bank is compelled to raise fresh capital. 11 the authorities will then be able to split up or wind down banks quickly, whatever their size or complexity. but an additional economic cost is incurred when governments rescue banks. this may have adverse effects on bank behaviour. in the field, this is referred to as measures that increase the risk of moral hazard. in bad times, the capital adequacy requirement is reduced to 1. 5 times the international minimum requirement. see swiss federal banking commission ( 2008 ) : “ sfbc and large banks agree to set higher capital adequacy targets and introduce a leverage ratio ”, press release 4 december. see myners, paul ( 2009 ) : “ developing a new financial architecture : lessons learned from the crises ”, speech at the financial times global finance forum, 18 september, hm treasury. the same theme is also dealt with in bair, sheila ( 2009 ) : “ remarks by fdic chairman sheila bair to the international institute of finance, istanbul ”, fdic, 4 october. i can provide an example. a creditor may for example assume that big banks are in practice “ insured ” by the authorities, which will also be reflected in rating agencies ’ assessments. banks considered systemically important receive a higher rating. as a result, funding costs for these banks are lower, allowing them to increase leverage and expand even further. reducing the procyclicality of bank behaviour both international studies and norges bank studies indicate that the current capital adequacy rules, basel ii, amplify the procyclical effects arising from bank behaviour. 12 during an expansion, bank earnings are high. ample supply of capital leads to high credit growth. in a see andersen, h. ( 2009 ), “ norwegian banks in a recession : procyclical implications of basel ii ”, working paper 2009 / 4, norges bank, and kashyap, a. k. and stein, j. c. ( 2004 ), “ cyclical implications of the basel ii standards ”, economic perspectives, federal reserve bank of chicago, quarter 1, p. 18 - 31. downturn, loan losses increase and erode the banks ’ capital. banks respond by tightening lending. bank behaviour therefore amplifies fluctuations in economic activity. an analysis by norges bank sheds light on the procyclical effects of the basel ii capital requirements. the analysis is based on a path where the norwegian economy is exposed to a

we have a flexible inflation targeting regime, i. e. both variability in inflation in relation to the target and variability in output and employment in relation to trend are given weight. the objective of monetary policy is low and stable inflation. the instrument is the interest rate. the interest rate influences inflation with a lag and with varying intensity. as interest rates fall, household and local government consumption and investment tend to pick up. higher demand leads to higher output and employment. wage growth may pick up. higher wage growth combined with higher profit margins will result in higher inflation. lower interest rates normally also lead to a depreciation of the krone. imported goods then become more expensive and inflation accelerates. expectations play a key role in price and wage formation, and they are influenced by the interest rate. expectations concerning inflation and economic stability have considerable impact, not least in the foreign exchange market. petroleum activity constitutes an important part of the norwegian economy. oil gives us an economic base that is not available to many other countries. at the same time, the extent of, and fluctuations in, petroleum activity pose a challenge to economic policy in norway. in a long - term perspective, norway ’ s petroleum wealth is to be distributed across generations. in the short term, the substantial capital revenues from the petroleum sector must be managed in such a way that they do not amplify cyclical fluctuations. the government petroleum fund was established in 1990 with a view to safeguarding long - term considerations in the use of petroleum revenues. the idea behind the petroleum fund is that the cash flow from an increase in oil prices should accrue to the fund and be invested abroad so that the increase in oil prices does not affect the wider budget. as a result, the increase in the cash flow does not affect the domestic economy. likewise, a fall in oil prices does not have an impact on the domestic economy, but results in a lower accumulation of foreign assets. the fund thus acts as a buffer against disturbances. by building up the fund, the aim of ensuring that several generations will enjoy the benefits of our petroleum wealth is also taken into account. in 2001, the storting adopted new economic policy guidelines in norway. at the same time as the inflation target was introduced in monetary policy, a strategy was drawn up for the use of petroleum revenues over the government budget, i. e. the fiscal rule. the fiscal rule is designed to prevent swings in the petroleum sector from spreading to the mainland economy. this ensures