Report on cooperation between Kredittilsynet and Norges Bank on financial stability and crisis management
Norges Bank's and Kredittilsynet's (The Financial Supervisory Authority of Norway) letter of 16 December 2005 to the Ministry of Finance
The following is a report on the cooperation between Norges Bank and Kredittilsynet (the Financial Supervisory Authority of Norway), cf. the letter of 3 October 2005 from the Ministry of Finance.
As the report states, there is a clear division of labour between the institutions and extensive and close cooperation.
Cooperation between central banks, supervisory authorities and ministries of finance within the EU has been strengthened by the recent multinational agreement between the ministries of finance, supervisory authorities and central banks in all the EU countries (Memorandum of Understanding on Co-operation between the EU Banking Supervisors, Central Banks and Finance Ministries of the European Union in Financial Crisis situations). The agreement emphasises that each country should establish appropriate systems for cooperation and the exchange of information between the supervisory authority, central bank and finance ministry concerning conditions related to financial stability. Under the agreement, the three parties may consider whether this cooperation should be laid down in an MoU similar to the MoU established in the EU. The agreement also stresses the importance of holding regular crisis exercises involving the three parties to test crisis procedures etc.
In the light of the EU agreement, a number of countries have established a national MoU. Denmark and Sweden, for example, recently established a cooperation agreement between the relevant ministries, the central bank and the supervisory authority. In the UK, a cooperation agreement and a "Standing Committee on Financial Stability" have been in place for a long time. ECOFIN recommends all countries establish "Domestic Standing Committees" to meet the need for coordination.
It is important for Norway to endorse the EU agreement mentioned above, as provided for in Section 10.2 of the agreement. It is our view that the Ministry of Finance should convey Norway's wish to endorse the agreement to the EU. The Ministry should also consider establishing the necessary national structures for a closer tripartite cooperation between Norges Bank, Kredittilsynet and the Ministry of Finance. We recommend that a statement to the parliament in Kredittmeldingen (Credit Report) about the division of responsibilities for financial stability and crisis management between the Ministry of Finance, Norges Bank and Kredittilsynet refers to the same issues as are included in a formal MoU agreement between similar authorities in other EEA countries.
We also propose that Norway establishes an arrangement for regular tripartite meetings between Norges Bank, Kredittilsynet and the Ministry of Finance. The meetings should be headed by the Ministry of Finance and held at least twice a year. These meetings should be in addition to the bilateral meetings already held between departments in the three institutions and should deal with more general issues. Discussions at these meetings should include the financial stability outlook, coordination of contingency planning and important factors related to the operational parameters for the financial sector.
(The Financial Supervisory Authority of Norway)
Bjørn Skogstad Aamo
The Storting (Norwegian parliament) decided in 1992 that Kredittilsynet and Norges Bank would remain separate, although under the assumption that measures would be taken to strengthen cooperation and coordination between the two institutions (cf. Recommendation to the Storting No. 246, 1991-92). A joint report setting out recommended forms of cooperation was subsequently sent to the Ministry of Finance on 26 April 1993. The report was followed up by updates on the cooperation process in 1997 and 2001.1 Both the forms and areas of cooperation have generally remained unchanged since then, although cooperation has been further developed in some areas and some new areas have been added. The following section provides a description of the division of responsibilities and an updated report on the cooperation.
2. Division of responsibility
In Norway, the authorities' work on financial stability is divided between the Ministry of Finance, Kredittilsynet (Financial Supervisory Authority of Norway) and Norges Bank. The Ministry of Finance has the overall responsibility for ensuring that Norway's financial industry functions smoothly. The Ministry also has an important role to play in coordinating the activities of the three institutions in the event of a financial crisis.
The responsibilities of Norges Bank and Kredittilsynet are laid down in the Norges Bank Act, the Financial Supervision Act and other legislation regulating the financial industry. Norges Bank has a particular responsibility for clearing and settlement systems. Kredittilsynet has primary responsibility with regard to financial strength, management and control in financial institutions. Both Norges Bank and Kredittilsynet have their own boards with clearly defined areas of responsibility.
