imbalances that may disturb activity and inflation somewhat further ahead suggest that key policy rate should be increased in the near future. the consideration with regard to financial imbalances is thus part of the basis for setting the interest rate. at the same time, there are limits as to how many considerations the interest rate can bear. the interest rate also has effects on other assets prices, such as the krone exchange rate. a monetary policy that aims at bringing down the value of domestic assets can easily push the value of the krone in the opposite direction. in interest rate setting we can never lose sight of the primary objective of monetary policy, which is low and stable inflation. in assessing the different considerations, monetary policy must adhere to the operational mandate – low and stable inflation. without results that show that the inflation target is actually attained over time, there is a risk that monetary policy will lose credibility. we therefore need more targeted instruments to dampen the build - up of risk in the financial system. the most important component is a long - term framework for financial market regulation that lays the basis for a robust financial system. the new basel iii framework is an important step in the right direction. an important feature of this regulatory framework is that the system - wide risk in the financial sector will be explicitly taken into account, and not only institution - specific risk. this chart showing a bank ’ s balance sheet provides a simplified presentation of how the new regulation will affect banks. they will be required to hold more capital and capital of higher quality. new capital requirements will be supplemented with stricter liquidity management requirements and quantitative requirements regarding liquidity buffers and stable funding. this will reduce banks ’ vulnerability to market turbulence. under the new regulatory framework, it will be more costly for banks to expand rapidly. they will not have the option to finance growth with short - term market funding to the same extent as earlier. moreover, the new framework includes macro - prudential measures that can be triggered when necessary. basel iii includes a countercyclical buffer that is effective when credit growth becomes excessive. when this buffer is effective, the banks must set aside more capital for their loans. this will increase their capacity to absorb future losses, which to some extent can also dampen credit growth during an upturn. in today ’ s situation in norway, with elevated debt burdens and rising house prices, a countercyclical buffer could be a useful instrument. basel iii will be an important step towards a framework

øystein olsen : ensuring financial stability in turbulent times speech by mr øystein olsen, governor of norges bank ( central bank of norway ), at the finance norway conference, oslo, 12 april 2011. the text below may differ from the actual presentation. this speech does not contain assessments of the economic situation or current interest rate setting. * * * introduction the experience of the past few years has clearly shown the cost of financial instability. the near seizure of the financial system in autumn 2008 gave rise to the most severe economic downturn of our time. there was a dramatic decline in international trade and in 2009 world gdp decreased for the first time in generations. economic policy was used actively in most countries to curb the economic downturn. substantial resources were deployed in the form of stimulus packages and measures to prevent financial market collapse. nonetheless, unemployment in the oecd area rose by 15 million in the first year after the outbreak of the crisis. the downturn also led to a sharp fall in tax revenues. budget deficits ballooned and government debt rose rapidly. global economic growth has recovered, but the effects of the financial crisis are still evident and will continue to be for some time yet. unemployment is still high and the current situation and prospects for several countries bear evidence of strained government finances. the financial crisis has followed a familiar pattern our actions during a financial crisis are very important, but the main task in our work on financial stability must be to prevent crises. history has shown that financial crises arise when financial imbalances have built up over a long period. our most important task is therefore to contain the build - up of imbalances and secure a robust financial system. no two financial crises are alike. however, similar features can often be identified in the runup to the crises. this slide illustrates three features. these elements were also prominent in the unfolding of the most recent global financial crisis. the first feature is often a sharp and persistent rise in property and other asset prices. the second, strong debt growth, is closely linked to the first. rising debt and increasing property prices is a mutually reinforcing dynamic. higher property prices lead to higher collateral values for loans. with easier access to credit, purchasing power increases. debt growth exceeds growth in bank deposits and banks must increasingly resort to market - based funding to finance the rise in lending. they become ever more reliant on market funding, which is often short term. when this cycle is allowed to continue for a period