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Norwegian Banking System Report

Ivan Mendes
Arthur Isibo

Norges Bank
Background: Granted independence from the Swedish throne in 1905. Norway is
not a part of the European Union. Norway is located in Northern Europe, boarding
Sweden and the North Sea, as well as, the North Atlantic Ocean. Natural resources
include petroleum, natural gas, iron ore, copper, lead, zinc, titanium, pyrites,
nickel, fish, timber, and hydropower. Some environmental issues plaguing Norway
are: water pollution, acid rain, threatening fish stocks, and air pollution. The
majority ethnic group is Norwegian (94 per cent), followed by other European, and
other. The current population stands at 5.2 million.
Economy & Government: Norway has a constitutional monarchy form of
government, with its chief of state being King Harald V, and its head of
government being Prime Minister Erna Solberg. Article 75c of the Norske
Constitution stipulates that the Storting (Norwegian Parliament) shall supervise
Norways monetary system, and in the Norges Bank Act, the central bank of
Norway was established. The Annual Reports are submitted to the Ministry of
Finance and communicated to the King in Council and to the Storting in the
Governments Finansmarknadsmeldinga (Financial Market Message/Report). The
Norwegian economy is a prosperous mixed economy, with a vibrant private sector,
and a large state sector, and an extensive social safety net. The government
controls such sectors as petroleum. Export revenue from petroleum, hydropower,
fish, forest, and minerals total roughly 30 per cent of government revenue. Norway
is the worlds third-largest natural gas exporter, and the seventh largest oil
explorer. The country has the worlds largest sovereign wealth fund valued at over
$850 billion. GDP (ppp) in 2014 was $346.3 billion. Norway is currently running a
budget surplus. Inflation stands at 2 per cent. The commercial bank prime-lending
rate in 2014 was 2.25 per cent. The exchange rate from USD to NOK is roughly
6.3021NOK to 1 USD.
Monetary Policy: The Government has defined an inflation target for monetary
policy in Norway. Norges Banks conduct of monetary policy shall be oriented
towards low and stable inflation. Inflation target of or at 2.5 per cent over time.
Employment and output shall also be stabilized. Norges Bank operates a flexible
inflation targeting regime, so weight is given to both variability in inflation and in
output and employment. The key monetary policy instruments are: policy rate
(interest rate on banks deposits), and foreign exchange market orders in order to
influence the krone exchange rate. Norges Bank does not normally intervene in the
exchange market but they could if desired. The Norges Bank has not intervened in
the FX market since January of 1999. In regards to the key rate, it is set by the
Executive Board, which is appointed by the King in Council, and is made up of the
Governor, the Deputy Governor and five external members. The Board meets up to

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six times a year. The analyses and the monetary policy strategy presented in NBs
Monetary Policy Report, together with assessments of price and cost developments
and conditions in the money and foreign exchange markets, form a basis for
monetary policy decisions. In addition, Norges Bank mints notes and coins; and
supplies banks and the general public with currency, and likewise, removes worn
and damaged notes and coins from circulation. As of March 1, 2016, the key policy
rate was because by 25 basis points to 0.50%.
Financial Stability: One of the Banks primary objectives is to ensure economic
stability, foster a robust and efficient financial markets and payments systems.
Norges Bank issues notes and coins and ensures daily settlement in Norwegian
kroner. The Payment Systems Act introduced the Norges Bank as the licensing
authority for banks clearing and settlement systems, and gave the Bank the
authority to take measures regarding the field of monetary, credit or foreign
exchange policy. Another aspect of the Bank is the ability to conduct
Countercyclical Capital Buffer, which in retrospect, is like the Federal Reserves
capital requirements. This buffer allows the Bank to stabilize financial markets
when in turbulent times (i.e. GFC of 2008). The buffer rate can be reduced in
events of an economic downturn and large bank losses, and if functions as
intended, banks will tighten lending to a lesser extent in a downturn. But when the
buffer is increased in good times, it may dampen credit growth and restrain the
financial markets. This policy is taken as a risk assessment and mitigation stance.
This buffer is set each quarter by the Ministry of Finance and will usually be
between 0 and 2.5 percent of banks risk-weighted assets.
Liquidity Management: The Norges Bank ensures that the banking system has
surplus liquidity on a daily basis, which the banks deposit in their current accounts
at the Norges Bank. The ST money market rate remains close to that key policy
rate. The bank reserves (quota) is NOK 45 billion or USD 5.2 billion. The Norges
Bank aims to maintain an average reserves in the banking system of NOK 35 billion
or USD 4.07 billion. Unlike with the Federal Reserves, the Government has an
account in Norges Bank. Norges Bank determines the appropriate reserve
requirements, and typically provide reserves via fixed-rate loans (F-loans) and, if
needs be, drains reserves by issuing fixed-rate deposits (F-deposits).
Government Debt: Borrowing to cover government debt is conducted by Norges
Bank in accordance with a mandate from the Ministry of Finance. Likened to the
U.S., a debt ceiling is issued on an annual basis. The primary objective of the
government debt management is to meet the governments borrowing
requirement at the lowest possible cost to the government and to promote an
efficient and well-functioning domestic securities market. Norwegian government
debt is issued by auction on Oslo Brs (Oslo Stock Exchange). Investors may then
trade such instruments as debt-backed-securities (DBS). This results in the
promotion of liquidity in the Norwegian government securities markets.
Key Similarities to the U.S. Federal Reserves:

