egil matsen : the equity share in the government pension fund global introductory statement by mr egil matsen, governor of norges bank ( central bank of norway ), oslo, 1 december 2016. * * * accompanying slides introduction the discovery of oil off the norwegian coast has shaped the economy for almost two generations. norway ’ s industry structure has undergone a fundamental change. oil has lifted the level of prosperity and generated substantial government revenues. chart : the government pension fund global twenty years have passed since the government made the first capital transfer to the government petroleum fund, which has since been renamed the government pension fund global ( gpfg ). since then, norway ’ s subsea oil wealth has to a large extent been transformed into foreign financial assets. the gpfg serves two main purposes : to insulate the central government budget from the effects of large annual fluctuations in petroleum revenues and to preserve a substantial share of the oil wealth and increase it for future generations. a milestone in the management of the nation ’ s oil wealth was the fiscal rule, adopted in 2001. the fiscal rule permits the government to spend the expected real return on the gpfg, then estimated at 4 percent. the rule was introduced to phase in oil revenues gradually into the economy in pace with the increase in the fund ’ s capital. the gpfg has grown rapidly over the past ten years. in line with the fiscal rule, the fund ’ s contribution to the central government budget has increased. owing to the fall in oil prices, government petroleum revenues are now lower. volatility in the return on the fund ’ s investments could have a considerable impact on the fiscal room for manoeuvre in the coming years. norges bank has managed the gpfg since the first transfer was made in may 1996. an important part of our responsibility for the operational management of the fund is to advise the ministry of finance on the fund ’ s investment strategy. chart : equity share in the strategic benchmark index and of the fund the investment strategy issue of most importance for the fund ’ s return and financial risk is the fund ’ s equity share. under the current investment mandate, the size of the fund ’ s actual equity investments will largely be determined by the equity allocation set by the ministry of finance for the fund ’ s benchmark portfolio. the equity share in the strategic benchmark index provides an important indication of volatility tolerance with regard to the fund ’ s value. to be able to maintain the

remains exceptional, and be designed in a way that is compatible with sound incentives in the banking system. rationale for liquidity regulation i would like to begin by briefly highlighting the micro - and macro - prudential benefits that will derive from a new set of liquidity standards. in particular, they should lead to an increase in individual credit institutions ’ liquidity buffers, and reduce the risks posed by maturity transformation. the recent financial crisis provided a dramatic illustration of how liquidity risk materialises. the inadequacies of banks ’ liquidity management became apparent when some markets for long - term debt securities ( including abs, abs cdos, etc. ) experienced a sudden re - pricing, resulting from the fact that risks were not properly reflected in their prices. banks faced bis central bankers ’ speeches substantial liquidity outflows and shortages owing to their excessive exposure to these instruments and their excessive reliance on short - term and volatile secured market funding sources. in the us, this phenomenon mainly materialised as a “ run on repo ” ; 1 in the euro area, it resulted into drying up of foreign currency funding, severe strains in bank unsecured funding, and / or a reduced access to repo through clearing houses. in all cases, the central bank had to step in and to expand its liquidity provision to banks. what does this imply for liquidity regulation? regulations should start from first principles, and we therefore have to identify the market failures or negative externalities that liquidity regulation aims at addressing. i consider that there are three main objectives for liquidity regulation : a ) to reduce the impact of uncertainty on the bank risk profile, b ) to build up liquidity buffers and c ) to mitigate the systemic characteristics of a liquidity crisis. maturity transformation gives rise to liquidity risk since, by definition, a bank engaging in maturity transformation cannot honour sudden and large withdrawal requests by depositors. they may face similar difficulties if interbank market lenders refuse to roll over their loans. such coordination failure may arise not because the depositors or the interbank market participants think the bank is likely to be insolvent, but because they anticipate others will withdraw. 2 the rationale of liquidity requirements is that they reduce the impact of uncertainty on the bank risk profile, since they allow the bank to withstand larger withdrawals. lolr and deposit insurance are other ways to achieve the same means : mitigating the risk of a run. the difference