New central bank act - Regjeringen.no · 2017. 6. 23. · Official Norwegian Reports NOU 2017: 13...

Official Norwegian Reports NOU 2017: 13 (Summary)

The Act relating to Norges Bank and the Monetary System and the organisation of Norges Bank and the management of the Government Pension Fund Global

New central bank act

Official Norwegian Reports NOU 2017: 13 (Summary)

New central bank actThe Act relating to Norges Bank and the Monetary System and the organisation of Norges Bank and the management of the Government Pension Fund Global

Report from the Commission appointed by Royal Decree on 10 April 2015.Submitted to the Ministry of Finance on 23 June 2017.

Translation from Norwegian. For information only.

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Contents

1 Summary and recommendations ....................... 5

1.1 Recommendations of the Central Bank Law Commission .................. 5

1.1.1 Governance and organisation ....... 51.1.2 The central bank’s purpose and

responsibilities ................................ 81.2 More about the Commission’s

proposals ......................................... 101.2.1 Purpose and functions ................... 101.2.2 Relationship between the central

bank and government authorities 111.2.3 Monetary policy and financial

stability ............................................ 121.2.4 The payment system ...................... 131.2.5 Other functions ............................... 141.2.6 Duty of confidentiality,

administrative procedures etc. ...... 14

1.3 Organisation of Norges Bank and the management of the GPFG ...... 15

1.3.1 Introduction .................................... 151.3.2 Norges Bank’s central banking

functions ......................................... 151.3.3 An investment management entity

separated from Norges Bank ....... 171.3.4 Norges Bank with the GPFG under

the management of the Bank ....... 181.3.5 The Commission’s assessments

and recommendations ................... 191.3.6 Some amendments to the

Government Pension Fund Act .... 21

2 Excerpts from the draft act on Norges Bank and the Monetary System, etc. ............... 22

Official Norwegian Reports NOU 2017: 13 (Summary) 5New central bank act Chapter 1

Chapter 1

Summary and recommendations

1.1 Recommendations of the Central Bank Law Commission

The mandate of the Commission has been to pro-pose a new Act relating to Norges Bank and theMonetary System and consider the organisationof Norges Bank and the management of theGovernment Pension Fund Global (GPFG), alsoreferred to as the Fund.

1.1.1 Governance and organisation

1. According to the mandate, the Commission isto consider whether the Fund should continue tobe managed by Norges Bank and propose gover-nance and organisational models where the Fundremains under the management of Norges Bankand where the Fund is separated from NorgesBank. The Commission was also requested to con-sider assigning functions to separate committeesin Norges Bank.

The Commission notes that the Ministry ofFinance is of the view that Norges Bank has mana-ged the Fund and the central banking operationsin a satisfactory manner. The Commission hassought to be forward-looking and has consideredhow Norges Bank and the Fund should be organi-sed in the light of current insight into centralbanking and investment management.

2. The Commission recommends, on the basis ofan overall assessment, to separate the managementof the Government Pension Fund Global from Nor-ges Bank and to establish a separate statutory entityto manage the Fund (in the report referred to asModel A).

The Commission has emphasised, amongother things, the following:

The traditional functions of central bankinghave changed considerably since the 1990s.Monetary policy was for a long period gearedtowards a fixed or stable exchange rate. Inflationtargeting requires a broader and more extensivedecision-making basis. The 2008 financial crisisreminded us how vulnerable the economy is when

confidence in the financial system collapses. Thesustained period of low interest rates following thefinancial crisis poses new challenges to the centralbank in its conduct of monetary policy, its work onfinancial stability and with regard to the inte-raction between the two areas. A frameworkshould be established to clarify and expand thecentral bank’s responsibility for financial stabilityand macroprudential supervision. The centralbank must have a leading role in Norway in thedevelopment of new forms of money and paymentsystems. The Commission is of the view that thework relating to the central bank’s overall functi-ons has become more demanding.

The management of the Fund has becomemore extensive than expected at the time thisfunction was assigned to Norges Bank. TheFund’s investment universe has been broadenedto include emerging economies and real estate.The size of the Fund has increased substantiallyand hence the Fund has become of considerableimportance for the Norwegian economy. TheFund is now of a size equivalent to around threetimes annual national income. The expectedannual return is on a par with the gross product ofNorway’s manufacturing industry as a whole. Aro-und every seventh Norwegian krone that is spentvia public sector budgets in 2017 will be drawnfrom the expected return on the Fund.

