Better regulation of banks

It is now well over a year since the financial crisis fully erupted. In Norway there was an immediate liquidity crisis in the banking system. Our money market stopped working the day after Lehman Brothers went down. During the fourteen days, it was great unrest in Norwegian banks because of the failure of the financing. The measures that were implemented to solve the liquidity crisis, it has worked. In Norway, there has so far not had to evolve into a solvency crisis in the banking system. It reflects that we have not received a full real economic crisis. We went from a strong expansion to a period of decline in the activity. But so far there has been a mild recession at home.

Yet it is important to learn from our and other countries' experiences.

One lesson is that extensive short-term financing is risky. Even if the Norwegian banks were solid when the crisis started, it was the liquidity crisis because they were too dependent on short-term market funding. Banks should increasingly fund themselves with deposits and long-term loans. It must be a requirement that banks have enough liquid assets to handle long periods of failure in the markets. Banks should adapt so that they can do without the support of the Central Bank if the financing from the markets would stay away a month or two.

Another lesson from other countries is that the requirements for banks' solvency should be changed so that banks hold more capital against unexpected losses. It can be done in several ways. Stricter requirements for what is accepted as core capital will increase banks' ability to bear losses. A minimum equity in relation to total capital will reduce banks' debt financing and how much risk they choose to take. Regulations should also be designed so that the banks will be less heated by selling loans in an upturn. Then they will not need to tighten as much in a downturn.

The regulation should not only seek to limit risk in each bank, but also risk in the entire financial system.

The regulation of banks and financial markets will be changed at home and abroad. The work done by the so-called Basel Committee on Banking Supervision and of the FSB (Financial Stability Board) with a mandate from the G20 countries. New legislation - with the minimum standards - coming to Norway via the European Union and the EEA Agreement. There will be a force on the Nordic countries could cooperate better if the rules beyond minimum standards, as we largely have a common banking system.