The liquidity management system
Norges Bank manages bank reserves with a view to keeping the shortest money market rates close to the policy rate. This is carried out through different forms of market operations, which means that the central bank can either supply or withdraw reserves to/from the banking system.
Norges Bank manages liquidity in the banking system through the use of reserve quotas. Banks receive interest only on a specific portion of reserves – a quota – equivalent to the key policy rate. Deposits in excess of the quota bear lower interest – equivalent to the reserve rate.
Moreover, the system has standing facilities, which means that banks can borrow reserves overnight or deposit surplus liquidity overnight in the central bank. There are also guidelines relating to collateral, which sets out the collateral requirements for borrowing reserves in the central bank.
In addition, Norges Bank offers an intraday facility, i.e. banks can borrow unlimited reserves against collateral through the day in the central bank.
Reserves in the Norwegian banking system are primarily determined by transactions over the government's account in Norges Bank. When private agents pay taxes and excise duties to the government, or when the government issues government securities, reserves are transferred from the banks' account in the central bank to the government's account in the central bank. This reduces the quantity of reserves in the banking system. When the government transfers funds to private agents (wages, benefits and different transfers), and when government securities mature, reserves are transferred from the government's account in the central bank to the banks' account in the central bank.
The level of bank reserves is furthermore determined by notes and coins in circulation. When banks buy notes and coins from the central bank, they pay by drawing on their deposits in the central bank. Hence the reserves in the banking system are reduced.
Structural liquidity refers to the level of reserves that would have existed if Norges Bank had neither supplied reserves to the banking system nor withdrawn reserves from the banking system. The aim is to maintain total reserves in the banking system at a specific level. Given the level of structural liquidity, Norges Bank must provide reserves or withdraw reserves from the banking system in order to maintain the desired level of reserves.
The banks that have access to Norges Bank's standing facilities receive interest only on a certain portion of reserves – a quota – at the policy rate. Deposits in excess of the quota bear lower interest – at the reserve rate. The quota is calculated as follows:
- Norges Bank determines the sum of all the quotas in all the groups (the total quota).
- The banks are divided into three groups according to Norges Bank's settlement system (NBO).
- All the banks in a group will be assigned the same quota.
- The aggregate quota of each group is set by the respective groups' share of total assets.
- Settlement banks will be assigned an additional quota determined by the size of the settlement bank in relation to the size of the banks which it performs settlements (as measured by total assets).
- Norges Bank will normally review the total quota and the distribution among banks twice annually.
- Norges Bank will publish structural liquidity forecasts twice a week.
See Circulars for the distribution of the total quota across banks for the level of the total quota, the distribution of the quota among banks and the details on the calculations of quotas.
The decision behind a new liquidity management system
Prior to 3 October 2011 the system for managing bank reserves in Norway was a so-called floor system. Banks then received interest on all deposits at the central bank at the policy rate, the sight deposit rate.
Norges Bank's Executive Board resolved to amend the "Regulation on the Access of Banks to Borrowing and Deposit Facilities in Norges Bank etc." with a view to changing the system for the management of banks' borrowing and deposit facilities in Norges Bank to the quota-based system we use today. The change was made with the aim of motivating banks to redistribute reserves in the interbank market. In isolation, this enhances the use of reserves and allows monetary policy to be implemented with a lower total amount of reserves in the banking system.
- Negative interest rates: Central bank reserves and liquidity management (Economic Commentaries 2/2015)
Liquidity management system: Floor or corridor? (Staff Memo 4/2010)
Norges Bank's balance sheet and earnings (Staff Memo 9/2013)
Structural liquidity (Economic Commentaries 9/2013)
Banks’ assessment of Norges Bank’s liquidity management system (Norges Bank Papers 4/2014)