Norges Bank requires collateral for all lending to banks.
Collateral is provided in the form of securities which are pledged to
Norges Bank. The list of eligible securities was changed in 2005. The
aim of the changes has been to reduce Norges Bank's risk while
ensuring that the borrowing facilities available to banks remain
sufficient for payments to be settled and monetary policy to be
implemented effectively. This article presents the changes that have
been made and analyses the effects on Norges Bank's risk and
banks' borrowing facilities. We conclude that the changes in the
rules have indeed reduced Norges Bank's risk, and that the rules
still provide for adequate borrowing facilities.
Banks can raise loans from Norges Bank against collateral in the
form of securities. These loans are to help ensure that banks have
sufficient liquidity for payments to be settled and monetary policy to
be implemented effectively (see Box 1). Norges Bank seeks to avoid
losses on its loans to banks and therefore requires that they are
collateralised. (2) The collateral must meet various requirements. The
collateral may be realised if a bank defaults on its obligations to
Norges Bank or is placed under public administration. A bank's
borrowing facilities correspond to the market value of the securities
pledged less haircuts for various types of risk.
When the requirement of full collateralisation of loans from Norges
Bank was introduced in 1999, Norges Bank accepted a wider range of
securities than is usual for a central bank. This was due, in part, to
few government bonds being issued in Norway. Internationally, government
bonds are the most common form of collateral for loans from central
banks. Relatively liberal rules on eligible collateral were necessary to
ensure that banks had sufficient borrowing facilities. Parts of this
eligible collateral entailed a degree of risk for Norges Bank.
In 2005, Norges Bank found that conditions were right for the rules
to be amended so that this risk could be reduced. There were several
reasons for this. First, banks" borrowing facilities had grown
relative to their borrowing requirements. Second, the Financial
Collateral Act of 2004 provided for immediate realisation of collateral,
allowing banks' borrowing facilities to be calculated on the basis
of market value rather than nominal value. The use of market value to
calculate borrowing facilities reduced Norges Bank's risk and paved
the way for lower haircut rates. For a given volume of pledged
securities, reduced haircuts mean increased borrowing facilities. Third,
there was reason to believe that banks would gradually begin to use new
covered bonds as collateral at Norges Bank.
Some of the changes adopted in 2005 did not enter into force until
1 November 2007. We now have a basis for analysing the consequences of
the changes in the rules for banks' borrowing facilities and Norges
During the turmoil in global financial markets in 2007-08, banks in
many countries borrowed more than usual from central banks. Demand for
central bank liquidity increased because the markets for interbank
lending functioned poorly. The turmoil was triggered by uncertainty
about which banks might be hit by losses and liquidity problems as a
result of difficulties in the US sub-prime mortgage market. Banks were
uncertain about both their own and other banks' future liquidity.
To reduce the risk, they therefore sought to limit their lending to
other banks. It became harder than usual for banks to raise loans, and
interest rates in these markets rose sharply. Many central banks
therefore injected additional liquidity into the banking system through
market operations and secured loans. Some central banks also extended
the range of eligible collateral. Norges Bank ensured a sufficient
supply of liquidity to the banking system through a slightly larger
allotment of F-loans than usual. (3)
This article is organised as follows. Section 2 summarises the
rules on collateral for loans from Norges Bank and compares them with
the rules at other central banks. Section 3 looks at the size and
composition of banks' borrowing facilities and how these have
evolved over time. We also analyse the consequences for banks'
borrowing facilities of the changes in the rules adopted two years ago,
and the size of banks' borrowing facilities is compared with their
need for credit when settling payments. Section 4 analyses changes in
Norges Bank's risk, while Section 5 draws conclusions and looks to
2 The rules and the changes in the rules
Norges Bank accepts many types of securities as collateral. When
deciding which assets are eligible, importance is attached to three
considerations. First, Norges Bank's risk is to be as small as
possible. Even if a loan is collateralised, there will be a risk if the
issuer of the pledged securities cannot fulfil his obligations, or if
the securities are difficult to sell. Second, the rules should be
designed in such a way that banks have sufficient borrowing facilities
at Norges Bank. Third, there are operational considerations: the
collateral should not necessitate a disproportionate amount of manual
follow-up at Norges Bank. Box 2 presents the key features of the current
2.1 Changes in the rules in recent years
In autumn 2005, Norges Bank decided to make changes in the rules.
Most of the changes tightened the collateral requirements. This was done
to increase the credit quality and marketability of the pledged
securities (in other words, reduce credit risk and liquidity risk).
