Chart: Unemployment, inflation, house prices and household debt ratio in Norway, the UK, the US and the euro area Norges Bank has in periods kept the interest rate somewhat higher than implied by mediumterm inflation and output gap considerations. In other words, we have been “leaning against  1  Tinbergen, J. (1952): On the theory of economic policy, North-Holland Publishing Company, 2nd edition. BIS central bankers’ speeches  1  the wind”. Norway is a large exporter of petroleum, and our economy has benefitted from 15 years of high oil prices. Unemployment has been low and consumer price inflation close to the 2.5 percent inflation target. At the same time, house prices have been rising sharply, and household debt is at a historically high level. Hence, our monetary policy trade-offs have in recent years differed from those of our trading partners. Before I return to the interlinkages between financial stability and monetary policy, let me describe some elements of macroprudential policy in Norway. Banking regulation has recently been reformed in Norway in accordance with Basel III and directives issued by the European Union. Capital requirements have been increased and the countercyclical capital buffer has been introduced. Norges Bank is responsible for conducting analyses and providing advice on the level of the countercyclical capital buffer for banks. The responsibility for the final decision on the buffer level lies with the Ministry of Finance. The current decision requires Norwegian banks to hold a countercyclical capital buffer as from July this year.

Another important element of the Basel reform package is the introduction of a range of measures designed to mitigate the inherent pro-cyclicality of the financial system. In this context, mechanisms that enhance prudent and forward-looking provisioning of banks as well as the building up of sufficient capital buffers in years of economic expansion that can be drawn down at times of stress, are all under consideration. Overall, these measures aim at ensuring that the financial system functions as an absorber, rather than an amplifier of shocks, thus smoothing the volatility of the financial and real economic cycles. In setting up a more forward-looking provisioning framework, the Basel Committee works closely together with the accounting standard setters with a view to developing a sound operational framework for expected loss provisioning. In this context, let me mention as very important the collaborative efforts under way between the Basel Committee and the IASB to develop a revised expected loss model that proves operational. Concerning measures on capital buffers, the Basel Committee set forth a proposal on a capital conservation buffer that would establish certain restrictions for undercapitalised banks with regard to the distribution of earnings in the form of dividends, share buy backs and bonuses. In addition, the introduction of a counter-cyclical buffering mechanism is also considered. It would require banks to build up additional capital buffers when excessive credit growth is identified in the economy. The last topic I want to pay some attention to is the role of central banks in financial stability.