Norges Bank manages bank reserves with a view to keeping the shortest money market rates close to the key policy rate. This is carried out through different forms of market operations, which means that the central bank can either supply or withdraw reserves to/from the banking system. Moreover, the system has standing facilities, which means that banks can borrow reserves overnight or deposit surplus liquidity overnight in the central bank. There are also guidelines relating to collateral, which sets out the collateral requirements for borrowing reserves in the central bank. In addition, Norges Bank offers an intraday facility, i.e. banks can borrow unlimited reserves against collateral through the day in the central bank.
Norges Bank administers the liquidity management through reserve quotas. The aim of the system is to maintain total reserves in the banking system at a specific level. Banks receive interest only on a specific portion of reserves – a quota – equivalent to the key policy rate. Deposits in excess of the quota bear lower interest – equivalent to the reserve rate. Deposits in excess of the quota bear lower interest – equivalent to the reserve rate.
See also The management of bank reserves: The system in Norway
Reserves in the Norwegian banking system are primarily determined by transactions over the government’s account in Norges Bank. When private agents pay taxes and excise duties to the government, or when the government issues government securities, reserves are transferred from the banks’ account in the central bank to the government’s account in the central bank. This reduces the quantity of reserves in the banking system. When the government transfers funds to private agents (wages, benefits and different transfers), and when government securities mature, reserves are transferred from the government’s account in the central bank to the banks’ account in the central bank (1)
The level of bank reserves is furthermore determined by notes and coins in circulation. When banks buy notes and coins from the central bank, they pay by drawing on their deposits in the central bank. Hence the reserves in the banking system are reduced.
Structural liquidity refers to the level of reserves that would have existed if Norges Bank had neither supplied reserves to the banking system nor withdrawn reserves from the banking system. Given the level of structural liquidity, Norges Bank must provide reserves or withdraw reserves from the banking system in order to maintain the desired level of reserves.
The system for managing bank reserves in Norway is a quota-based system which comprises two elements. First, Norges Bank seeks to maintain the total quantity of reserves in the banking system at a specific level. This level may vary over time. Second, the banks that have access to Norges Bank’s standing facilities receive interest only on a certain portion of reserves – a quota – at the key rate. Deposits in excess of the quota bear lower interest – at the reserve rate. The quota is calculated as follows:
- Norges Bank determines the sum of all the quotas in all the groups (the total quota).
- The banks are divided into three groups according to Norges Bank’s settlement system (NBO).
- All the banks in a group will be assigned the same quota.
- The aggregate quota of each group is set by the respective groups' share of total assets.
- Settlement banks will be assigned an additional quota determined by the size of the settlement bank in relation to the size of the banks which it performs settlements (as measured by total assets).
- Norges Bank will normally review the total quota and the distribution among banks twice annually.
- Norges Bank will publish structural liquidity forecasts twice a week.
See Circular no. 2 / 1 March 2012 for the distribution of the total quota across banks.
The decision behind a new liquidity management system
Prior to 3 October 2011 the system for managing bank reserves in Norway was a so-called floor system. Banks then received interest on all deposits at the central bank at the key rate, the sight deposit rate. Under this system, the sight deposit rate sets a floor for short-term money market rates. During the financial crisis in 2008-09, the provision of reserves (liquidity) to banks was an important central bank instrument. In several countries, this led, in practice, to a change in the systems for the management of bank reserves. A review of the characteristics of the Norwegian system revealed a number of weaknesses.
Norges Bank’s Executive Board therefore resolved to amend the “Regulation on the Access of Banks to Borrowing and Deposit Facilities in Norges Bank etc.” with a view to changing the system for the management of banks’ borrowing and deposit facilities in Norges Bank. Under the new system, a defined volume of bank deposits in Norges Bank (a quota) will bear interest at a rate equivalent to the key rate (sight deposit rate). The interest rate on deposits in excess of this quota will be lower. This will enhance the redistribution of liquidity in the interbank market and boost activity in the shortest segment of the money market.
See The new system for managing bank reserves: background for more information.
Norges Bank sent a letter and a consultative document to Finance Norway (FNO) with a view to changing the system for the management of banks’ borrowing and deposit facilities in Norges Bank.
Norges Bank also sent a letter to FNO urging FNO to take responsibility for establishing a more transparent and accessible system for banks’ calculations of money market rates, referred to as NIBOR quoting. In the view of Norges Bank, NIBOR quoting should follow international practice with a formalised and official set of rules.
The consultation responses from banks to the consultative document of 6 October 2010 are available in Norwegian only on Norges Bank’s website.
On 15 December 2010, Norges Bank’s Executive Board resolved to amend the “Regulation on the access of banks to borrowing and deposit facilities in Norges Bank etc.”
For further details, see A. Fidjestøl (2007) “The central bank’s liquidity policy in an oil economy”, Economic Bulletin 3/2007.