norges bank & the federal reserves strategic operations

8/17/2019 Norges Bank & the Federal Reserves Strategic Operations

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Norwegian Banking System Report

Ivan Mendes

Arthur Isibo


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Norges Bank

Background: Granted independence from the Swedish throne in 1905. Norway isnot a part of the European Union. Norway is located in Northern Europe, oardin!Sweden and the North Sea, as well as, the North "tlantic #cean. Natural resourcesinclude petroleum, natural !as, iron ore, copper, lead, $inc, titanium, pyrites,nic%el, &sh, timer, and hydropower. Some en'ironmental issues pla!uin! Norwayare( water pollution, acid rain, threatenin! &sh stoc%s, and air pollution. )hema*ority ethnic !roup is Norwe!ian +9 per cent-, followed y other European, andother. )he current population stands at 5.2 million.

Economy & Government: Norway has a constitutional monarchy form of!o'ernment, with its chief of state ein! in! /arald , and its head of!o'ernment ein! rime inister Erna Soler!. "rticle 35c of the Nors%e4onstitution stipulates that the Stortin! +Norwe!ian arliament- shall super'iseNorways monetary system, and in the Nor!es 6an% "ct, the 7central an% ofNorway was estalished. )he "nnual 8eports are sumitted to the inistry ofinance and communicated to the in! in 4ouncil and to the Stortin! in theGo'ernments inansmar%nadsmeldin!a +inancial ar%et essa!e:8eport-. )heNorwe!ian economy is a prosperous mi;ed economy, with a 'irant pri'ate sector,and a lar!e state sector, and an e;tensi'e social safety net. )he !o'ernmentcontrols such sectors as petroleum. E;port re'enue from petroleum, hydropower,&sh, forest, and minerals total rou!hly ?50 illion. G@ +ppp- in 201 was >


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si; times a year. )he analyses and the monetary policy strate!y presented in N6sonetary olicy 8eport, to!ether with assessments of price and cost de'elopmentsand conditions in the money and forei!n e;chan!e mar%ets, form a asis formonetary policy decisions. Bn addition, Nor!es 6an% mints notes and coinsF andsupplies an%s and the !eneral pulic with currency, and li%ewise, remo'es worn

and dama!ed notes and coins from circulation. "s of arch 1, 201A, the %ey policyrate was ecause y 25 asis points to 0.50.

Financial Stability: #ne of the 6an%s primary o*ecti'es is to ensure economicstaility, foster a roust and eHcient &nancial mar%ets and payments systems.Nor!es 6an% issues notes and coins and ensures daily settlement in Norwe!ian%roner. )he ayment Systems "ct introduced the Nor!es 6an% as the licensin!authority for an%s clearin! and settlement systems, and !a'e the 6an% theauthority to ta%e measures re!ardin! the &eld of monetary, credit or forei!ne;chan!e policy. "nother aspect of the 6an% is the aility to conduct4ountercyclical 4apital 6uIer, which in retrospect, is li%e the ederal 8eser'es

capital reJuirements. )his uIer allows the 6an% to staili$e &nancial mar%etswhen in turulent times +i.e. G4 of 200?-. )he uIer rate can e reduced ine'ents of an economic downturn and lar!e an% losses, and if functions asintended, an%s will ti!hten lendin! to a lesser e;tent in a downturn. 6ut when theuIer is increased in !ood times, it may dampen credit !rowth and restrain the&nancial mar%ets. )his policy is ta%en as a ris% assessment and miti!ation stance. )his uIer is set each Juarter y the inistry of inance and will usually eetween 0 and 2.5 percent of an%s ris%=wei!hted assets.

Liquidity Management: )he Nor!es 6an% ensures that the an%in! system hassurplus liJuidity on a daily asis, which the an%s deposit in their current accounts

at the Nor!es 6an%. )he S) money mar%et rate remains close to that %ey policyrate. )he an% reser'es +Juota- is N# 5 illion or US@ 5.2 illion. )he Nor!es6an% aims to maintain an a'era!e reser'es in the an%in! system of N#


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The Federal Reserve's duties fall into four general areas

• Conducting the nation's monetary policy by inluencing the monetary and credit conditions in the

economy in pursuit o ma!imum employment" stable prices" and moderate long#term interestrates

• Supervising and regulating banking institutions to ensure the saety and soundness o the nation's

banking and inancial system and to protect the credit rights o consumers• Maintaining the stability o the inancial system and containing systemic risk that may arise in

inancial markets

• $roviding inancial services to depository institutions" the %&S& government" and oreign oicial

institutions" including playing a maor role in operating the nation's payments system