The organisational structure must be desig-ned to facilitate the further development of theFund. Establishing an organisation and a boardsolely responsible for this function will strengthenthe Fund.

Norges Bank and the new investment manage-ment entity will both be transparent organisationswith a clear governance structure. They should beable to deliver results and meet goals. The gover-ning bodies and management will be held accoun-table and liable for their actions. This is importantin order to maintain the prevailing credibility andlegitimacy of Norges Bank and the Fund. Withtwo separate entities, the professional competence

6 Official Norwegian Reports NOU 2017: 13 (Summary)Chapter 1 New central bank act

and composition of the governing bodies canmore easily be tailored to the task at hand.

If the Fund is to be managed by Norges Bank,the governance structure becomes complicated,and the Governor will face a substantial scope oftasks. Few persons will possess the experienceand breadth of skills required to handle bothfunctions. There will be a risk that a failure ininvestment management could undermine thecredibility and reputation of central banking ope-rations and the central bank’s independent posi-tion.

3. The Commission proposes the establishment ofa separate statutory entity charged with managingthe Fund, delinked from Norges Bank. The newentity shall have a board appointed by the Govern-ment. The Ministry of Finance shall, as is the casetoday, define the mandate for investment manage-ment pursuant to the Government Pension FundAct. The Commission assumes that the practice ofparliamentary endorsement of important changesto the mandate is retained. The Ministry ofFinance is responsible for the appointment ofauditors, approval of the accounts and oversight ofboard decisions and mandate compliance. Theentity reports to the Ministry of Finance, and theMinistry reports on Fund’s activities to the Stor-ting (Norwegian parliament).

The investment management unit at NorgesBank, Norges Bank Investment Management(NBIM), and its staff can be transferred to thenew investment management entity.

The Commission has used the working titleNorwegian Government Investment Management(NGIM) to designate the new entity.

4. The Commission finds that the main riskassociated with such a separation is that the pre-vailing framework for the Government PensionFund could be compromised. The Commissionemphasises that a separation must not in anyother respect affect the framework for the Fund.In order to safeguard the important role of theFund in overall economic policy, the Commissionproposes to incorporate into the Government Pen-sion Fund Act that the Fund is to be investedabroad, that the capital in the Fund is to reflect realgovernment saving and a goal formulation thatstrengthens the emphasis on the Fund’s function asa source of financing of the welfare state acrossgenerations. The requirement of the highest possi-ble return at an acceptable and carefully weighedrisk level is thus of particular importance.

The Commission would caution against divi-ding the Fund into several entities, in the light ofthe additional costs and management challenges

this would entail. It is not meaningful in this caseto create competition between government-con-trolled investment entities. The Commissionwould also caution against using the Fund as aninstrument of foreign policy, business policy, regi-onal policy or environmental policy. Public resour-ces to promote these policies should be allocatedvia the central government budget subject to thecriteria for prioritisation, realistic budgeting,transparency and the loss provisioning practicesthat follow thereof. The Fund must not, as emp-hasised in the legislative history, become agovernment budget number two for purposes thatare not prioritised in the annual budget process.

A separation may have implications for the taxposition of the Fund and immunity from lawsuitsand seizure of assets in other countries. It is assu-med that the Fund’s tax positions in the main willbe retained as the government will still be thebeneficial owner, but the interpretation of bothlocal law and of tax agreements may vary acrosscountries. It would also appear that the Fundunder the management of Norges Bank benefitsfrom somewhat greater immunity in somecountries. Any effects in respect of both taxationand immunity are uncertain, but the Commissionjudges that their size is such that they should notbe given decisive weight.

A separation entails one-off costs and willrequire planning and resources. Relative to thebenefits of establishing a solid organisation for thefuture, the costs are nonetheless assumed to bemoderate. In order to dispel uncertainty about theorganisation, it is important that the decision-making process and a separation process are car-ried out in an efficient manner.

5. The Commission proposes the establishment ofa five-member committee for monetary policy andfinancial stability at Norges Bank. The Commis-sion proposes that the committee be assignedresponsibility for the use of monetary policyinstruments and the work on promoting financialstability. The committee is chaired by theGovernor of Norges Bank. Norges Bank shouldhave one Deputy Governor and he/she shouldserve as vice chair. Two external members shouldserve in at least a half-time position, while onemember, who is a full-time employee of NorgesBank, should be appointed by the Board on theproposal of the Governor. This provides a fra-mework for a highly professional body, focused oncentral bank policy. External members can pro-vide corrective feedback by providing new inputfrom other professionals in their field, but as inmost central banks, they should not have a majo-


rity of the seats in the committee. Part-time exter-nal members are useful in that the members canthereby be equally well prepared for the commit-tee’s deliberations. With external members ser-ving part-time, the risk of conflict with other busi-ness or occupational roles is reduced.

