Norges Bank's Role in the Event of Liquidity Crises in the Financial Sector

Central banks have traditionally had a role as lender of last resort (LLR). This means that the central bank can supply extraordinary liquidity to an individual bank or the banking system when demand for liquidity cannot be met from other sources. This role has changed over time for Norges Bank. In the course of the past 30 years, the stance on extending loans on special terms (S-loans) to banks has become more restrictive. This is partly attributable to the liberalisation of credit markets and increased opportunities for banks to raise funds in the market. Following the banking crisis, Norges Bank’s attitude to providing extraordinary liquidity for the individual bank has remained unchanged. The Executive Board’s most recent review of the Bank’s role as LLR, in March 2004, confirms that extraordinary provision of liquidity should be reserved for situations in which financial stability may be threatened without such support. The review also clarified the Bank's reaction to different types of liquidity problems and its criteria for granting S-loans

Norges Bank's Role in the Event of Liquidity Crises in the Financial Sector

Central banks have traditionally had a role as lender of last resort (LLR). This means that the central bank can supply extraordinary liquidity to an individual bank or the banking system when demand for liquidity cannot be met from other sources. This role has changed over time for Norges Bank. In the course of the past 30 years, the stance on extending loans on special terms (S-loans) to banks has become more restrictive. This is partly attributable to the liberalisation of credit markets and increased opportunities for banks to raise funds in the market. Following the banking crisis, Norges Bank’s attitude to providing extraordinary liquidity for the individual bank has remained unchanged. The Executive Board’s most recent review of the Bank’s role as LLR, in March 2004, confirms that extraordinary provision of liquidity should be reserved for situations in which financial stability may be threatened without such support. The review also clarified the Bank's reaction to different types of liquidity problems and its criteria for granting S-loans

The Neutral Real Interest Rate

The concept “neutral real interest rate” is generally associated with the real interest rate level, which implies that monetary policy is neither expansionary nor contractionary. We define the neutral real interest rate as the real interest rate level which in the medium term is consistent with a closed output gap. We consider in more detail how the neutral real interest rate in a small, open economy is influenced by global conditions. The neutral real interest rate cannot be observed, and estimates are uncertain. Different methods for estimating the neutral real interest rate are presented in this article. An overall assessment implies that it will normally lie in the range of about 2½–3½ per cent in Norway. In recent years, with low real interest rates globally, we cannot exclude the possibility that the neutral real interest rate in Norway may be even lower. The neutral real interest rate has probably been falling since the 1980s and early 1990s, partly as a result of lower inflation risk premia

On the Purpose of Models - the Norges Bank Experience

Macroeconomic models are important ingredients in the monetary policy process, and, in the Norwegian case, projecting a forward interest rate path. In this paper we argue that when deciding on a model strategy, it is crucial to consider the purpose of models. If the purpose is to understand basic mechanisms in the economy and implications of economic policy, we need a set of models that highlight these features. If the purpose is to forecast short-term developments, a different set of models may be required. Given the complexity of the real world, we argue that it is better to provide the policymakers with a good characterization of uncertainty instead of only providing point forecasts, i.e. it is better to be "roughly right" than "exactly wrong". A robust strategy for handling uncertainty should be an inherent part of the preferred system of models

The Effect of Higher Interest Rates on Household Disposable Income and Consumption - a Static Analysis of the Cash-Flow Channel

Household debt in Norway has risen substantially over the past 15-20 years relative to both disposable income and bank deposits. An increase in interest rates will therefore reduce disposable income for Norwegian households more than previously. Changes in interest rates can have a direct impact on household consumption via changes in disposable income - an effect generally referred to as the cash-flow channel. In this article, we use tax data from Statistics Norway for all Norwegian households in the period between 2004 and 2015 to shed light on how the cash-flow channel has developed over time. In line with developments in net household debt, we find that the cash-flow effect has become stronger in recent years, but that the increase is somewhat smaller than the total increase in net interest expenses in isolation would imply, owing to increased buffers in the form of liquid assets

Financial Variables and Developments in the Real Economy

This article examines whether financial variables are useful as leading indicators of the output gap and mainland GDP growth. Financial variables may be leading indicators either because they (a) are priced on the basis of expectations, (b) affect the economy with a lag or (c) are published earlier and more frequently than GDP figures. Moreover, they are not subject to significant revisions. We find that house prices, equity prices, credit growth, money growth, real exchange rates, real short-term interest rates and the difference between long- and short-term interest rates can serve as leading indicators of GDP growth and/or the output gap. The output gap is most strongly correlated with growth in domestic credit to enterprises (lagged 0–4 quarters) and cyclical fluctuations in equity prices (lagged 2–5 quarters). We include effects of equity prices and enterprise credit in an econometric forecasting model of GDP. The model takes into account that equity prices and credit growth may influence each other and that changes in GDP may feed back to financial variables. The model fits well and has stable coefficients

Three episodes of financial fragility in Norway since the 1890s

This paper provides for the first time a comparative study of three major banking crises in Norway (1899-1905, 1920-28 and 1988-92), and presents financial and macroeconomic data spanning more than 130 years. Financial sector development appears to be closely linked to booms and busts in economic activity during these years. The boom periods that preceded each of the three crises all have some common features: they were characterised by significant bank expansion, considerable asset price inflation and increased indebtedness. The non-financial sector increased its debt only slightly more than its income during the first two boom periods, but subsequent deflation increased its debt burden. A puzzle in the two first boom periods was that the commercial bank equity-to-total assets ratio increased markedly. Nonetheless, the commercial banks were severely affected in the each subsequent bust. Possible explanations are provided, but this puzzle calls for more research. Altogether, a strong causal link between financial fragility and banking crises is suggested. The crises occurred in different institutional environments and monetary policy regimes, and the role of these is explored and policy lessons are drawn. In particular, the close link between monetary and financial stability is highlighted.financial fragility in Norway, banking crises in Norway

Bankenes motpartsrisiko - resultater fra en kartlegging gjennomført av Norges Bank og Kredittilsynet

Norges Bank og Kredittilsynet har kartlagt en del norske bankers usikrede eksponeringer mot deres største motparter for å vurdere risikoen for en systemkrise hvis en viktig motpart ikke innfrir sine forpliktelser. Funnene indikerer at det i de fleste tilfeller ikke vil føre til alvorlige problemer. Risikoen knyttet til store eksponeringer i valutaoppgjøret vil dessuten trolig avta sterkt når kronen blir inkludert i det internasjonale valutaoppgjørssystemet CLS i 2003