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The Federal Reserve's duties fall into four general areas
Conducting the nation's monetary policy by influencing the monetary and credit conditions in the
economy in pursuit of maximum employment, stable prices, and moderate long-term interest
rates
Supervising and regulating banking institutions to ensure the safety and soundness of the nation's
banking and financial system and to protect the credit rights of consumers
Maintaining the stability of the financial system and containing systemic risk that may arise in
financial markets
Providing financial services to depository institutions, the U.S. government, and foreign official
institutions, including playing a major role in operating the nation's payments system

Norges Bank mandate and core responsibilities

Norges Bank shall promote economic stability in Norway.
Norges Bank has executive and advisory responsibilities in the area of monetary policy and is
responsible for promoting robust and efficient payment systems and financial markets.
Norges Bank manages Norways foreign exchange reserves and the Government Pension Fund
Global
Monetary Policy: Norges Bank and the Federal Reserves
Both the Federal Reserves and Norges Bank Governors are appointed by the acting President and/or
King in Council. The general meetings take place at a minimum of four times per annum; this is
applicable for both central banks. The main objectives regarding monetary policy are the maximization
of employment and moderation of long-term interest rates in order to stabilize prices, which ultimately
produces a healthy economy. Both ensure this mandate through pursuing objectives, such as, seeking to
explain its monetary policy decisions to the general public with great specificity. Simply, clarity in
information fosters well-informed decision making at the household/business level. Such efforts are put
in place to reduce financial uncertainty while increasing the effectiveness of monetary policy. Both the
Federal Reserves and Norges Bank attempt to maintain inflation at two percent and the communication
of this goal helps maintain long-term inflation expectations firmly attached. This then becomes a key to
foster price stability and moderate long-term interest rates while promoting maximum employment.
In addition, maximum employment is determined by nonmonetary factors which then disturb structures
and dynamics of the job market because changing factors produce uncertainty which may be
immeasurable. Thus is the rationale behind the Federal Reserves and Norge Bank not specifying for
maximum employment (although exemplary employment targets are set to reach low unemployment
levels). In setting monetary policy, the Federal Reserves and Norges Bank both seeks to mitigate
deviances in inflation over the long run and as well as deviances in employment from the assessments of
its maximum capacities. In summation, all objectives are generally complementary. Under
circumstances in which the committees judge that such objectives as uncomplimentary, it attempts to
produce a balanced approach, taking into account the magnitude of the deviations and the potential
longevity in which employment and inflation are projected to return to levels judged consistent with
federal mandate.
Statistics as of 2016

Inflation
Unemployment
Interest on Treasury bills 1yr
Interest on Government bonds 10yr
Overnight interest rate
Reserve rate
GDP growth rate

Federal Reserve
2%
5.0
0.62
1.91
1.74
0.50
2-3

Norges Bank
2%
3.4
0.54
1.39
1.75
-0.25
2.20

Key Differences to the U.S. Federal Reserves:

