the credit volumes that they find privately optimal, and allocate it to the projects that are most profitable to them. neither the credit volume nor the credit allocation is necessarily socially optimal : this is one basic reason why financial markets are and should be regulated. the next question is : how strictly should they be regulated? when does regulation severely impair the positive effect from financial markets to economic growth? let me again make some observations from my home country : norway had a severe banking crisis around 1990. three of the four largest banks failed and the direct capital injections required were alone more than 3½ per cent of gdp. just to put this figure into perspective, the 106 billion euros the european banks need for recapitalisation now is less than 1 per cent of gdp in the euro area. ever since the norwegian banking crisis in the early 1990s, our banking industry has been regulated more strictly than banks in comparable countries. for instance, bank capital definitions have been tighter and the financial supervisor has been more actively restricting banking activities. another example is that packaging loans into complex financial instruments was in practice not permitted until 2007 when new regulations provided for the issuance of covered bonds. the complex instruments central in the creation of the subprime crisis were never introduced, and norwegian banks did not invest in them. our gdp growth rates have still been high during the years up to 2008, also outside the petroleum sector. and the downturn we experienced in 2009 was modest in relation to comparable countries. at the early stage of the banking crisis in the1990s, the norwegian central bank provided a large liquidity loan to a savings bank. it soon became clear that the loan would not be paid bis central bankers ’ speeches back. a liquidity problem turned into a problem of solvency. this was not the first time! we were again reminded how responsibilities should be shared between the fiscal authorities and the central bank. it is the responsibility of the parliament and the government to spend taxpayers ’ money. it is not up to an independent central bank to spend their money! we still remembered this principle in late 2008 and early 2009 when the funding of norwegian banks also dried up. then we made sure that the ministry of finance became the banks ’ counterparty in the bond swap i mentioned earlier. we thus avoided the discussion we have seen elsewhere about the central bank intruding into the arena of the fiscal authorities. the financial crisis also hit some very small norwegian municipalities – far up north close to the coldness of the

rate, weight is also given to stabilising developments in output and employment. for monetary policy to contribute to stabilising developments in output and employment, there must be confidence that the inflation target will be reached. inflation will not be at target at all times, but if there is confidence in monetary policy, expected inflation will be close to the inflation target over time, which in itself contributes to stabilising inflation. norges bank ’ s communication of monetary policy aims to stabilise inflation expectations by giving the reasons for and explaining interest rate setting. by publishing its interest rate forecasts and monetary policy strategy, norges bank has made it easier for others to understand and evaluate monetary policy. it is my objective to continue and enhance the bank ’ s analysis and communication. since march of this year our monetary policy reports have included a summary of the executive board ’ s discussion of monetary policy prior to the reports. chart : surplus liquidity in the banking system to be effective, the key policy rate must have an impact on market rates. norges bank supplies liquidity to banks to bring short - term money market rates down closer to the key policy rate. surplus liquidity in the banking system is kept as sight deposits at norges bank. the redistribution of interbank liquidity does not function adequately. in 2010 norges bank had to maintain high liquidity in the banking system to keep short - term money market rates close to the key policy rate. to dampen demand for central bank liquidity and promote increased activity in the money market, norges bank ’ s executive board approved changes in the system for managing liquidity in the banking system in december 2010. under the new regulation, only a certain amount of banks ’ deposits – a quota – will bear interest at the key policy rate. deposits in excess of this quota will bear a lower interest rate. this will give banks a stronger financial incentive to redistribute liquidity among themselves, making the norwegian money market function more effectively. the new system is expected to take effect from 3 october of this year. 3. from financial crisis to debt crisis chart : general government gross debt the experience of recent years has shown the costs of financial instability in many countries. global economic growth has recovered, but the effects of the financial crisis are still visible and will be so for some time ahead. financial crises tend to be followed by debt crises. fiscal policy was used actively in most countries to dampen the effects of the financial crisis. the mistakes