however, we must not forget that the turbulence first translated into a liquidity crisis, as was the case for the uk bank northern rock in autumn 2007 when depositors rushed to withdraw their savings. for norwegian banks, the crisis has essentially been a liquidity crisis. norwegian banks were affected because they became dependent on market funding. the financial crisis has revealed that substantial short - term money market funding is risky. when it comes from foreign markets, the risk of funding shortfalls increases. in the mid - 1980s, norwegian banks also borrowed heavily in foreign markets. in spring 1986 – following a sharp fall in oil prices – confidence in the norwegian economy plummeted, and liquidity flowed out of the country as was the case in autumn last year. the funding source that is considered to be the most stable, deposits, has become less important over time. it is our assessment that the funding of norwegian banks is a structural problem. when the financial crisis is behind us, we expect banks to give increased weight to deposits and long - term loans as funding sources. the maturity of banks ’ market funding should be longer than it was before the financial turbulence. during the financial crisis, investors were reluctant to provide long - term funding and required high risk premiums. prospects for banks in general have now improved and risk premiums have declined. strengthening of banks ’ equity capital is helping to reduce the risk facing bondholders. bond premiums are nevertheless likely to remain clearly higher than prior to the financial crisis. investors cannot be certain that government will cover bond investors ’ losses when banks ’ capital evaporates during the next banking crisis, c. f. the planned uk proposal to impose a “ living will ” on the large institutions. a favourable source of funding for banks is covered bonds, referred to as omf in norway. these debt instruments are secured by sound collateral backed by residential mortgages, public loans or commercial property loans. the risk premium on these loans is therefore lower than on ordinary bank bonds. the covered bond market was also heavily impacted by the financial crisis. activity in the secondary market has been low, and investors showed little interest in new issues. the swap arrangement introduced by the norwegian authorities eased the situation for banks. the market has recently improved. covered bonds have a long tradition in other countries ’ housing markets. as manager of the government pension fund – global, norges bank has taken initiative to strengthen the european covered bond market. together with several other large investors and support from a number of central banks

svein gjedrem : the financial crisis – the path ahead speech by mr svein gjedrem, governor of norges bank ( central bank of norway ), at the annual meeting of the norwegian savings banks association, oslo, 22 october 2009. the text below may differ slightly from the actual presentation. this lecture does not contain assessments of the economic situation or current interest rate setting. * * * the past two years have been turbulent for banks, their customers and the authorities. the turbulence began to affect norway in earnest last autumn. norway has experienced banking crises before, and there is much to be learned from the management of these past crises. one who experienced his fair share of crises was nicolai rygg, another central bank governor from this part of norway and the son of a local shoemaker. the name stems from the rygg farm in randaberg. in 1923, handelsbanken, the fifth largest bank in norway, was on the brink of collapse. 1 at that time, government interventions were to a greater extent kept out of the public eye and the bank received government support in secret. however, the government had approved the allocation without informing the storting. as a result, prime minister abraham berge and six government ministers were impeached. in his testimony, rygg stated : “ through both of these years, 1921 and 1922, ceaseless efforts had been made week after week to resolve a wretched situation. there was a constant stream of worries, one thing after another, one disheartening report after another, and minor setbacks were followed by major setbacks. it was reminiscent of an operating theatre. the task was onerous not only because of its proportions, but also because of the oppressive weight of the anxiety that accompanied it. ” 2 “ the greatest risk lay in the fact that this anxiety had now become pervasive. the very foundations of confidence, the nation ’ s confidence in its own credit institutions had been shaken … the most important objective was therefore to prevent an avalanche, seek to contain the damage, hang on and hold back. that was the dominant thought, to prevent total collapse, for the danger of this was indeed present … and the general atmosphere of nervousness manifested itself in the most peculiar ways. in the blind panic that ensued, unreasonable attacks were made on institutions that were more than deserving of their depositors ’ confidence. ” 3 there may have been a similar feeling in many countries last autumn that