What is Norges Bank’s role in the financial system?
The central bank is the core of the financial system and is responsible for ensuring that important pieces of the system function.
Norges Bank issues cash and settles interbank payments in deposit money. If the financial system fails, the consequences will be serious. The work on identifying vulnerabilities and crisis preparedness are therefore essential.
The central bank is the bankers’ bank
All banks in Norway are entitled to have an account with Norges Bank, and the central bank is the ultimate settlement bank for interbank payments in Norway. The interest rate on central bank deposits - the policy rate - therefore steers the general interest rate in the economy.
Every day, more than NOK 200bn in payments are settled through Norges Bank’s settlement system. Overall, and at any given time, banks have approximately NOK 35bn in accounts at the central bank, enabling them to meet their payment obligations to each other.
In addition to the banks, the government and central banks of other countries have accounts at Norges Bank. Norges Bank is the settlement bank for foreign exchange transactions in NOK, and executes the payments in the Norwegian system for securities settlement.
Sole right to issue notes and coins
The central bank is responsible for issuing notes and coins in NOK and ensuring that society has access to a sufficient quantity of notes and coins to meet demand.
For notes and coins to function efficiently as a means of payment, there must also be confidence in their authenticity. It is Norges Bank’s responsibility to maintain confidence in Norwegian cash. Norwegian banknotes therefore have advanced security features that are difficult to copy.
The broad set of security features makes it easy for both cash handling machines and the general public to distinguish between genuine notes and counterfeits. Compared with other countries, there are very few cases of banknote counterfeiting in Norway.
Monitoring the financial system
Norges Bank monitors the financial system to gather information on developments that pose a threat to the stability of the system as a whole. In the annual Financial Stability Report, Norges Bank assesses vulnerabilities and risks in the financial system.
As the ultimate settlement bank in the Norwegian payment system, Norges Bank also has a particular responsibility for supervising the part of the system where the banks settle payments between each other. In the annual Financial Infrastructure Report, Norges Bank provides an account of current developments and the Bank’s work on the supervision and oversight of the financial infrastructure.
Crisis preparedness - lender of last resort
Financial problems can emerge unexpectedly and spread quickly. History has shown that financial crises have serious economic consequences. Therefore, in addition to prevention, contingency planning is also important for managing problems.
Since Norges Bank has the sole right to issue NOK and functions as bankers’ bank, it can “print” new money on short notice to lend to an individual bank or the entire banking system if other sources of liquidity are unavailable. The central bank is therefore said to be “lender of last resort”.
By lending money to individual banks or the entire banking system, the central bank can on short notice contribute to the ability of banks in crisis to quickly meet their obligations. The Bank thereby prevents a limited problem from spreading and having severe consequences.
At the same time, the central bank sets strict requirements for when such emergency loans may be granted, and on what terms. Among other things, banks are required to post sufficient collateral for the loans.
The countercyclical capital buffer is a component of the total capital requirement that banks must meet to be more resilient. It is intended to contribute to building bank capital during upturns.