Norges Bank and Kredittilsynet analyse financial institutions and financial markets and monitor the financial sector to identify any risk of problems. The two institutions cooperate to avoid unnecessary duplication of effort and to maintain a clear division of responsibility in their work on financial stability and crisis management. A more detailed description of areas and forms of cooperation is provided in section 3.
2.1 Kredittilsynet - responsibilities and tasks
Kredittilsynet's tasks are laid down in the Financial Supervision Act and other legislation regulating the financial industry. According to the Financial Supervision Act, Kredittilsynet shall ensure that financial institutions operate in an appropriate and proper manner in accordance with law. In addition, Kredittilsynet performs a number of tasks for the Ministry of Finance in the preparation of new regulations. On the basis of legislation, Kredittilsynet receives a specification of the main objectives in an annual letter of allocation from the Ministry of Finance.
Kredittilsynet's work on financial stability consists of three parts:
Preventing financial instability.
The aim of Kredittilsynet is to contribute to regulatory and operational parameters that enable markets to function smoothly both for the supervised entities and their customers. Kredittilsynet advises the Ministry of Finance in connection with the drafting of new regulations. Whenever a decision is to be taken by the Ministry on a matter within Kredittilsynet's supervisory domain, Kredittilsynet shall be responsible for the preparatory process. Authority in some areas has also been delegated by the Ministry to Kredittilsynet for decisions on applications for clearance to start up, acquire or merge enterprises. In cases where Kredittilsynet does not decide on the application itself, the agency shall submit a recommendation to the Ministry of Finance.
Monitoring risks to financial stability.
Through its supervision of enterprises and markets, Kredittilsynet's task is to promote financial stability and orderly market conditions. Supervision of enterprises, both by on-site and document-based inspection, is conducted to ensure satisfactory financial strength, risk awareness, good governance and control. Priority is given to enterprises of systemic importance. The profitability and financial strength of individual institutions must largely be assessed in the light of the general status of the financial system. As a supplement to its ongoing supervision of individual institutions, Kredittilsynet conducts analyses and assessments of potential stability problems in the Norwegian financial industry on the basis of developments in the Norwegian and global economies. Kredittilsynet publishes its assessment of financial markets and institutions in the annual report The Financial Market in Norway: Risk Outlook.
Kredittilsynet seeks to identify factors that threaten the stability of the financial system and has contingency plans for managing problems in the financial sector. If a situation should arise in a bank or several banks that poses a threat to financial stability, Kredittilsynet will assess whether action should be taken.
2.2 Norges Bank - responsibilities and tasks
Norges Bank's tasks and responsibilities with regard to stability in the financial system have their basis in Section 1 of the Norges Bank Act, which states that the Bank shall: "( ) promote an efficient payment system domestically as well as vis-à-vis other countries, and monitor developments in the money, credit and foreign exchange markets", and in Section 3: "The Bank shall inform the ministry when, in the opinion of the Bank, there is a need for measures to be taken by others than the Bank in the field of monetary, credit or foreign exchange policy. The Bank shall inform the public about the monetary, credit and foreign exchange situation." Under the Payments Systems Act, Norges Bank has responsibility for authorising banks' clearing and settlement systems, i.e. the interbank systems.
Norges Bank's work on financial stability consists of three parts:
Preventing financial instability.
Norges Bank's preventive tasks are primarily aimed at limiting the risk associated with clearing and settlement systems in order to prevent liquidity and solvency problems from spreading among financial market participants. In Norges Bank's own settlement system (NBO), banks can settle interbank claims and debts in central bank money, which does not bear any liquidity or credit risk. In addition, Norges Bank advises Kredittilsynet and the Ministry of Finance on issues related to the regulation of financial markets, with a view to contributing to an appropriate balance between the interests of efficiency and financial strength.
Monitoring risks to financial stability.
