We refer to the Ministry of Finance's letter dated 15 December 2005 concerning the above.

The proposed legislative amendments are a result of the new capital adequacy rules from the Basel Committee (Basel II) and changes in appurtenant EU directives. In formulating the draft, it has been emphasised that the statutory provisions shall provide an overview of the main elements and structure of the capital adequacy rules, while the proposal calls for regulation of detailed requirements by means of regulations and guidelines. The structure of the Basel Committee's rules, in the form of the three pillars, is apparent in the Ministry's proposed statutory provisions. Norges Bank supports the proposed development of rules for capital adequacy in the Norwegian legal framework.

The heading "Sanctions" has been used both in the draft of Section 2-9d of the Financial Institutions Act and in Section 8-10d of the Securities Trading Act. We recommend that this be changed because it is unfortunate and clearly misleading. The provisions do not deal with "sanctions", but rather authorise various supervisory measures or injunctions concerning corrections, amendments etc. Sanctions describe reactions designed to punish as a consequence of a rule violation. It is assumed that it is not the intention of the draft act that, for example, par. 5 should provide a basis for raising the minimum capital requirement as "pure punishment" for a rule violation, when an institution's situation or other supervisory factors do not provide a basis for such an increase.

Giving general authorisation for a flexible or partial entering into force, as well as other transitional rules should be considered, possibly as part V. This may seem somewhat arbitrary when this only comes to light now in connection with some provisions, cf. typically in the draft of the final paragraph no. 5 of Section 2-9a of the Financial Institutions Act.

In the Committee of European Banking Supervisors (CEBS), extensive work to implement the capital adequacy rules is currently underway. As a result of this work, it may gradually become necessary to make changes in the Norwegian capital adequacy rules. Therefore, the Ministry of Finance and Kredittilsynet (the Financial Supervisory Authority) should agree on an appropriate division of responsibilities in connection with the formulation of capital adequacy rules in Norway.

The proposed draft legislation does not cover insurance companies. In connection with this, we refer to Kredittilsynet's letter of 9 December 2005 to the Ministry of Finance concerning alternative models for protecting the solvency of insurance companies until Solvency II enters into force. Norges Bank agrees with Kredittilsynet that a better response to the current challenges would be to replace the minimum capital adequacy requirement that is used for insurance companies (Basel I) with an alternative risk-based capital requirement, which would take into account the guidelines that have so far provided the basis for the EU Commission's Solvency II project.

Yours sincerely

Kristin Gulbrandsen