Changes were also made to avoid the borrower and the issuer of the
collateral belonging to the same sector and therefore potentially
running into financial problems at the same time. Some minor changes
were motivated by operational considerations at Norges Bank. It was also
decided to reduce the haircut rates, which, in isolation, served to
increase banks' borrowing facilities. To make it easier for banks
to adjust to the changes in the rules, it was decided that some of the
changes would not enter into force until 1 November 2007. A number of
additional changes relaxing the rules were adopted in autumn 2007, and
these also entered into force on 1 November 2007.
Table 1 shows the most important changes which Norges Bank has made
in the rules over the last couple of years. The table shows when the
changes were adopted, when they entered into force, and what was the
reasoning behind them. (4)
Norges Bank accepts securities issued by public and private issuers
in Norway and abroad. Norges Bank also accepts units in funds registered
with the Norwegian Central Securities Depository (VPS).
2.2 Rules on collateral at different central banks (5)
Different central banks accept different types of asset as
collateral. Table 2 summarises the rules on the provision of collateral
for a selection of central banks. Of these selected banks, the Federal
Reserve in the US seems to have the most liberal rules, while the Bank
of England has the most stringent. (6) Sveriges Riksbank in Sweden and
the Eurosystem have fairly similar rules to Norges Bank. Some central
banks, including the Bank of England, widened the range of eligible
collateral during the market turmoil in 2007-08. Table 2 is based on
current regulation and not ad hoc crisis measures.
Norges Bank, the Eurosystem, Sveriges Riksbank and the Federal
Reserve accept securities issued by banks. Norges Bank and Sveriges
Riksbank set a limit on the proportion of the total collateral for which
such securities may account. The same four central banks accept
corporate securities, covered bonds and asset-backed securities.
Danmarks Nationalbank in Denmark does not accept bonds issued by banks
or asset-backed securities, but does accept covered bonds. The
Eurosystem and the Federal Reserve are the only central banks in the
selection which accept bank loans (that is, loans to customers) as
The rules on eligible collateral need to be seen in the light of
the size of the bond market in local currency. Countries with a
relatively small local bond market, such as Norway and Sweden, accept
securities issued in a variety of currencies. Countries and regions with
large bond markets, such as the euro area, the UK and Denmark, accept
few currencies other than the local one. The exception is the Federal
Reserve, which generally has liberal rules on collateral in connection
with the settlement of payments. The size of the bond markets also helps
to explain why Norges Bank and Sveriges Riksbank are the only banks in
the selection to have a minimum volume requirement to ensure that the
collateral is sufficiently liquid.
The rules must also be seen in the light of the size of the banking
system's liquidity requirements. In Norway, large incoming payments
are made to the government on certain days of the year. These are paid
via the banks to the government's account at Norges Bank. The banks
need a great deal of liquidity to execute these payments. Banks'
liquidity requirements are therefore greater in countries where the
government has an account at the central bank and also has large
incoming payments. (7)
3 Banks' collateral at Norges Bank
Banks' available liquidity at Norges Bank comprises their
deposits in sight deposit accounts and unused borrowing facilities at
the Bank. The limit on these borrowing facilities applies to F-loans and
D-loans combined: borrowing rights used for F-loans cannot also be used
for D-loans, and vice versa. Banks have pledged more securities to
Norges Bank in recent years, which has increased their aggregate
borrowing facilities (Chart 1).
Banks' liquidity requirements are related to the size of the
positions they settle through Norges Bank's Settlement System
(NBO). Developments in average turnover in NBO are an indicator of
developments in liquidity requirements. (8)
The fluctuations in turnover illustrate that liquidity requirements
vary. Aggregate liquidity comes under most pressure on days when large
payments are made to the government. Petroleum taxes have a particular
impact when they fall due twice a year. (9) In the period immediately
after petroleum taxes fall due, the liquidity available for the
settlement of payments is reduced. This is because large parts of
banks' borrowing facilities are used to raise F-loans, with the
increased deposits that result then being used to pay the petroleum
taxes. The changes in the rules adopted in 2005 have affected
banks' borrowing facilities. The following discusses the changes in
borrowing facilities for different categories of banks. We also look at
different banks' utilisation of available liquidity in NBO on days
when liquidity is scarce due to payments to the government.
3.1 Categories of banks
Both borrowing requirements and borrowing facilities normally vary
with the size of a bank. To simplify the analysis, we distinguish
between small, medium-sized and large banks (see Table 3).
