in the banking sector has perhaps something to learn from insurance practices. theoretical papers on bank credit risk management also go in the same direction, stressing the importance of proper pricing ( i. e. the interest rate charged should cover expected losses as well as the cost of holding capital for unexpected losses ). estimating expected losses when the bank assesses the borrower is the first step for sound risk management. proper risk management is obviously a primary task of bank managers and shareholders. but we, as bank supervisors, should evaluate the effectiveness of a bank ’ s policies and practices for assessment of loan quality and provisioning practices. the ability of a bank ’ s loan review system to identify, classify, monitor and address loans with credit quality problems in a timely manner should be assessed by the supervisor on a regular basis as part of its risk - based approach. a misclassification of assets ( and the corresponding under - provisioning ) is always present in banks heading for profitability and solvency difficulties. sound credit risk management practices at the banks ’ level, including acknowledgement of expected losses in due time, collide to a certain extent with the current accounting framework. the problem stems from the fact that this framework does not support the notion of provisions on the basis of expected losses, with the result that the recognition of losses is frequently delayed. some of the answers given by accounting - rules setters to this problem ( i. e. full fair value accounting ) may have other important drawbacks. i will touch upon this later. let me briefly summarise the content of our dynamic provision. in december 1999, the bank of spain introduced a new solvency provision, the so - called statistical or dynamic provision, focusing on the statistical risk embedded in the unimpaired portfolio. it started to apply in july 2000. the main idea behind this provision is to try to capture, together with the other provisions of the spanish system, expected losses. from the very moment that a loan is granted, and before any impairment on this specific loan appears, there is a positive default probability ( no matter how low it might be ) following a statistical distribution with an expected loss. the expected loss is known in a statistical sense but not yet identified in a specific loan operation or borrower. as the risk appears at the beginning of the operation, so does the statistical provision requirement. with this system, provisions run in parallel to revenues and are therefore distributed through the cycle allowing for a better mapping between income and costs in

svein gjedrem : monetary policy from a historical perspective speech by mr svein gjedrem, governor of norges bank ( central bank of norway ), at the conference to mark the 100th anniversary of the association of norwegian economists, oslo, 16 september 2008. the text may differ slightly from the actual presentation. * * * introduction let me begin by offering my congratulations to the association of norwegian economists on its 100th anniversary. one hundred is a respectable age. in norway, the introduction of a university degree in economics was certainly an important stimulus in the first part of the last century. in the period since the second world war, major changes in society have increased the demand for expertise in the field of economics. and economists are constantly gaining new insights. this also applies to the field of central banking, even though one of the fundamental central bank responsibilities – to safeguard the value of money – was as important 100 years ago as it is today. monetary policy in norway has changed considerably over the past 100 years. the government, with the support of the storting, has now defined an objective for monetary policy of low and stable inflation. norges bank sets its interest rate with a view to achieving price stability. this has not always been the case. monetary policy in norway norges bank was established in 1816 and was placed directly under the storting ( norwegian parliament ). the government had no control or influence. the bank was authorised to issue banknotes that were to serve as legal tender. to ensure stability in the value of money, the banknotes were to be redeemable in silver, although this was not achieved until 1842. later – in 1874 – the basis for the monetary system was changed from silver to gold. one year later, in 1875, norway entered the scandinavian currency union with sweden and denmark. norway was a member of the currency union until around the mid - 1920s, but after 1914 the union lost its practical significance. 1 the latter half of the 1800s was generally marked by stable prices. hence, when the first students completed their degree in economics in 1908, price stability was perhaps not the main concern of economists. when the first world war broke out in 1914, confidence in the monetary system faltered. the obligation to convert banknotes into gold was suspended. the money supply was out of control and inflation rose sharply. it reached 40 per cent in 1918. when nicolai rygg took office as chairman of the board of norges bank in 1920, he regarded