Norges Bank's monitoring is aimed at identifying developments that may lead to reduced earnings and increased losses in the financial sector and the build-up of financial imbalances that may pose a threat to financial stability. Norges Bank focuses in particular on systemic risk in the financial sector. A summary of Norges Bank's monitoring is published in the semi-annual report Financial Stability. The purpose of the report is to provide an overall assessment of the situation in the financial sector and the outlook ahead, with particular emphasis on banks and their ability to cope with any major disturbances in the economy. Norges Bank presents its assessment of financial stability in submissions to the Ministry of Finance.
Should a situation arise in which financial stability is threatened, Norges Bank and other authorities will, if necessary, implement measures to strengthen the financial system. Norges Bank may supply extraordinary liquidity to individual banks or to the banking system as a whole.
3. Cooperation update
The aim of the cooperation between the two institutions is to underpin their joint objective of promoting stability in the financial system. Methods employed to achieve this include the exchange of information on an ongoing basis, an efficient division of tasks and the joint development of expertise.2 The aim is to make optimal use of the specialist expertise held by each of the two institutions and avoid duplication of effort while at the same time safeguarding the independent role and tasks of each institution. The cooperation is largely conducted systematically through formal meetings, although there is also broad ad hoc contact between the staff of the two institutions. Norges Bank is also represented by an observer on the Board of Kredittilsynet. The central bank is able to gain broad insight into Kredittilsynet's work through board documents and by participating in meetings, and the bank's observer contributes with views on issues where the bank has special expertise.
3.2 Areas of cooperation
Financial stability Kredittilsynet and Norges Bank both monitor factors of importance to financial stability. This work is documented in the institutions' respective reports on financial stability.3 Kredittilsynet and Norges Bank exchange analyses and reports, discuss results and methods and keep each other informed about projects in progress and future plans. Cooperation takes the form of both formal meetings and more informal contact. There are regular meetings every three months between the executive management of the two institutions, and monthly meetings between the directors of the Finance and Insurance Supervision department of Kredittilsynet and Norges Bank Financial Stability department. Topics of importance to both institutions are discussed, including the situation in financial markets and financial stability. The meetings are also used to establish joint working groups and to follow up other joint projects.
Kredittilsynet and Norges Bank cooperate on analysis and research in a number of areas. One example of cooperation over many years is the link between Norges Bank's SEBRA database and bankruptcy prediction model and Kredittilsynet's figures showing banks' credit exposure. Another example is the joint purchase of market information and accounting data for analysis of banks' credit risk.
Norges Bank has access to inspection reports produced by Kredittilsynet, and is notified in more detail of observations made during inspections that are particularly important to financial stability. In autumn 2005, Norges Bank was also informed about the overall risk assessments carried out by Kredittilsynet for all the large Norwegian banks.
Crisis management and contingency planning
Kredittilsynet and Norges Bank cooperate on contingency planning and crisis management exercises, both bilaterally and in contingency planning groups with other participants. The Financial Infrastructure Contingency Planning Committee is an example. The Committee is headed by Norges Bank and participants include Kredittilsynet and some other key actors in the financial sector. A number of contingency exercises have been conducted in recent years with the participation of both Kredittilsynet and Norges Bank. The Contingency Planning Committee conducted exercises in 2004 and 2005, and the Nordic supervisory authorities and central banks organised a joint exercise in 2002. In autumn 2005, a joint exercise involving the securities settlement system was completed by Norges Bank, Kredittilsynet and the Norwegian Central Securities Depository. Kredittilsynet and Norges Bank also carried out a contingency exercise in December 2005, where the systems in the Norwegian Banks' Guarantee Fund were tested in particular.
Procedures for notifying Norges Bank in the event Kredittilsynet is informed that a serious liquidity or solvency problem may arise in a financial institution are laid down in the Bank Guarantee Act. In 2004, Norges Bank specified its role in the event of liquidity crises in the financial sector in more detail. If an institution requires an extraordinary loan, Norges Bank will request Kredittilsynet to assess the reasons for the institution's liquidity problems, its capital and liquidity situation and possible action to solve the problems. As part of the contingency arrangements, Kredittilsynet and Norges Bank regularly exchange updated lists of their contact persons in banking and finance and in securities settlement.