The small banks rarely, if ever, participate directly in settlement
in NBO. They therefore have little or no need to borrow from Norges
Bank, and so little or no need to pledge securities to Norges Bank. Many
small banks have nevertheless retained their borrowing facilities,
probably in order to meet the quantitative liquidity requirement which
previously applied, (10) To meet this requirement, banks needed to hold
6 per cent of their balance sheet as liquid assets, and unused borrowing
facilities at Norges Bank counted as liquid assets. Since the
quantitative liquidity requirement was replaced by a qualitative
requirement in 2006, several small banks have terminated their accounts
and borrowing facilities at Norges Bank.
In an emergency, small banks too may need to borrow from Norges
Bank. This might suggest that they should have access to securities
which are eligible as collateral for loans from Norges Bank. Banks which
settle through a private bank must have an alternative settlement bank
which will be used if the settlement bank normally used cannot continue
to operate. Banks which wish to use Norges Bank as their alternative
settlement bank should own or quickly be able to obtain securities which
can be used as collateral for loans from the central bank. Such
securities can also be used to raise F-loans from Norges Bank in periods
when it is difficult to borrow elsewhere.
The medium-sized banks participate directly in settlement at Norges
Bank, and some of them take out F-loans. Around half of the medium-sized
banks have an account at a foreign securities depository. Those which do
not have, or do not wish to have, such an account must limit themselves
to investing in securities registered with VPS.
The large banks participate actively in NBO, raise the largest
volumes of F-loans, and extend lines of credit to Norwegian and foreign
banks. This means that they have large liquidity requirements. On the
other hand, they normally have good access to funding in the securities
markets, and they invest in a wide range of foreign-registered
3.2 Banks' borrowing facilities and the impact of the new
Banks' aggregate borrowing facilities have increased in recent
years (see Charts 1 and 2). However, there have been major differences
between the different categories of banks. While the large banks have
generally increased their borrowing facilities substantially, small
banks as a whole have reduced theirs. There are also big differences
between individual banks (see Chart 3).
The composition of the pledged portfolio has changed. The
proportion of foreign-registered securities has risen from 56 to 80 per
cent in the last three years (see Chart 2). It is primarily the largest
banks which have contributed to this. The proportion and value of
Norwegian-registered securities in the pledged portfolio have fallen.
This reflects the tact that the tightening of the collateral
requirements has had a particular effect on the pledging of
It is difficult to gauge the impact of the changes in the rules.
First, there is reason to believe that the composition of the collateral
would have changed even if the rules had not. The large banks have
needed to increase their borrowing facilities (11), and banks of this
kind typically invest in bonds registered abroad. Second, banks
gradually adapted to the new rules before they entered into force.
Banks' gradual adjustment is illustrated in Chart 4, which
shows the estimated change in the value of eligible collateral assuming
that the new rules had been introduced on three selected days prior to 1
November 2007. In other words, the chart shows how much of the
collateral would no longer have been eligible. The impact of reduced
haircuts has been ignored here. This comparison gives rise to three
--The first observation (16 November 2004) is from before the
changes in the rules were announced. This shows that the three
categories of banks bad different needs to modify their collateral in
order to maintain it at the same level.
--The second observation (11 July 2007) shows the situation four
months before the new rules actually entered into force. The large banks
were well prepared, while the smaller banks still had a substantial
proportion of securities pledged which would soon no longer be eligible
--The third observation (31 October 2007) shows what the banks
actually lost in terms of eligible collateral when the rules entered
into force the following day. One reason why the reduction was not
larger is that Norges Bank actively encouraged the smaller banks to
adjust their collateral in the months leading up to November.
When parts of the new rules entered into force in 2005, banks'
borrowing facilities increased considerably. This was a result of
haircut rates being reduced immediately following the transition to
market value, while the changes tightening the collateral requirements
were introduced over a two-year period.
The positive effect of the reduced haircut rates meant that the net
reduction in borrowing facilities was smaller than the reduction in
collateral as a result of the tightening of the rules (illustrated in
Chart 4). If all of the changes in the rules (both the tighter
collateral requirements and the reduced haircut rates) had entered into
force in November 2004, the banks' aggregate borrowing facilities
would have been cut by 15 per cent (see Chart 5). This figure assumes no
adjustments by either banks or issuers.