Norges Bank mandate and core responsibilities

• Norges Bank shall promote economic stability in Norway&

• Norges Bank has e!ecutive and advisory responsibilities in the area o monetary policy and is

responsible or promoting robust and eicient payment systems and inancial markets&• Norges Bank manages Norway(s oreign e!change reserves and the )overnment $ension *und

)lobal

Monetary Policy: Norges Bank and the Federal Reserves

Both the *ederal Reserves and Norges Bank )overnors are appointed by the acting $resident and+or

,ing in Council& -he general meetings take place at a minimum o our times per annum. this is

applicable or both central banks& -he main obectives regarding monetary policy are the ma!imi/ationo employment and moderation o long#term interest rates in order to stabili/e prices" which ultimately

produces a healthy economy& Both ensure this mandate through pursuing obectives" such as" seeking to

e!plain its monetary policy decisions to the general public with great speciicity& Simply" clarity in

inormation osters well#inormed decision making at the household+business level& Such eorts are putin place to reduce inancial uncertainty while increasing the eectiveness o monetary policy& Both the

*ederal Reserves and Norges Bank attempt to maintain inlation at two percent and the communicationo this goal helps maintain long#term inlation e!pectations irmly attached& -his then becomes a key to

oster price stability and moderate long#term interest rates while promoting ma!imum employment&

In addition" ma!imum employment is determined by nonmonetary actors which then disturb structuresand dynamics o the ob market because changing actors produce uncertainty which may be

immeasurable& -hus is the rationale behind the *ederal Reserves and Norge Bank not speciying or

ma!imum employment 0although e!emplary employment targets are set to reach low unemployment

levels1& In setting monetary policy" the *ederal Reserves and Norges Bank both seeks to mitigatedeviances in inlation over the long run and as well as deviances in employment rom the assessments o

its ma!imum capacities& In summation" all obectives are generally complementary& %ndercircumstances in which the committees udge that such obectives as uncomplimentary" it attempts to produce a balanced approach" taking into account the magnitude o the deviations and the potential

longevity in which employment and inlation are proected to return to levels udged consistent with

ederal mandate&

Statistics as of 2016


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*ederal Reserve Norges Bank

Inlation 23 23

%nemployment 4&5 6&7

Interest on -reasury bills 8yr 5&92 5&47

Interest on )overnment bonds 85yr 8&:8 8&6:

;vernight interest rate 8&


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reali$ed ased on the depositors ris%=wei!hted assets, and shall apply to all an%swithin Norway, and forei!n an% ranches operatin! in country. #n the contrary,the ederal 8eser'es reJuirement rate can de'iate etween 0 and 10. ordepositors with net transaction accounts 'alued at less than >15.2 million, thereJuirement is as low as 0, and for depositors with net transaction accounts

'alued etween >15.2 and >110.2 million, the reser'es reJuirement is


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Bn contrast, temporary open mar%et operations would include Mshort=termrepurchase and re'erse repurchase a!reements used to aIect the si$e of theederal 8eser'e Systems portfolio, as well as inCuence daily tradin! acti'ities.

Such operational systems do not e;ist in the Norwe!ian central an% system,which is more or less concerned with an% liJuidity and loans to meet liJuiditydemand. Nor!es 6an% does operate in securities and tradin! ut does not ha'e aMpermanent nor Mtemporal open mar%et operation system. Some of Nor!es 6an%central operational systems include the mana!in! of forei!n e;chan!e reser'es,and the relati'ely rare manipulation thereof, and in uIerin! the !o'ernmentud!et:portfolio with the Go'ernment etroleum und, which is one of the lar!est!loally.

" &nal note, Nor!es 6an% reJuires collateral eJualin! 90 or !reater of the face'alue of loans +whether o'erni!ht or re!ular-, which should e;plain the diminished

le'els of le'era!e that the an% has. 4ollateral securities can e( 6onds andcerti&cates issued y the !o'ernment or other #E4@ memer states that ha'e notrene!otiated det in the last &'e years, onds and certi&cates issued or!uaranteed y the Norwe!ian municipalities, counties, states, enterprises, andmort!a!e companies, or units in trusts limited in in'estment !rades, and othercollaterals are accepted as security. 4ollateral not accepted would e securitiesissued y another entity within the same &nancial !roup as the an%. )he need forcollateral !reatly uIers the an% a!ainst defaults and 'olatile mar%et mo'ements.