Payment and settlement systems
Under the Payment Systems Act, Norges Bank has the responsibility for authorising and supervising interbank systems, while Kredittilsynet is responsible for the customer side of payment systems (systems for payment services) and approval of securities settlement systems. There is some overlapping between Norges Bank's supervisory tasks under the Payment Systems Act and Kredittilsynet's supervisory responsibility under the Financial Supervision Act. To achieve the optimal use of resources and to avoid unnecessary duplication of effort, the two institutions hold 3-4 meetings per year to discuss the payment systems, with particular focus on incidents or operational disruptions in the interbank systems. Supervisory activities and possible joint projects, mainly related to assessment of operational risk in the interbank systems and the institutions operating the systems, are also reviewed.
Kredittilsynet and Norges Bank have drawn up a joint document concerning the division of roles between the two institutions in securities settlement systems, including cooperation and information exchange.4 The institutions are currently cooperating with the Norwegian Central Securities Depository on implementing the IMF's recommendations for improvements to the securities settlement system.
The two institutions have also cooperated on a number of joint projects involving payment services, including a report on regulation of international credit card companies' commissions and a survey of prices for cross-border payment transactions. Norges Bank exchanges information with Kredittilsynet in connection with the preparation of the central bank's annual Report on Payment Systems.
Financial institutions' reporting of accounts
Norges Bank, Kredittilsynet and Statistics Norway work together on a joint reporting system and database for accounting information for banks and financial undertakings (the ORBOF data base).5 Norges Bank is responsible for obtaining and processing accounting data, while Kredittilsynet is responsible for regulations and guidelines. The three institutions meet regularly to discuss these financial market statistics. A cooperation project is currently in progress to introduce a new technical system for ORBOF and update agreements between the three institutions.
Regulations and authorisations
Kredittilsynet and Norges Bank cooperate in some cases on developing financial market regulations, particularly the capital adequacy rules. Working together in joint working groups has enabled both institutions to make good use of their respective expertise.
Authorisation applications that involve the largest financial conglomerates and are important to financial stability are submitted to Norges Bank for comment before being processed by Kredittilsynet.
Both institutions take an active part in international work in the field of finance. Participation in EU and EEA contexts is shared appropriately between the two institutions. When both take part in these meetings, they collaborate on preparations for the meeting and on the subsequent follow-up. This applies for example to their participation in the Committee of European Banking Supervisors (CEBS) and regular meetings with the European Central Bank (ECB) to discuss financial stability issues. Kredittilsynet and Norges Bank also exchange information and minutes from international meetings of common interest.
A biannual overview of international work on the operational parameters for the financial sector is jointly compiled by Norges Bank and Kredittilsynet and is published on both institutions' websites.
The Ministry of Finance, Kredittilsynet and Norges Bank worked closely and extensively together in connection with the IMF Financial Sector Assessment Program for Norway, which was carried out in autumn 2004/spring 2005.
Cooperation between various countries' supervisory authorities and central banks is necessary with regard to the supervision of financial conglomerates with cross-border activities. This applies in particular to the Nordic countries, where there is a relatively high level of cross-border activity in the financial industry. Information is exchanged between Norges Bank and Kredittilsynet about ongoing Nordic cooperation in general and about the individual conglomerates. Supervision of Nordea has been given particular emphasis, including the consequences of any changes in corporate structure.
1 The updates are referred to in Kredittmeldingen (Credit Report) 1996 (Report No. 12 to the Storting (1997-98) and Kredittmeldingen 2000 (Report No. 6 to the Storting (2001-2002).
2 There is no statutory restriction on the exchange of information between Kredittilsynet and Norges Bank, cf. section 7 of the Financial Supervision Act and section 12 of the Norges Bank Act.
3 Norges Bank publishes a Financial Stability report twice a year. Kredittilsynet produces a biannual report on macroeconomic monitoring and financial stability, which is exempt from public disclosure, and Kredittilsynet's report "The Financial Market in Norway: Risk Outlook" is published annually.
4 The document has been published on both institutions' websites.
5 Kredittilsynet and Statistics Norway share the responsibility for collecting and processing accounting data for insurance companies in the FORT database.