Full interview transcript: Øystein Olsen, Norway's central bank governor

Norges Bank is responsible for giving advice on the counter-cyclical buffer. We stress very eagerly the focus and the aim of this new measure which is not an ordinary instrument to fine-tune the business cycle, although it can be used to supplement and compliment the interest rate decision.

The primary objective of monetary policy is to stabilise prices. Monetary policy is also the first line of defence to stabilise business cycles. The purpose of introducing capital requirements or the counter-cyclical buffer is to make banks more robust and resilient to major shocks which hopefully do not occur as frequently as more ordinary business cycles.

Which macroprudential tool has had the most impact?

We have supported the introduction of the counter-cyclical buffer. We have also supported floors on risk weights on stricter prudential measures, partly because the different measures have been necessary to make banks more resilient and also because there are effects via lending and the demand for housing. But to go further and quantify which measure has been most important, is hard.

Even though the list of macro-prudential measures appears to be long, it is primarily the counter-cyclical buffer which, according to the international guidelines, designed to be time varying. We regard many of the other measures, including loan to value caps as primarily structural measures. For example, we supported the lowering of the LTV cap to 85pc in 2010, but first and foremost as a structural measures. The LTV cap is important for the economy but it’s also important from the point of view of the borrowers .

Why should it be a permanent feature?

Household capital is an insurance against harder times. Borrowers or house buyers should be prepared for the fact that housing prices fluctuate. They can go up, but they may also fall. But in the end we regard it as a very sensible cap also from a macro-economic perspective, to increase the resilience in the economy.

Is an LTV cap too political?

I think we we are best served by setting a sensible level on the LTV cap which should be more or less permanent. I’m sceptical, at least in our situation to let that level vary through the business cycle or even through a credit cycle because I don’t think it would function very well. Other countries may have other experiences, New Zealand, for example, have defined this instrument as macro prudential measure and intend vary it to some extent, and that could function in their case.

But in our case, I think other measures should be used to stimulate or to hold back the demand in the economy. Monetary policy is one example.

Capital requirements should not be about regulating business cycles, I think it should be to make banks more robust so that banks could be resilient and resist and robust to handle crises when they come.

Could you talk more about why LTV caps should be made permanent?

If one should seek to vary LTV requirements through the business cycle or credit cycle, the timing is very difficult. Moreover, LTV requirements is targeted towards a group of the population, typically young people which do not have their own equity capital in advance on their way into the housing market. So you don’t target the whole population, you target a smaller group of the population, and I’m a bit critical to use that group to stabilise the overall economy through letting that requirement vary through the cycle.

You seek an optimal level that is sensible for the stability of the economy and young people. From a personal point of view, it should be regarded as an insurance, and that will also make the overall economy more stable.

Economically, Norway is in a very good position, because we have still positive growth, low unemployment and the perspectives for our economy looking forward are quite good. The situation is very different in other European countries, so you can understand why they have postponed the introduction of stricter macro-prudential requirements. But there are a couple of other countries that are in the same position, or perhaps ahead of Norway in ahead of introducing macro prudential policies such as Switzerland, I mentioned New Zealand. I think those are interesting cases.

Are you worried about LTV caps spurring a rise in unsecured lending or shadow banking?

In the case of Norway that is not happening to any significant extent because we don’t really have a shadow banking system. What’s happening here is that when younger people meet these LTV caps, they are helped by their parents to fill up some of the necessary equity capital. We know that is happening to a large extent. Those with parents who can afford it are being helped up to some extent. There are some remaining who are not in that position. They could have problems.

Could this cause inequality issues?

Yes, possibly. Equality questions are not part of the central bank’s mandate, but the issue underpins my scepticism of letting this cap vary, because you use a smaller group of younger people who do not have parents that could help them out, to stabilise the economy.

I think this could be an argument for reaching a sensible level but which is permanent so that for every generation they are quite aware of this requirement, which they will meet when they go to the bank.

In order to ingrain a savings culture from a young age?

Yes.

What is your advice for Mark Carney?

Generally speaking, I would say that in monetary policy and in macroprudential policy, all countries could learn from each other. We communicate, we talk to each other. We have learned a lot from the Bank of England because they were earlier in introducing the inflation targeting regime. We have extensive contact with the Bank of England. We have been early in integrating our monetary policy analyses and our financial stability analyses, and merging our policy reports. But then it’s also important to point out that institutional setups between different countries vary. Some countries have a separate FSA. The Bank of England has a separate macro-prudential committee. I have full confidence that the Bank of England will implement these measures in a sensible way.

Should macro-prudential measures be used en-masse or in a step-by-step approach?

My view is that we have implemented in Norway several measures, notably the counter-cyclical buffer, floors on risk weights on mortgages, a tightening of prudent lending standards, and an increase in capital requirements. But I regard most of these measures as permanent and not macro-prudential in the sense that they should not vary over time.

I’m bit sceptical to broaden the macro-prudential toolbox and let all these so-called new instruments vary through cycles, and we should be careful not to be overly ambitious in implementing this toolbox. The overall economy is complex and it is demanding to identify the driving forces behind financial crises in advance. That is always easier ex-post. So I think we should be quite humble and realise that our analysis and understanding of bubbles inflating and bursting, , , is in an initial phase. And I think policy should be designed in accordance with that humbleness.

So we should implement the measures slowly?

It depends on the economic situation. They have been introduced quickly in our country, for good reasons. It's about time to have stricter stricter regulations of banks. And countries should seek the necessary measures to build up bank buffers once their economy can sustain them.

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