As mentioned above, the rule changes have impacted differently on
the different categories of banks. Smaller banks have been affected more
than larger banks. This is because small and medium-sized banks pledge
more Norwegian-registered securities than large banks do, and the rule
changes have had the greatest effect on Norwegian-registered collateral.
Norwegian-registered collateral has been affected particularly by the
requirement for minimum volume outstanding. In addition, some Norwegian
securities are no longer eligible because they are not listed on an
exchange or do not have a sufficiently high credit rating.
3.3 Actual use of borrowing facilities
Some banks' borrowing facilities have been reduced as a result
of the rule changes. To see whether this has led to an increased risk of
disruption in the settlement of payments in NBO, we have compared
banks' liquidity requirements with their access to central bank
liquidity (deposits and borrowing facilities at Norges Bank).
We have calculated how much liquidity each bank needs during the
day for the settlement of payments (see Box 3). It is assumed that all
transactions are settled immediately. Thus we have not taken account of
banks being able to reduce their liquidity requirements by waiting for
incoming transactions from other banks.
On days with no large incoming payments to the government, all of
the banks have ample access to central bank liquidity. On one such day
chosen at random (11 July 2007), 17 of the 22 large and medium-sized
banks had more than three times more liquidity than they needed at any
time during the day. On days when large tax payments fall due, their
liquidity requirements are substantially larger, and the margins
We have also calculated the large and medium-sized banks"
liquidity requirements on the days in 2007 with the largest incoming
payments to the government. For these days, we have looked at the ratio
between actual access to liquidity and the maximum need for liquidity
during the day. This "liquidity ratio" shows how many times
more liquidity the banks have than they actually need. If supply is
equal to demand, the ratio will be 1. We have then chosen the lowest
liquidity ratio for each of the banks--in other words, the liquidity
ratio on the day with the smallest margin between a bank's access
to and need for liquidity (see Chart 6). There is one column for each
bank, with the liquidity ratio on the y-axis.
There are major variations between banks. Chart 6 shows that some
banks have a relatively small margin on extreme days. However, a
liquidity ratio of less than 1 does not mean that a bank failed to
settle its transactions on the day in question. When a bank lacks cover
for a transaction at Norges Bank, the transaction is queued. The
transaction is settled once the bank obtains cover, either through the
provision of additional collateral or through transactions received.
While some banks increased their borrowing facilities in the months
leading up to l November, others reduced theirs, due partly to the
tightening of the rules. For most banks, the change in their borrowing
facilities had little effect on the liquidity ratio. This is illustrated
by the red columns in Chart 6. Here, banks' actual borrowing
facilities on the days in question are adjusted for the percentage
change in their borrowing facilities from 11 July to 1 November 2007.
With the exception of the bank on the far left of the chart, the banks
with the lowest ratios did not reduce their borrowing facilities. This
lowers the risk of settlements being disrupted.
4 Norges Bank's risk
To limit Norges Bank's risk, the securities which banks pledge
as collateral must be of high credit quality and highly marketable even
in periods of financial turmoil. In the case of securities denominated
in foreign currencies, it is also important that the currency does not
depreciate significantly against the Norwegian krone in a short space of
time. (12) Banks are increasingly pledging securities denominated in
foreign currencies and registered with foreign securities depositories
(see Chart 2).
4.1 Foreign-registered collateral
A security's credit quality can be gauged using a credit
rating (see Box 4). All pledged securities from foreign issuers must
have a rating of at least A from Standard & Poor's or A2 from
Moody's. It has been estimated that the annual probability of
default for a security rated A--by Standard & Poor's or A3 by
Moody's (i.e. slightly below the required rating) is approximately
0.1 per cent. (13) The credit quality of securities pledged to Norges
Bank is shown in Chart 7. Where securities are rated differently by the
two rating agencies, the lower rating is shown.
Approximately 90 per cent of the securities pledged have a credit
rating of AA--or higher (see Chart 7). AAA and AA are the highest rating
categories. Of the remaining foreign bonds pledged, almost all have a
rating of A+. The likelihood of a credit event in the pledged portfolio
can therefore be considered very small.
