Financial Stability 2/09: Enhanced regulation
- The financial crisis has demonstrated that heavy reliance on short-term funding is risky, particularly if Norwegian banks are overly dependent on funding in certain markets. One lesson to be drawn is that banks should reduce liquidity risk so that they are better poised to cope with future market failures, says Governor Svein Gjedrem in connection with the publication of Financial Stability 2/09.
It now seems that the Norwegian banking system will not experience a solvency crisis. Banks are improving their capital adequacy. This strengthens the banks’ capacity to procure funding, bear losses and provide credit.
Nevertheless, developments ahead may be demanding. Banks’ loan losses are likely to increase somewhat in the period ahead. Loans to commercial property companies, shipping and borrowers in the Baltic countries still have the highest loss exposure. If economic developments are broadly in line with projections, Norges Bank expects the financial position of banks to remain satisfactory.
- It is important to draw lessons from Norway’s and other countries’ experience. Improved liquidity and capital regulation will reduce the frequency and severity of future crises. The financial system will benefit from regulation that not only limits risk at individual banks, but that also limits risk across the entire financial system, says Governor Gjedrem.
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