increase in interest rates had a smaller impact than it would normally have. on the basis of the lessons learned from the crisis we believe that we will need to maintain a larger foreign - exchange reserve than in recent years. nevertheless, it should be borne in mind that our target is to keep the exchange rate stable. the foreign - exchange reserve is one of the tools for observing this target, and its size depends very much on its buffer function. the foreign - exchange reserve has to some extent been increased by raising sovereign loans in foreign currency, but market conditions have also allowed danmarks nationalbank to buy foreign exchange. * * * later this year, the legislation on covered bonds – or sdos, as we call them in danish – will be reviewed on the basis of the experience gained. it is important to take into account what the financial crisis has taught us and to perform a thorough analysis. it is still to early to draw any firm conclusions as regards potential amendments. in this context, it may be useful to outline some of the preliminary observations from the financial crisis that seem to be particularly relevant. firstly, access to capital may be limited when the need is greatest. secondly, house prices may fluctuate strongly and have to some extent been driven by innovation in the mortgage market. thirdly, if the problems reach a systemic level, they no longer affect only lenders and borrowers, but become problems to society as a whole. in its 2007 consultation response concerning sdo legislation, danmarks nationalbank indicated that it preferred a robust and simple model and that the upper loan - to - value limit for residential properties was set at 70 per cent at the time that the loan was granted and not subsequently raised. since the loan - to - value ratio may not exceed 80 per cent, a substantial buffer is required. experience with a scarce supply of capital when the need is greatest, combined with the drop in property prices, may warrant an even greater margin. the launch of covered bonds means that credit institutions must restore the underlying collateral if house prices fall. this has introduced a risk in the danish mortgage system that did not exist previously – a risk that has been accentuated by the financial crisis. danmarks nationalbank finds it important to consider this aspect carefully when reviewing sdo legislation. after all, government guarantees do not last forever. late in the sdo legislation process a deal was struck whereby sdo loans can be redeemed at par. this provision has limited the scope for product development, and

will remain at a relatively high level. with a reasonable degree of certainty, it can be said that the nominal exchange rate will swing more than that implied by our projections. given the other assumptions in the inflation report, our best projections for the coming years is that the krone will hover around this level. it is not easy to project the nominal exchange rate, but perhaps we can provide an indication of the movement in the real exchange rate in the very long term : an economist at norges bank, farooq akram, has analysed the fundamental equilibrium real exchange rate for the norwegian krone 1. he takes into account that a steadily smaller share of our imports will be covered by current petroleum revenues and the return on the government pension fund - global. q, farooq akram. oil wealth and real exchange rates : the feer for norway. working paper 2004 / 16 rough estimates based on this study indicate that the real exchange rate that maintains the trade balance when petroleum wealth no longer accounts for the same share of the economy will be more in line with the real krone exchange rate prevailing in the 1960s - before oil production started. this depreciation can come about either by lower price and wage inflation in norway than among trading partners or by a nominal weakening of the krone. the latter will probably be the least painful and also the most likely scenario as the krone exchange rate is floating.