##ges bank estimated that a 40 % fall in house prices would reduce the eligible cover pool by around 20 %. in such an extreme scenario, refinancing costs may rise for covered bonds. however, the rise in costs would probably be somewhat limited compared with the rise in refinancing costs for unsecured funding. thus, even under extreme market conditions, covered bonds would remain attractive, at least in relative terms. 1 / 3 bis central bankers'speeches role in balance sheet of banks while covered bonds provide investors with a broad range of options to the investment opportunity set and contribute to deep and liquid markets, they also impact banks ’ balance sheets. when banks use covered bonds as a source of funding, a proportion of the banks ’ assets become pledged to covered bond creditors. one issue that arises is what effect this may have on the quality of the balance sheet of banks. at the outset, a banking group ’ s liquidity and credit risk will rise since covered bonds reduce the volume of encumber - able assets available to the bank. in addition, banks are often both significant issuers and holders of covered bonds. such interconnection may increase systemic risk. however, market participants may assume that resolution rules and liquidity and capital requirements nonetheless limit the risk. for example, all banks are subject to regulation of their core equity – notably through the basel iii standard of the basel committee, implemented in europe through the crd4 / crr regulation. this is the primary insurance for tax payers and investors against the potential failure of large banks. sufficient equity and a resilient banking system will always be the main instruments to ensure stability in the financial system as a whole. this is why senior bonds are also considered a relatively safe asset. impact on the supply of credit and capital allocation how do covered bonds impact the supply of credit and capital allocation? capital requirements under basel ii and iii incentivise banks to supply residential mortgage lending. the introduction of irb models for calculation of capital requirements have resulted in low risk weights for residential mortgages. this may encourage leveraging. some countries where large shares of covered bonds are backed by residential mortgages, have experienced relatively strong growth in residential mortgage lending and brisk house price growth. the availability of a large and liquid covered bond market may have facilitated this development. one would expect that the emergence of a vibrant residential covered bond market would generally deepen fixed income markets through larger volumes and better liquidity. the cheaper financing of residential

øystein olsen : management of the government pension fund global ( gpfg ) introductory statement by mr øystein olsen, governor of the norges bank ( central bank of norway ), before the storting ’ s standing committee on finance and economic affairs, oslo, 30 april 2013. * * * please note that the text below may differ from the actual presentation. charts in pdf i would like to thank the chairman and thank you for giving norges bank the opportunity again this year to report on the management of the government pension fund global ( gpfg ). chart : changing the regional allocation the investment strategy of the gpfg builds on its specific features, purpose and our perception of the functioning of financial markets. the gpfg is a large fund and features a long investment horizon. the objective of investment management is to preserve the longterm international purchasing power of the gpfg. in 2012, the investment strategy was changed. as a result, investments in emerging markets have increased. just over 10 percent of the overall portfolio is now invested in these markets. chart : increasing investments in real assets the allocation to equities was increased to 60 percent between 2007 and 2009. when the allocation to real estate reaches 5 percent further ahead, the gpfg's allocation to real assets will make up two - thirds of the overall portfolio. the long - term expected return on real assets is higher than on nominal bonds. the risk is also higher, but the long - term investment horizon puts us in a solid position to carry that risk. the key to realising the higher return is to adhere to the strategy also in times of heightened uncertainty, as we did through the financial crisis in 2008 and 2009. an official framework for rebalancing back to a set allocation to equities has now been established. this will help ensure that this strategy is carried out during the next period of high volatility in financial markets. chart : lower costs management costs for equities are higher than for fixed - income securities. the cost of managing many small shareholdings is higher than managing a few large ones, as is the cost of managing investments in emerging markets in relation to developed markets. overall management costs as a percentage of the gpfg have nonetheless fallen over time. we have exploited its size to realise economies of scale. in the past few years, costs have been reduced also in krone terms. this is partly due to reduced use of external managers. costs