The key monetary policy goals for the Federal Reserves are the promotion of
maximum employment, stable prices and moderate long-term interest rates or
ultimately, containing inflation and promoting expansion. It can be conceived that
the Norges Bank would promote such things, and in fact they do, but the key
differences come in operational importance. The operational target of the Norges
Bank is explicitly defined in a consumer price index (CPI) of 2.5 percent over time,
as well as establishing instruments to maintain stable inflation over a two-year
period. The bank will tolerate deviations of actual inflation, but a major change
could result in changes in interest rates, taxes, excise, and duties, as detailed by
Giovanni Olivei of the Boston Federal Reserves. According to Giovanni Olivei, while
other central banks set interest rate on liquidity supplied through open market
operations and thereby signals the market rate it deems appropriate, Norges Bank
has decided not to signal interest rates in this way (New England Economic
Review , 46). On the contrary, Norges Bank uses the policy rates as the standing
interest rate on sight deposit (standing facilities). In addition, the policy rate is
used as the overnight lending rate for overnight loans. The difference between the
sight deposit rate and overnight lending rate is kept at two percentage points on
an annualized basis.
Reserves Requirement (Capital Buffer)
According to Norges Banks latest quarterly report, the current reserves
requirement ranges between 12.0% and 14.5%, which was a major increase from
July of 2014 (10.0%). The factors that result in the CET1 requirement 1 are:
countercyclical capital buffer (4.5%), buffer for systemically important banks
(2.0%), systemic risk buffer (3.0%), conservation buffer (2.5%) and minimum
requirements (4.5%). The higher rates will apply to the bigger banks while the
lower rates will be constituted to smaller banks. The capital buffer requirement is
1 Common equity tier 1 (CET1) capital consists of equity capital less regulatory deductions. This is
divided by the banks total risk-weighted assets. The higher the risk of loss, the higher an assets
risk weight. The higher the risk weight, the more capital the bank must hold against the asset.
1 = 1

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realized based on the depositors risk-weighted assets, and shall apply to all banks
within Norway, and foreign bank branches operating in country. On the contrary,
the Federal Reserves requirement rate can deviate between 0% and 10%. For
depositors with net transaction accounts valued at less than $15.2 million, the
requirement is as low as 0%, and for depositors with net transaction accounts
valued between $15.2 and $110.2 million, the reserves requirement is 3%. The
10% reserves requirement are for depositors with total net transaction accounts of
more than $110.2 million. Likewise, for banks that pose a systemic risk to the
financial markets, a capital requirement is necessary, and may range between
1.0% and 4.5%, a slightly lower requirement than that of Norges Bank, The Federal
Reserves requirement rates stated above were affective as of January 2016.
Deposit & Lending Rates
As of March 2016, Norges Bank lowered its key policy rate by 25 basis points
resulting in a new key policy rate of 0.50%. Thus the key policy rate would likewise
be the deposit rate for Norwegian banks. As well, the overnight lending rate would
be 2.50% (reference overnight lending requirements, and rate information
mentioned above). In 2010, the key policy rate floated at 2.00%. Interestingly
enough, the United States Federal Reserves has a 0.50% interest rate for required
and excess reserves, but the federal funds rate stands at only 0.38%. The federal
funds rate is the interest rate at which banks can borrow money from the Federal
Reserves. The Federal Reserves have a lower interest rate on borrowing because it
desires to stimulate the American economy since the downfall that occurred in
2007 from the GFC. In 2007, the Federal Funds rate was 5.25%.
Open Market Operations
The primary operational difference is that the Federal Reserves has and continues
to conduct a Large-Scale Asset Purchase Program (LSAPP) beginning in 2008.
Norges Bank does not conduct Large-Scale Asset Purchases, mainly, due to the fact
that the Norwegian economy is less leveraged and less in size than the United
States economy. Secondly, the GFC caused the majority of asset purchase
programs in the American economy. Another difference in operations comes in the
form of securities lending (loans), in that in the United States loans are made on a
competitive basis for overnight loans against other Treasury securities as
collateral. This is done to promote smooth clearing on both ends. The Federal
Reserves of the United States conducts two forms of Open Market Operations
(OMOs), one being a permanent operation and another being temporal. A broad
definition of permanent OMOs is given below:
The purchase or sale of Treasury securities on an outright basis adds
or drains reserves available in the banking system. Such transactions
are arranged on a routine basis to offset other changes in the Federal
Reserves balance sheet in conjunction with efforts to maintain
conditions in the market for reserves consistent with the federal funds
target rate set by the Federal Open Market Committee (FOMC)
(Federal Reserve Bank of New York).