The committee reports to the Ministry ofFinance on its use of judgement and use of policyinstruments. In addition to chairing the commit-tee, the Governor is responsible for the dailymanagement of Norges Bank and the DeputyGovernor serves as his/her deputy.

6. The Commission proposes the establishment ofa board for Norges Bank with seven members.When the responsibility for monetary policyinstruments and the work on promoting financialstability are assigned to a committee, the board ofNorges Bank should be independent of the dailymanagement and administration of the Bank. Theboard should take over the functions currentlyassigned to the Executive Board of Norges Bank,with the exception of those assigned to thecommittee and the responsibility for managingthe Fund, which in this model is separated fromthe Bank. The board shall establish plans, bud-gets and guidelines for the Bank’s activities,instructions for the daily management of the Bankand oversee the operation of the Bank and the per-formance of the Governor in his capacity as gene-ral manager. In this work, the board shall besupported by an internal audit service. The boarddraws up an annual report and accounts, andreports to the Ministry of Finance, which appro-ves the accounts. The functions will include,among others, establishing guidelines for themanagement of foreign exchange reserves andfor the Bank’s deposit and lending facilities,issuing notes and coins and the work on the pay-ment systems. The Governor’s responsibility asgeneral manager and external representative of theBank shall be specified in the act. The Governmentshall appoint the Governor, Deputy Governor, theexternal members of the monetary policy and finan-cial stability committee and the members of theboard of Norges Bank.

7. The Commission finds that a board composedonly of external members eliminates the need forNorges Bank’s Supervisory Council. The board ofthe Bank is to oversee daily management and acti-vities, as do the boards of other government andprivate undertakings. The Ministry of Financeshould take over the Supervisory Council’s task ofappointing an auditor, approving the Bank’s acco-unts and overseeing the board’s decisions, gover-nance, control, etc. The Ministry of Finance shall

retain its function of evaluating the Bank’s use ofjudgement and goal performance.

The Ministry of Finance reports to the Stor-ting. The Office of the Auditor General of Norwayoversees the use of powers by the Ministry ofFinance. The Storting controls the Bank by meansof its deliberations on the Ministry’s white papers,reports by the Office of the Auditor General ofNorway and hearings by the Standing Committeeon Finance and Economic Affairs of the Ministerof Finance, Norges Bank’s senior managementand members of the Bank’s bodies.

The Commission is of the view that this provi-des further clarification regarding lines of respon-sibility. Each level in the governance chain over-sees the level below. This makes it easier to assignaccountability. The Bank’s board and committeeare accountable to the Ministry of Finance andthe Government, and the Ministry of Finance andthe Government are accountable to the Storting.In the event of a failure at the Bank, it will no lon-ger be unclear whether it is the Minister ofFinance or the Storting’s own supervisory bodythat is to be held accountable to the Storting.

8. The Commission also recognises that thereare arguments in favour of keeping the GovernmentPension Fund Global under the management ofNorges Bank. As owner, the Ministry of Finance’sevaluation of the results thus far has been positive,and the Fund’s incorporation into Norges Bankappears to have promoted a stable mandate for theFund and for the governance and leadership ofinvestment management. The Commission presentstwo alternative models should the Fund be keptunder the Bank (in the report called model B andC).

In model B a separate board is established forinvestment management in addition to the boardfor Norges Bank and the monetary policy andfinancial stability committee. Model C is moresimilar to the existing governance model with aboard and a supervisory council, but in additionthe model includes a monetary policy and finan-cial stability committee and some changes to theSupervisory Council.

The Commission is of the view that both ofthese models are feasible and adequate, but thatmodel B may be preferable.

In the first alternative (model B), Norges Bankhas two boards, the board for Norges Bank andthe board for investment management, both appo-inted by the Government. The board of NorgesBank is only composed of external members andoversees the board for investment management.The board of the Bank also decides on matters


that concern both boards and draws up the bud-get, accounts and annual report for the entireBank.

