defenders of old truths see the light, but rather because they eventually die. 4 if we take a closer look at the basel iii framework, there are still signs of innovation. macroprudential policy is a new element of the framework, aimed at containing systemic risk in banks and financial institutions. for the first time, international banking regulation includes requirements grounded in the interplay between the banking sector and the rest of the economy. we must acknowledge that in the run - up to a financial crisis, the authorities, banks and other economic agents often confuse good times with normal times. strong growth in real estate prices, credit and tax revenues are perceived as normal. statistical filtering methods confirm that trend growth is high and that debt growth is sustainable. this time is different. we should know better – because we have fairly extensive knowledge about the economic background leading to financial crises. analyses, including our own, show that a rapid accumulation of debt almost always precedes a financial crisis. empirical studies document that high debt growth increases the probability of a crisis and results in a deeper crisis. 5 debt is at the core of all financial crises. real estate prices also rise rapidly ahead of a crisis. and it is warning signal when banks have to run to securities markets to finance growth faster than deposits alone allow them to do. systemic risk increases when imbalances build up. macroprudential policy is designed to address the systematic features of financial crises, strengthen bank resilience and curb the probability of a crisis. policy rules and transparency are aimed at avoiding complacency in good times. for example, the basel iii framework specifies that the ratio of credit to gdp should be a conditioning variable when setting the level of the countercyclical capital buffer for banks. the authorities must explain and justify their actions, or their inaction. if banking regulation is to be effective, not only must we be able to identify imbalances that are building up, but we must also understand the interaction between banks and other economic agents and how systemic risk arises. lessons from the 1960s and 1970s showed that detailed regulation was not very effective. if we are to intervene in the markets, we must understand how the market functions and why the market cannot be left to its own devices. this provides a basis for regulating markets and insight into regulatory effects. from the textbooks we are well aware of the ingredients of market failure – or the preconditions for regulating markets. environmental economics is often used as an example. if a poll

svein gjedrem : financial crisis – lessons from the nordic experience article by mr svein gjedrem, governor of norges bank ( central bank of norway ), in the financial times, 3 february 2009. * * * with the financial crisis gathering strength and spreading to the real economy, it is instructive to learn the lessons from the nordic crisis of the mid - 1990s. there are some important similarities today : but also some important differences. the financial strength of the banks, and hence their ability to continue to supply a steady flow of financing, can be bolstered in either of two ways : by injecting capital ; or by removing highrisk loans from the banks ’ balance sheets – and in turn creating a “ bad bank ”. in the nordic banking crisis 20 years ago, we did both, and learned three important lessons : first, government crisis resolution measures do not have to be costly for the taxpayer. the state injected equity capital, while private share capital was written down on the basis of a realistic assessment of loan losses. this ensured that the equity capital injected by the state could benefit from upside opportunities. in norway, the state assumed 100 per cent ownership of the three largest banks. the board of directors and senior management in each bank were replaced. then, in the years following the crisis, the state gradually sold its shares in the nationalised banks – at a profit. second, it is not always necessary to take the bad loans off the banks ’ balance sheets. in norway, the banks dealt with the problem loans themselves, and there is good reason to try to achieve this, where possible : the originating banks themselves are the best placed to deal with the problem loans. however, this presupposes that the problem loans account for only a limited proportion of total lending, so that the banks are able to continue to operate normally. sweden and finland established a “ bad bank ” that took over the high - risk loans. but this was in most cases done only after the state had nationalised the banks and was thereby able to control the kinds of loans that were transferred to the “ bad bank ”. third, banking crises do not need to be prolonged. in the nordic economies the prompt and extensive writing down of problem loans and recapitalisation of the banks limited the economic downturn, which lasted only around a few years. this experience stands in contrast to that of japan, where loan losses were recognised too slowly, with substantial and decade