In contrast, temporary open market operations would include short-term

repurchase and reverse repurchase agreements used to affect the size of the
Federal Reserve Systems portfolio, as well as influence daily trading activities.
Such operational systems do not exist in the Norwegian central bank system,
which is more or less concerned with bank liquidity and loans to meet liquidity
demand. Norges Bank does operate in securities and trading but does not have a
permanent nor temporal open market operation system. Some of Norges Bank
central operational systems include the managing of foreign exchange reserves,
and the relatively rare manipulation thereof, and in buffering the government
budget/portfolio with the Government Petroleum Fund, which is one of the largest
globally.
A final note, Norges Bank requires collateral equaling 90% or greater of the face
value of loans (whether overnight or regular), which should explain the diminished
levels of leverage that the bank has. Collateral securities can be: Bonds and
certificates issued by the government or other OECD member states that have not
renegotiated debt in the last five years, bonds and certificates issued or
guaranteed by the Norwegian municipalities, counties, states, enterprises, and
mortgage companies, or units in trusts limited in investment grades, and other
collaterals are accepted as security. Collateral not accepted would be securities
issued by another entity within the same financial group as the bank. The need for
collateral greatly buffers the bank against defaults and volatile market movements.
Recommendations & Improvements
As with all systems, there are areas that will always require attentive actions and
considerations. For starters, the Federal Reserve systems are continuously in the
process of making the payment system safe, more efficient, and faster, and that
for several reasons. Jerome Powell, a Federal Reserve Board Governor and
Oversight Committee Co-chair, emphasized that producing a more efficient system
would contribute to public confidence and economic growth, one of the very key
policy of the System (2015). His 18-month long research on the efficiencies of the
payment systems produced several discrepancies, such as the safe
implementation of payments, faster payment capabilities, and combating fraud in
payment systems (2015). Thus the Federal
Review Board has listed a set of outcomes and strategies that are most desired.
The desired outcomes, are ubiquitous: speed, security, efficiency, international and
collaboration. As well, desired strategies would be: (a) the involvement of outside
stakeholders on designing a more effective payment systems, (b) working to
reduce fraud and advance the safety of the system, and (c) achieving greater endto-end efficiency for payments, domestically and internationally (2015). Given that
payments systems can easily be fraudulent, the Federal Reserve has attempted
and will continue to adapt this system.

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Another area of improvement may be the way that the Federal Reserve gauges the
stability of the economy and the dictation of interest rate changes. The fact that
the Federal Reserve can greatly effect global markets, a more value oriented
approach may be better in determining the necessary increase in interest rates,
rather than leaving the markets in limbo and uncertainty. The provision of a more
efficient oversight of the markets may be to the best interest of the Federal
Reserve System and can benefit all involved in the system.
In 2014, Norges Bank produced it strategic outlook and development for 2014 to
2016, and in that outlook was the updating and development of the core tasks, the
contributing to international standard for monetary policy, the oversight and
analysis of financial stability, and for global investment management (Norges
Bank 2013). As with the Federal Reserve, Norges Bank also should and is
attempting to conduct a more efficient payments systems, as well as the reduction
of fraudulent activities. In addition to payment systems, Norges Bank should
consider a more solid crises response team, in that if another financial crisis were
to occur to such a small country, it could have dire consequences. A crisis that the
Sovereign Wealth Fund faces today is the massive decline in Brent and WTI crude
oil, because Norway is a leading producer of crude oil, and crude revenue plays a
large role in its yearly revenue. The fund, which is invested in crude related
investments have lost over $50 billion since the decline of crude prices. Thus it is
imperative that Norges Bank, and Norges Bank Investment Management produce
necessary changes in the investment strategies of the Sovereign Wealth Fund.
Surprisingly enough, the fund has begun to conduct such changes with a recent
story stating that the fund has shifted allocation and has invested more into real
estate, an allocation that has been seen as a safe investment (usually). Regarding
Monetary policy, it is recommended that capital requirements, buffer capital, and
necessary liquidity rates be reviewed on a periodic basis and revised whenever
necessary for the betterment of the Norwegian economy. Such a view is to produce
a more liquid, and more efficient economy that is able to face another crisis if
necessary. It is hoped that by taking such measures, Norges Bank can help place
the Norwegian economy on a stable and efficient road for success, relating to
investments and international politics. That concludes our recommendation
regarding Norges Bank and the Federal Reserve System.

Reference
Credit and Liquidity Programs and the Balance Sheet. (n.d.). Retrieved April 13, 2016, from
http://www.federalreserve.gov/monetarypolicy/bst_openmarketops.htm
Norges Bank. (n.d.). Strategy 2014-2016. Retrieved March 30, 2016, from http://www.norgesbank.no/Upload/Om Norges Bank/Organisasjon/Strategy_2014.pdf
Norges Bank. (2015, December). Monetary Policy Report with financial stability assessment. Retrieved
from http://static.norges-bank.no/PAGES/104204/MPR_4_15.PDF?
V=1/11/2016121540PM&FT=.PDF

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Norges Bank - The central bank of Norway. (n.d.). Retrieved February 15, 2016, from
http://www.norges-bank.no/en/
Olivei, G. P. (2002). Norways Approach to Monetary Policy. Retrieved March 20, 2016, from
https://www.bostonfed.org/economic/neer/neer2002/neer202j.pdf
2nd Quarter Report by the Boston Federal Reserves

INDEX

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