for the entire period in the chart. BIS central bankers’ speeches  3  Uncertainty and the need for resilience suggest that the buffer should not be reduced automatically even if there are signs that financial imbalances are receding. In periods of prolonged lending growth and low losses, banks should normally hold a countercyclical capital buffer. Banks will be allowed to draw on the buffer in the event of an economic downturn and large bank losses. If the buffer functions as intended, banks will tighten lending to a lesser extent in a downturn. This may mitigate the procyclical effects of tighter bank lending. The four key indicators are not well suited to signalling whether the buffer should be reduced. Other information, such as market turbulence and loss prospects for the banking sector, will be more relevant. The benefits of higher capital requirements for banks must be weighed against any costs the countercyclical capital buffer imposes on the economy. Several analyses, such as those conducted by the Basel Committee on Banking Supervision, suggest that higher capital requirements will not give rise to considerable, permanent economic costs in the longer term.