Almost two-thirds of foreign securities pledged as collateral are
issued by financial undertakings (see Chart 8). Issuers in this category
are often special-purpose vehicles, and a substantial proportion of
these bonds are backed by mortgages. As a result of the turmoil
associated with US sub-prime mortgages, there has been some uncertainty
about special-purpose vehicles as issuers of such bonds. However, a
review has shown that only a small number of asset-backed securities
pledged to Norges Bank have been downgraded by the rating agencies in
connection with the market turmoil since last summer. Though prices of
many pledged bonds have fallen during the turmoil, only a small share of
pledged bonds have experienced that prices have dropped to below 90 per
cent of the issued price. (14) Banks have not changed their collateral
during the market turmoil in such a way as to reduce the quality of the
Even if the issuer of a bond has a high credit rating, Norges Bank
may incur a loss if the bond is denominated in a currency which weakens
against the Norwegian krone. Norges Bank has therefore set an additional
haircut of 3 percentage points for securities which are not denominated
in NOK. A review of exchange-rate movements between the krone and
eligible foreign currencies in the period from 1994 to 2007 shows that
this haircut was sufficient in the vast majority of cases. For the most
widely used currency (EUR), the decline in value over a period of one
week (15) was less than the haircut in 99.7 per cent of cases. The
equivalent figure for the currency with the widest fluctuations against
the krone (JPY) was 98.3 per cent.
4.2 Norwegian-registered collateral
Securities issued or guaranteed by a government or municipality
feature very low credit risk and are highly marketable. Securities from
the banking and corporate sectors often feature higher credit risk and
are traded less frequently. The low turnover of these securities is due
partly to Norwegian securities often having a low volume outstanding.
The requirements adopted in 2005 have improved the quality of
Norwegian-registered collateral at Norges Bank. A substantial proportion
of the securities issued by the banking and corporate sectors are no
longer eligible as collateral. In the case of securities from the
banking sector, this is because they do not meet the volume requirement;
in the case of securities from the corporate sector, this is because
they do not meet the requirement of having a credit rating. This has led
to reduced pledging of Norwegian-registered securities issued by banks
and companies (see Chart 9). The gradual reduction in the bank quota
from 50 to 35 per cent has also contributed to this. On 1 November 2007,
less than 30 per cent of Norwegian collateral was from private issuers
with a credit rating of BBB+ or below (see Chart 10). The proportion of
low-rated collateral fell after the remainder of the new rules entered
into force on 1 November 2007.
The rules on collateral at Norges Bank have been revised in recent
years. The main motivation for the changes was to reduce Norges
Bank's risk. This has been achieved. Borrowing facilities are now
based on market values which are updated daily. The proportion of
securities issued by banks has fallen, while the proportion of
securities of high credit quality has risen, and the volume requirement
has increased the collateral's liquidity.
The rule changes adopted in 2005 would have led to a slight
decrease in banks' borrowing facilities if they had chosen to
retain their original portfolio of pledged securities after the new
rules came into force (based on securities pledged in autumn 2004).
Aggregate borrowing facilities have increased in recent years.
Calculations indicate that banks have sufficient liquidity for the
settlement of payments. A number of small and medium-sized banks'
borrowing facilities have been reduced. As small banks nearly always
settle with the help of another private bank, they have less of a need
to borrow from Norges Bank. Small banks which wish to have a contingency
account at Norges Bank should hold securities which Norges Bank can
accept as collateral.
The market for covered bonds in Norway is in its infancy. If the
markets for these bonds in neighbouring countries are anything to go by,
this could also become a large market in Norway. If so, it will provide
a new source of eligible collateral for Norges Bank in the years ahead.
It was decided in 2005 to lower the quota of bank securities from
50 to 35 per cent, and it was announced that further reductions would
follow. Norges Bank will present a schedule for these reductions in
(1) We would like to thank Asbjorn Enge, Andreas Sand and Pal Winje
for useful comments. This is a translation of an article published in
Penger og Kreditt 4/07, with a few minor updates due to recent market
and regulatory developments.
(2) This fundamental principle was established in connection with
the banking crisis of the early 1990s. For example, Report to the
Storting No. 24 (1989-90) states that "the writing down of the
central bank's, loans may [...] constitute active use of government
funds which should be considered by the Storting in advance."
(3) For further information on liquidity management at Norges Bank
and the response of other central banks during the turmoil, see Monetary
Policy Report 3/07, Norges Bank.
(4) The changes adopted in 2005 are described in more detail in
Bakke, B. and H. Tretvoll: "Collateral for loans from Norges
Bank--new rules", Economic Bulletin 4/05, Norges Bank.
(5) This description is based on available information about the
various central banks' rules on collateral for loans and has not
been quality-assured by the central banks in question.
(6) Several central banks have different rules on eligible
collateral in connection with market operations and lending facilities
relating to the settlement of payments. In this comparison, we look at
the rules for the equivalent of intraday and overnight D-loans at Norges
(7) Other factors also affect banks' liquidity requirements.