$ecommendation & m'rovement"s with all systems, there are areas that will always reJuire attenti'e actions and

considerations. or starters, the ederal 8eser'e systems are continuously in theprocess of ma%in! the payment system safe, more eHcient, and faster, and thatfor se'eral reasons. erome owell, a ederal 8eser'e 6oard Go'ernor and#'ersi!ht 4ommittee 4o=chair, emphasi$ed that producin! a more eHcient systemwould Mcontriute to pulic con&dence and economic !rowth, one of the 'ery %eypolicy of the System +2015-. /is 1?=month lon! research on the eHciencies of thepayment systems produced se'eral discrepancies, such as the safeimplementation of payments, faster payment capailities, and comatin! fraud inpayment systems +2015-. )hus the ederal8e'iew 6oard has listed a set of outcomes and strate!ies that are most desired. )he desired outcomes, are uiJuitous( speed, security, eHciency, international and

collaoration. "s well, desired strate!ies would e( +a- the in'ol'ement of outsidesta%eholders on desi!nin! a more eIecti'e payment systems, +- wor%in! toreduce fraud and ad'ance the safety of the system, and +c- achie'in! !reater end=to=end eHciency for payments, domestically and internationally +2015-. Gi'en thatpayments systems can easily e fraudulent, the ederal 8eser'e has attemptedand will continue to adapt this system.


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"nother area of impro'ement may e the way that the ederal 8eser'e !au!es thestaility of the economy and the dictation of interest rate chan!es. )he fact thatthe ederal 8eser'e can !reatly eIect !loal mar%ets, a more 'alue orientedapproach may e etter in determinin! the necessary increase in interest rates,rather than lea'in! the mar%ets in limo and uncertainty. )he pro'ision of a more

eHcient o'ersi!ht of the mar%ets may e to the est interest of the ederal8eser'e System and can ene&t all in'ol'ed in the system.

Bn 201, Nor!es 6an% produced it strate!ic outloo% and de'elopment for 201 to201A, and in that outloo% was the updatin! and de'elopment of the core tas%s, thecontriutin! to international standard for monetary policy, Mthe o'ersi!ht andanalysis of &nancial staility, and for !loal in'estment mana!ement +Nor!es6an% 20150 illion since the decline of crude prices. )hus it isimperati'e that Nor!es 6an%, and Nor!es 6an% Bn'estment ana!ement producenecessary chan!es in the in'estment strate!ies of the So'erei!n Realth und.Surprisin!ly enou!h, the fund has e!un to conduct such chan!es with a recentstory statin! that the fund has shifted allocation and has in'ested more into realestate, an allocation that has een seen as a safe in'estment +usually-. 8e!ardin!onetary policy, it is recommended that capital reJuirements, uIer capital, and

necessary liJuidity rates e re'iewed on a periodic asis and re'ised whene'ernecessary for the etterment of the Norwe!ian economy. Such a 'iew is to producea more liJuid, and more eHcient economy that is ale to face another crisis ifnecessary. Bt is hoped that y ta%in! such measures, Nor!es 6an% can help placethe Norwe!ian economy on a stale and eHcient road for success, relatin! toin'estments and international politics. )hat concludes our recommendationre!ardin! Nor!es 6an% and the ederal 8eser'e System.

ReerenceCredit and >i?uidity $rograms and the Balance Sheet& 0n&d&1& Retrieved April 86" 2589" rom

http@++www&ederalreserve&gov+monetarypolicy+bstopenmarketops&htm

Norges Bank& 0n&d&1& Strategy 2587#2589& Retrieved March 65" 2589" rom http@++www&norges# bank&no+%pload+;m Norges Bank+;rganisason+Strategy2587&pd

Norges Bank& 02584" =ecember1& Monetary $olicy Report with inancial stability assessment& Retrievedrom http@++static&norges#bank&no+$A)S+857257+M$R784&$=*

DE8+88+2589828475$MF*-E&$=*


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Norges Bank # -he central bank o Norway& 0n&d&1& Retrieved *ebruary 84" 2589" rom

http@++www&norges#bank&no+en+

;livei" )& $& 025521& Norway(s Approach to Monetary $olicy& Retrieved March 25" 2589" rom

https@++www&bostoned&org+economic+neer+neer2552+neer252&pd

2nd Guarter Report by the Boston *ederal Reserves

(DE)


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norges bank & the federal reserves strategic operations

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