Introduction

In this commentary we look more closely at Norwegian banks’ investment alternatives for meeting proposed new international liquidity buffer requirements. The Basel Committee’s final recommendations for liquidity standards are expected during December 2010. For the time being, Norwegian krone-denominated investment alternatives appear to be Norwegian government securities and possibly covered bonds. The liquidity standards will boost banks’ demand for government securities and perhaps also for covered bonds. It is unclear whether Norwegian covered bonds qualify for inclusion in the liquidity buffer. However, the volume of issued Norwegian
government securities and covered bonds is, to a large degree, associated with the swap arrangement, where the government and banks have swapped Treasury bills for covered bonds for an agreed period. The expiry of the swap arrangement is likely to affect both the size and ownership composition of the government securities and covered bond market.