The Financial Crisis Commission

25 January 2011

 

Better positioned against financial crises

The autumn of 2008 saw the outbreak of the most serious international financial crisis in our time. Never before have problems in the financial sector given so quick and severe fallout in the real economy. Norway is among the countries that, at least so far, have been the least affected by the financial crisis. This is probably due to a combination of luck, skill and caution. The impact could have been far more severe in absence of the comprehensive support measures provided by the Government. There were vulnerabilities in the Norwegian economy and in the financial system prior to the crisis, many of which still are of concern.

The Financial Crisis Commission, which today has delivered its report to Minister of Finance Sigbjørn Johnsen, proposes a number of measures to address the lessons from the international financial crisis. The Commission’s recommendations can be grouped into five important policy areas:

• Long term economic policies 
• The use of taxes and fees as policy instruments
• Strengthening financial regulation 
• Introducing macro prudential policy
  Strengthening consumer protection

“It is not possible to foresee the nature of the next financial crisis, how it will affect Norway, or whether it will originate domestically or abroad. Efforts to secure financial stability must assume that the character of the next financial crisis may be very different from the current crisis. There is still considerable uncertainty about the way forward for the global economy and about the outcome of regulatory reforms in many countries. Norway thus needs to be better positioned against financial crises and develop measures to ensure financial stability,” says Commission Chair Jon M. Hippe.

It is the view of the Commission that a wide range of measures should be considered in order to ensure that the financial sector in Norway is robust and appropriate. Taxes and fees should supplement the toolbox of regulation and supervision. The Commission proposes that a stability fee is imposed on Norwegian financial institutions, based on institutions’ liabilities except equity and guaranteed deposits. The fee should reflect any expectations of creditors that their risk is reduced as a result of the likelihood of government intervention. The Commission also suggests that the Government consider an activities tax levied on profits and wage payments, as a way of taxing the added value generated by the financial sector.

“A financial stability fee may act to correct a market failure, promote financial stability, and help finance future government interventions. Many countries have already introduced such fees. Moreover, because financial services mainly are exempt from VAT, the Commission proposes the Government to study the properties of an activities tax further. A new activities tax may affect the sector’s organization and role in the Norwegian economy in a purposeful manner,” says Mr Hippe.

The Norwegian financial market regulation has contributed to Norwegian financial institutions faring relatively well through the financial crisis. Experience from the Norwegian banking crisis in the early 1990s, as well as a culture of good banking, may also explain the conduct of Norwegian financial institutions. The Commission recommends that central features of the Norwegian financial market regulation are preserved and further developed. Improvements in capital and liquidity requirements are of particular importance. In Norway, the economy is growing and the institutions in the financial sector are sound. This gives Norway greater freedom to consider appropriate capital and liquidity requirement for financial institutions in light of experiences from the international financial crisis.

The crisis has demonstrated the need to strengthen consumer protection in financial markets and to make it easier for consumers to make good investment decisions. In this area the Commission i.a. puts forward proposals for better information to consumers, measures to improve consumers’ legal protection and a clearer responsibility for supervisory authorities to safeguard consumers’ interests and rights in financial markets.

“Many of the choices consumers need to make in financial markets differ substantially from the choices in other areas of life. Choices regarding pension savings, loans for house purchases and securities investments may involve substantial risk to the individual, and there is little room for learning by “trial and error.” It is therefore important that the information provided to consumers by financial institutions is tailored to fit with the financial literacy of the recipient, and that it is standardized and comparable across different institutions,” says Commission Chair Jon Hippe.

“The Commission has been broadly composed and has largely achieved broad agreements regarding the main proposals and assessments. This gives Norwegian authorities a solid basis for further work to promote financial stability, and to ensure that Norway is well positioned against future financial crises. Financial markets in the Nordic area are largely integrated and are in many ways a natural and appropriate common regulation area. Norwegian authorities should take the initiative to establish a broader Nordic cooperation on financial market regulation and supervision. Such cooperation may contribute to the Nordic financial market being subject to a comprehensive and robust regulation, better suited to the structure of the market,” says Mr Hippe.

See also:

• Press release from the Ministry of Finance
• Press note from the Commission
• English summary of the Commission’s report in Appendix 2 of NOU 2011:1