øystein olsen : macroprudential policy and financial stability speech by mr øystein olsen, governor of norges bank ( central bank of norway ), at the meeting of the norwegian savings banks association, oslo, 31 october 2013. * * * accompanying charts can be found at the end of the speech : charts in pdf - format. thank you for inviting me to this meeting of the norwegian savings banks association. it is a pleasure to meet representatives of norway ’ s many savings banks. as a key element of the financial system, savings banks play an important role in the norwegian economy. the financial crisis showed the importance of promoting financial stability. in the wake of the crisis, a number of reforms were introduced in many countries. these efforts have achieved results. regulations have been tightened and have incorporated a clearer macroprudential perspective. banks ’ capital ratios have been raised. there are also initiatives aimed at bolstering the resilience of the financial infrastructure. i will devote most of my time today to the introduction of the new capital framework in norway, including a countercyclical buffer requirement, and i will also touch upon the interaction of the buffer with monetary policy. i will conclude by saying a few words about norges bank ’ s settlement system, which plays an important role in promoting financial stability. chart : banks play a key role why capital regulation? a well functioning financial market is essential for virtually all other economic activity in a market - based economy. banks play a key role. banks channel funds from savers to investors. banks determine who should be given credit and closely monitor borrowers and their projects. this is a task that would be difficult for small savers to undertake. by offering customers various kinds of financial products, banks also help to diversify and redistribute risk. this function is essential in a modern market economy. at the same time, experience shows that complex financial structures are a source of increased vulnerability. chart : securitisation resulted in complex and vulnerable structures ahead of the financial crisis, there was a proliferation of complex financial products, including residential mortgage - backed securities in the us. in theory, these new products were intended to improve the distribution of risk. banks ’ exposure to risk that had been shifted off their balance sheets would be limited. in reality, it turned out differently. risk was not very well distributed, merely hidden. with so many links in the chain between borrower and saver, the responsibility for monitoring borrowers

. the subsequent losses in the real economy have been substantial. banking regulation must therefore include a macroprudential perspective. the purpose is to dampen the build - up of systemic risk and ensure that the banking system as a whole is resilient to shocks. in a number of countries, frameworks are now being established for macroprudential regulation, along with efforts to put policy instruments in place. preferably, such instruments should focus directly on the sources of systemic risk. this is the principle that is applied when taxes are imposed directly on environmentally hazardous products. in the financial system, however, this is difficult to accomplish in practice. systemic risk has numerous sources. the financial system and its interaction with the real economy are complex, and problems spread across borders. the financial crisis was a clear reminder of this. new sources and forms of systemic risk may also arise. it is difficult to imagine instruments that can fully prevent financial crises from developing. yet it is still appropriate to increase banks ’ resilience to losses when systemic risk increases. this is the primary purpose of the countercyclical capital buffer, which is now being introduced in norway. the countercyclical capital buffer the amendments to the financial institutions act that were approved in summer include a number of new capital adequacy standards. there are new buffer requirements in addition to the minimum common equity tier 1 ( cet1 ) capital ratio requirement. banks that do not meet the buffer requirements will face restrictions on distributing dividend and paying out bonuses. chart : new cet1 capital requirements for norwegian banks the capital conservation buffer is permanent and independent of systemic risk. the systemic risk buffer is designed to act as a buffer against more persistent systemic risk and will apply to all norwegian banks. in addition, the largest banks will be subject to a separate capital buffer requirement. the norwegian authorities are currently formulating criteria for designating systemically important financial institutions. the countercyclical capital buffer is designed to act as a buffer against systemic risk that varies over time. the buffer rate is to be bis central bankers ’ speeches assessed each quarter, and will normally be between 0 and 2. 5 percent of banks ’ riskweighted assets. the requirement will apply to all banks operating in norway, eventually also branches of foreign banks. on 4 october, a new regulation relating to the countercyclical capital buffer was approved by the government. the ministry of finance has been tasked with setting the level of the countercyclical capital buffer