margins. under basel ii, risk weights on lending are required to reflect differences in risk to a greater extent. risk weights for mortgages, for example, have been sharply reduced. this will lead to a considerable reduction in capital adequacy requirements for norwegian banks. the new rules were introduced in norway in 2007, but it is likely that many banks began to adjust to the effects even before the rules were introduced. this has resulted in a fall in banks ’ interest margins. banks ’ lending margins on new mortgages are estimated at - 0. 05 percentage point at the beginning of october. as mentioned above, the money market rate is clearly higher than the key policy rate as a result of the problems in the interbank market. with normal interest rate formation in money markets, given our key policy rate, lending margins would have been ½ percentage point. norges bank ’ s estimates show how low lending margins on fully secured mortgages could fall when banks have a required return on the equity underlying the mortgages of 15 per cent. lending margins are determined by expected loan losses, the loan ’ s administrative costs, the share of the loan financed by the bank ’ s equity capital, and the required return on equity. in the estimates, it is assumed that expected loan losses and administrative costs will be 0. 3 per cent of the lending volume. the method banks choose to calculate capital adequacy will affect the share of lending that is financed by equity capital. under basel i, the lending margin on fully secured mortgages is estimated to be 0. 9 percentage point. using the standardised approach under basel ii, banks will be able to operate with a lending margin on fully secured mortgages of 0. 8 percentage point. banks using the internal rating - based advanced approach under basel ii, will be able to make the largest reduction in their lending margins. as an illustration, we have assumed that the share of equity capital is 1. 5 per cent. the lending margin on fully secured mortgages could then be 0. 5 percentage point. in conclusion, we should be able to say that the decline in lending margins has probably come to an end. it will come as no surprise if lending margins rise somewhat ahead. it is now likely that a number of banks are not achieving a satisfactory return on new loans. banks may have compensated for this by having low deposit rates. however, as mentioned above, there has been a marked rise in borrowing costs. even if some of the increase should be

the entire financial system. financial institutions started to doubt their counterparties and interbank lending came to a halt. experience shows the need for tighter regulation of systemically important banks. this can for example be achieved by introducing higher bank capital and liquidity requirements for such banks. the capital requirement for mortgage lending should to a larger extent reflect the overall risk of such loans. see carmen m. reinhart and kenneth s. rogoff ( 2009 ) : “ this time is different. eight centuries of financial folly ”, princeton university press. justified criticism has been levelled at international banks. the focus is now shifting to government fiscal management in many countries. fiscal slippage seems to have been considerable in some european countries in particular. eu budget policy guidelines have been diluted and have not been adhered to. countries have experimented with budget frameworks and have debt - financed public investments, which require operating and maintenance costs but yield little income. with already large deficits, the crisis has destroyed state finances in many countries. economic developments over the next 5 – 10 years will be marked by the tightening measures that will now have to be implemented in these countries. however, there are exceptions. state finances in nordic countries are in order, which provides a better starting point. with ample state coffers, the norwegian economy was to a considerable extent insulated from the effects of the financial crisis in 2008 and 2009. norway has had room for manoeuvre because solid state finances secure credibility and because inflation expectations are firmly anchored. even though oil prices fell from close to usd 150 per barrel in summer 2008 to almost usd 30 at the end of the year, norway ’ s state finances were not called into question. in addition, oil prices increased markedly as early as spring last year. the oil fund mechanism curbs the effects of oil price fluctuations on demand and output – as well as on inflation and the krone exchange rate. the government pension fund global is also an important source of funding for public spending in the next decades. reductions in government welfare spending, which will probably be a matter of necessity with an increasingly ageing population, will be smaller than would have been the case without the fund. 5. challenges to the norwegian economy in the period 1992 – 2008 the norwegian economy experienced a long upturn. in the 2000s, the cost level started to rise, partly reflecting a sharp improvement in our terms of trade. prices for norwegian goods, such as oil, gas, metals, minerals and fish increased sharply