See, for example, Fidjestol, A.: "The central bank's liquidity
policy in an oil economy", Economic Bulletin 4/07. Norges Bank.
(8) Banks' liquidity requirements depend not only on how much
they send and receive, but also on the order in which this happens (see
(9) The Norwegian Ministry of Finance has recently proposed that
petroleum taxes fall due six times rather than twice a year, starting on
I. August 2008. If implemented, this would reduce liquidity requirements
on extreme days.
(10) For information on the new and old liquidity requirements, see
Section 4 of Proposition to the Odelsting No. 44 (2005-06), "Nye
likviditetskrav for banker" [New liquidity requirements for banks],
(11) The large banks" borrowing requirements have increased
partly as a result of increased petroleum taxes, which have necessitated
the raising of larger F-loans than before.
(12) Gradual exchange rate movements do not present tiny risk to
Norges Bank because banks' borrowing facilities are based on daily
updated exchange rates.
(13) "The single list in the collateral framework of the
Eurosystem", Monthly Bulletin 5/06, ECB.
(14) Borrowing facilities are based on daily updated market values,
which reduces Norges Bank's risk.
(15) This is a relevant time frame because the realisation of
collateral can take a few days.
Bjorn Bakke, adviser, Interbank Settlement Department, Knut Sandal,
assistant director, Payment Systems Department, and Ingrid Solberg,
adviser, Payment Systems Department (1)
Box 1. Norges Bank's lending
Norges Bank's lending facilities are important
instruments in the implementation of its liquidity
policy. First, they are to help adjust the supply
of liquidity so that Norges Bank's interest
rate decisions influence market interest rates.
Through auctions of fixed-rate loans (F-loans),
Norges Bank ensures that banks have sufficient
liquidity to maintain suitably large deposits in the
central bank. This means that short-term money
market rates remain just above the key policy
rate (the sight deposit rate), which is the interest
on banks' deposits at Norges Bank. Second, the
lending facilities are to help ensure that banks
have sufficient liquidity for smooth settlement of
payments. Banks settle their dues by transferring
funds between their accounts at Norges Bank. If
a bank has insufficient deposits in its account to
settle a payment, it can use Norges Bank's D-loan
facility. (1) This serves as an overdraft facility.
Intraday loans are interest-free, while overnight
loans attract a rate of interest which is 1 percentage
point higher than the key policy rate. As a
result, banks normally make sure that they repay
D-loans before the end of the day, often with funds
borrowed from other banks.
F-loans and D-loans are Norges Bank's ordinary
lending facilities. The central bank can also issue
loans on special terms (S-loans) to a bank running
into acute liquidity problems. No such loans have
been issued since the banking crisis of the early
(1) For further information on F-loans and D-loans, see Fidjestol, A.:
"The central bank's liquidity policy in an oil economy", Economic
Bulletin 4/07, Norges Bank, and "Norske finansmarkeder--pengepolitikk
og finansiell stabilitet" [Norwegian financial markets--monetary
policy and financial stability], Occasional Papers 34, Norges Bank,
(2) For further information on S-loans, see pp. 36-37 of Financial
Stability 2/04, Norges Bank.
Box 2. Main features of the rules (1)
Norges Bank accepts securities issued by public and private issuers in
Norway and abroad. Norges Bank also accepts units in funds registered
with the Norwegian Central Securities Depository (VPS).
Requirements for all securities
Securities must not be subordinate to other debt or be linked to
credit derivatives. They must have prices available and be registered
with an approved securities depository. Securities must not be
convertible, be linked to an index, or have a capped floating rate. A
bank may not pledge securities issued by a company in the same
group (excludes covered bonds).
Requirements for securities issued by private Norwegian issuers
Securities issued by private Norwegian issuers must have a minimum
volume outstanding of NOK 300 million and be registered with an
exchange or other approved marketplace. Securities issued by companies
must also have a minimum credit rating of BBB--from Standard & Poor's
or Baa3 from Moody's. An equivalent credit rating for the issuer may
be accepted if the security itself is not rated.
The proportion of securities issued by banks and bank-owned mortgage
companies (bank quota) must be no more than 35 per cent of a bank's
overall collateral. The bank quota does not include covered bonds.
