svein gjedrem : housing finance in norway speech by mr svein gjedrem, governor of norges bank ( central bank of norway ), to the norwegian covered bond forum, oslo, 27 january 2010. 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. * * * from state to private housing finance after the second world war, the credit market in norway was regulated. credit demand was high. the norwegian state endeavoured to steer credit flows towards priority sectors and the state banks therefore played an important role as credit intermediaries. there were considerable housing shortages after the war. for some population groups, living conditions were poor. in1946, the norwegian state housing bank was established to provide credit for new residential construction. this bank and statens landbruksbank ( the state agricultural bank ) dominated housing finance for new house purchases up to the 1980s. state bank mortgage rates were initially set based on political objectives, but were over the years gradually revised up and adjusted to market rates. with the gradual deregulation of the credit market in the 1980s, state lending institutions assumed a lesser role in housing finance and the private market took over. sales of existing homes increased. in 1992 private banks provided the majority of residential mortgages. their share of housing finance was also high compared with other nordic countries. in denmark and sweden, mortgage institutions were the primary source of residential mortgages. even though their importance has been reduced in recent years, mortgage companies still provide most residential mortgages. with the predominance of mortgage companies, fixed - rate mortgages have been a tradition in denmark and sweden. this has not been the case for norway. mortgages from the state housing bank were primarily adjustable - rate loans. after credit market liberalisation, adjustable - rate mortgages were also offered by banks. the supply of fixed - rate mortgages was limited. fixed - rate loans are less common in norway than in the other nordic countries. from the 1980s to the 1990s, the norwegian economy moved from high to low inflation with, until recently, falling nominal long - term interest rates. borrowers with fixed - rate mortgages fared poorly in this period, and even more poorly than maturity or mortgage insurance premiums alone would imply. but with a clear monetary policy objective to keep inflation low and stable – and with an independent central bank tasked with achieving this objective – the result would be

pool is required at all times to exceed the value of the covered bonds. both assets and liabilities are to be recorded at estimated market value. this implies that a mortgage company must add further collateral to the cover pool, for example in the form of government bonds, to replace any shortfall. an efficient bond market can handle large trading volumes without substantially affecting prices. such a market requires instruments that are easy to understand and clear regulation. trading should be transparent. ideally, there should be multiple independent bidders and askers and trading volumes should be high in primary and secondary markets. issues of covered bonds have picked up in norway since the regulations relating to covered bonds entered into force on 1 june 2007, supported since autumn 2009 by the arrangement for the exchange of government bonds for covered bonds. to facilitate banks ’ access to borrowing from norges bank during the period of financial turbulence, collateral requirements for loans were temporarily eased. in october 2009, it was announced that the temporary rules for collateral requirements would be changed. acceptance of new securities eligible under the temporary rules was discontinued in october. securities already approved under the temporary rules would be eligible as collateral until maturity, or at the latest until 15 february 2012. changes in the so - called bank quota were also announced. under the current rules, up to 35 per cent of a bank ’ s borrowing facility can be based on collateral in bonds issued by other norwegian banks. debt instruments issued by foreign banks will be included in the bank quota as from 1 december 2010. securities issued by banks will no longer be eligible as collateral for loans as from 15 february 2012. covered bonds will still be eligible as collateral, including, until further notice, bonds to which no credit rating has been assigned and bonds issued by a bank ’ s own mortgage company. this is expected to contribute to the development of the norwegian covered bond market. the housing market – a source of disturbances in the economy banks have had strong incentives to extend credit for house purchases. even during the banking crisis around 1990, norwegian banks ’ losses on residential mortgages were low. this is reflected in the low risk weights for residential mortgages in banks ’ risk models. for an individual bank, residential mortgages are low - risk loans. however, market fluctuations, accompanied by shifts in saving behaviour, are nonetheless a source of business cycle fluctuations and substantial losses when banks have to write off loans to firms selling goods and services to households. with low risk weights for residential mortgages, banks can lend extensively, operating with a