Requirements for securities funds
Securities funds must be registered with VPS or be confined by their
rules to investing in securities which are eligible under Norges
Bank's rules. A fund may nevertheless invest in unlisted securities
if there is a binding commitment to list the securities on an exchange
within 14 days. Fund units are included in the quota of bonds issued
by banks and bank-owned mortgage companies if the fund's rules allow
it to invest in such bonds.
Requirements for securities from foreign issuers
Securities from foreign issuers must have a minimum credit rating
of A from Standard & Poor's or A2 from Moody's. Securities must be
denominated in USD, EUR, GBP, SEK, DKK, JPY, CHF, NZD or AUD. The
issuer must be domiciled in a country approved by Norges Bank.
Securities from private issuers must also have a minimum volume
outstanding of EUR 100 million. A maximum of 20 per cent of a loan's
outstanding volume may be pledged by the same bank. Private
securities must be listed on an exchange or other marketplace
approved by Norges Bank.
In special cases, Norges Bank may approve other collateral or depart
from the requirement for collateral, cf. Section 3 of the Regulation
on Banks' Access to Loans and Deposits in Norges Bank etc.
(FOR 2001-04-25 No. 473).
1 A more detailed presentation of the rules can be found on Norges
Box 3. Liquidity requirements in
the settlement of payments
Banks send and receive transactions in NBO
throughout the day. A bank's liquidity requirements
will be greatest at the time when the value
of transactions sent (outgoing payments) is highest
relative to the value of transactions received
(incoming payments). Banks' liquidity requirements
therefore depend on the size and order of
the transactions they send and receive. If a bank
does not have sufficient liquidity, its transactions
are queued. The transactions in the queue are
settled once the bank receives new transactions or
pledges more collateral to Norges Bank.
Box 4. Credit ratings
A rating from a credit rating agency is an assessment
of the creditworthiness of an issuer or a
security. It can be a help for investors who may
otherwise have little such information. The rating
is not a reflection of liquidity or market risk.
In the autumn of 2007, the rating agencies were
criticised for their ratings of bonds issued by special-purpose
vehicles (structured finance products).
A number of bonds issued by these vehicles have
been downgraded, and highly rated bonds have
defaulted. This indicates that, in some cases, these
securities were originally rated too highly.
The CESR (1) is currently conducting a study of
how structured products are rated as part of its
annual assessment of whether rating agencies
active in Europe are adhering to IOSCO's Code
of Conduct (2). IOSCO is considering whether these
recommendations need to be revised in the light of
the problems that can arise in the rating of structured
products. One example of such a problem
is the way that the rating agencies first advise on
the design of these products and then award them
a rating. (3) Conflicts of interest may undermine the
quality of these credit ratings.
(1) The Committee of European Securities Regulators (CESR) is an
independent body which aims to promote cooperation between
securities regulators, serve as an advisory body for the European
Commission, and ensure that EU securities legislation is
implemented by member states consistently and within the stipulated
(2) The International Organisation of Securities Commissions
(IOSCO) draws up recommendations for securities markets. Its
members include the regulatory authorities in the countries with
the world's most important securities markets. See "Code of Conduct
Fundamentals for Credit Rating Agencies". IOSCO, 2005. 3 This
section is based on Financial Stability Report 22, Bank of England,
Table 1 Changes in the rules in recent years
Change Motivation (1)
Credit rating required for foreign Reduced credit risk
government bonds and Norwegian
Collateral must not be subordinate to Reduced credit risk
Bank quota lowered from 50 to 35 Reduced credit risk
Increase in the minimum volume Reduced liquidity risk
outstanding for private issuers
Securities from Norwegian private Reduced liquidity risk
issuers must be listed
Maximum 20 per cent of private foreign Reduced liquidity risk
loans pledged by the same bank
Foreign-registered securities must Operational considerations
have information in FTID (4)
Collateral must not be linked to Operational considerations
Reduction in haircut rates--from Increased borrowing
nominal to market value facilities
Acceptance of covered bonds5 issued Increased borrowing
by companies in the same group facilities
Acceptance of funds with unlisted Increased borrowing
assets if there is a binding facilities
commitment to listing
Securities funds with full currency Increased borrowing
hedging exempted from foreign facilities
Change Adopted Effective
Credit rating required for foreign 24 Oct 2005 1 Nov 2007 (2)
government bonds and Norwegian
Collateral must not be subordinate to 24 Oct 2005 1 Nov 2007 (2)
Bank quota lowered from 50 to 35 24 Oct 2005 1 Nov 2006 (3)
Increase in the minimum volume 24 Oct 2005 1 Nov 2007 (2)
outstanding for private issuers
Securities from Norwegian private 24 Oct 2005 1 Nov 2007 (2)
issuers must be listed
Maximum 20 per cent of private foreign 24 Oct 2005 1 Nov 2005
loans pledged by the same bank
Foreign-registered securities must 24 Oct 2005 1 Nov 2005
have information in FTID (4)
Collateral must not be linked to 24 Oct 2005 1 Nov 2007 (2)
Reduction in haircut rates--from 24 Oct 2005 1 Nov 2005
nominal to market value
Acceptance of covered bonds5 issued 24 Oct 2005 1 Nov 2005
by companies in the same group
Acceptance of funds with unlisted 2 Oct 2007 1 Nov 2007
assets if there is a binding
commitment to listing
Securities funds with full currency 2 Oct 2007 1 Nov 2007
hedging exempted from foreign
(1) A change may have been motivated by more than one consideration.
Only the most important is stated in the table.
(2) These requirements entered into force on 1 November 2005 for
securities not previously pledged.
(3) The quota for how much of a bank's pledged portfolio may consist
of Norwegian bank bonds was reduced gradually. It was lowered from 50
to 45 per cent on 24 October 2005, to 40 per cent on 2 May 2006, and
to 35 per cent on 1 November 2006.
(4) Financial Times Interactive Data (FTIO) supplies market prices
from international exchanges and from transactions directly between
counterparties. FTID may also supply synthetic prices produced by the
(5) Covered bonds are issued by mortgage companies and have
preferential rights to the collateral for specific loans, such as
mortgages. The issuers of such bonds are subject to regulation and
Source: Norges Bank
Table 2 Rules on eligible collateral at selected central banks
Norges Euro- Bank of
Bank system England
Bank bonds and notes Yes Yes No
Corporate bonds and notes Yes Yes No
Covered bonds Yes Yes No
Asset-backed securities (1) Yes Yes No
Credit rating required (2) BBB-/A A-3 --
Foreign currencies 8 0 1
Bank loans No Yes No
Bank quota Yes No --
Minimum volume outstanding NOK No No
Requirement for government Yes No No
account at central bank
Sveriges Danmarks Federal
Riksbank Nationalbank Reserve
Bank bonds and notes Yes No Yes
Corporate bonds and notes Yes No Yes
Covered bonds Yes Yes Yes
Asset-backed securities (1) Yes No Yes
Credit rating required (2) A -- BBB-/AAA
Foreign currencies 7 1 8
Bank loans No No Yes
Bank quota Yes -- No
Minimum volume outstanding SEK 100m No No
Requirement for government No No No
account at central bank
(1) Securities issued by special-purpose vehicles. These vehicles
purchase mortgages and other types of debt, often from banks and other
financial institutions, and fund these purchases by issuing bonds
secured against the portfolio acquired.
(2) Where two ratings are given, the first is for domestic securities,
and the second for foreign securities.
(3) Rating or estimated bankruptcy probability corresponding to such
Sources: Norges Bank, ECB, Bank of England, Sveriges Riksbank,
Danmarks Nationalbank and Federal Reserve.
Table 3 Classification of banks with an account at Norges Bank
Large Medium Small
Number 4 18 104
Participation in settlement Direct Direct Indirect
of NICS retail clearing
in NBO (1)
Participation in gross Frequent Daily Rare
settlements at Norges
Account at foreign All Half Very few
Credit lines to other banks Significant Limited Limited
Share of total assets (2006) Approx. 60% Approx. 25% Approx. 15%
Share of F-loans 93% 6% <1%
Share of total borrowing 80% 16% 4%
facilities (1 Nov 2007)
Proportion of category's 87% 57% 20%
(1) Retail payments to be settled between the banks are cleared in the
Norwegian Interbank Clearing System (NICS). Clearing results in a net
position for each bank. Banks classified as large and medium-sized
settle their positions directly at Norges Bank. Small banks have an
agreement with a large or medium-sized bank whereby the latter
includes the small bank's position in its own position when settling
at Norges Bank. NICS is a clearing house and transaction channel for
(2) Transactions which are settled individually are referred to as
gross transactions and are settled continuously at Norges Bank.
Chart 7 Collateral in the form of foreign-registered securities on
1 November 2007 by rating. Per cent
Source: Norges Bank
Note: Table made from pie chart.
Chart 8 Collateral in the form of foreign-registered securities on
1 November 2007 by issuer. Per cent
Source: Norges Bank
Note: Table made from pie chart.