The board for investment management isresponsible for both the administrative and pro-fessional performance of investment managementand it recruits the general manager for investmentmanagement. The Ministry of Finance issues amandate for investment management directly tothis board and the board reports on performanceto the Ministry of Finance. The Commission is ofthe view that the Governor must chair this boardand with the Deputy Governor as vice chair. TheFund’s link to the Bank would otherwise be tooweak, and it would be problematic if the Bank’ssenior management had no influence whatsoeverover such a large part of the Bank’s activities.

The lines of responsibility in this model are byand large clear between the different levels in theBank, but could nevertheless be perceived as notentirely straightforward (see Section 1.3.4). Thelines of responsibility are also somewhat blurredby the fact that it will be the board for NorgesBank that oversees the board for investmentmanagement, even though the latter operatesunder a mandate issued by the Ministry ofFinance. Two boards, with a separate board forinvestment management in the Bank, could pro-vide more time for the members of the respectiveboards to deal with matters in their areas with bet-ter suited professional competence, but theGovernor will still be faced with a substantialscope of tasks.

In the other model (model C), the board of thecentral bank retains the responsibility for themanagement of the Fund. The Governor retains adual role as chair of the board and general mana-ger of central banking operations. In addition, he/she chairs the monetary policy and financial stabi-lity committee with functions that are currentlythe responsibility of the Executive Board of Nor-ges Bank. The scope of tasks and responsibilitiesfor the board and the Governor would remain sub-stantial. Nor is this model straightforward. Thedivision of responsibility between the Ministry ofFinance, as the owner, and the Supervisory Coun-cil in overseeing the Fund will still be unclear.Most of the functions of the Supervisory Councilare retained in this model, but the number ofmembers should be reduced and its duties andresponsibilities should be further defined and cla-rified.

1.1.2 The central bank’s purpose and responsibilities

9. Under the terms of the mandate, the Commis-sion is tasked with assessing other aspects of theAct relating to Norges Bank and the MonetarySystem in addition to the organisation of theBank, including the Bank’s purpose and its relati-onship to government authorities.

The Commission emphasises that the Bankshould have democratic legitimacy, which shouldbe combined with transparency, predictability anda long-term approach in its use of instruments andthe performance of its tasks.

The Commission proposes that the Stortingshould define the Bank’s purpose and – as underthe current Act – delegate important tasks andinstruments to the Bank. The Government isgiven the authority to set objectives, such as themonetary policy mandate.

It will thus be clear under the Act that the Stor-ting and the government define the Bank’s pur-pose and specifies its objectives. Experience,supported by theory, indicates that central bankinstrument independence from the centralgovernment authorities promotes transparency,predictability and a long-term approach. TheCommission proposes that Norges Bank shouldbe given somewhat greater independence thantoday by, for example, raising the threshold forwhen government instructions can be issued tothe Bank.

The Bank’s bodies and management must atthe same time be held accountable for their use ofjudgement. The Bank’s goal performance must bethoroughly evaluated. The Commission holds theview that the government and the Storting couldstrengthen their work in this area. The Commis-sion is also in favour of regular evaluations of theBank’s objectives, as expressed for example in themonetary policy mandate.

10. The Commission proposes that NorgesBank’s purpose should be to maintain monetary sta-bility. Norges Bank should be the executive and advi-sory authority for monetary policy. The functionsand responsibilities of central banks have chan-ged considerably over time. A central bank’s tradi-tional responsibility has been to issue banknotesand coins and contribute to a smoothly functio-ning payment and credit system. But the paymentsystem only functions smoothly when the publichas trust in the value of money. Preserving thevalue of the currency has therefore always beenimportant for central banks. It is equally impor-tant to prevent prices from falling as it is to pre-


vent high and variable inflation. A stable value ofmoney enhances the soundness of saving andinvestments. With low and stable inflation,markets are more efficient. It is easier for marketparticipants to determine whether a higher pricefor a product reflects a shortage of that particulargood. Central banks can normally contribute tostable price developments by means of the instru-ments at their disposable.

Norges Bank’s purpose should also include pro-moting the stability of the financial system and anefficient and secure payment system. Norges Bankhas executive and advisory authority in the work topromote financial stability. Finanstilsynet (Finan-cial Supervisory Authority of Norway), with theMinistry of Finance as the supreme authority, alsohas important functions in the same area.

Unstable banks and financial markets can leadto economic decline. Central banks are generallyresponsible for ensuring that interbank paymentand settlement systems are efficient and stable. Inaddition, Norges Bank also works to promotefinancial stability in a broader sense. This is parti-cularly evident in the management of crises whenthe Bank supplies substantial liquidity both toinfluence market rates and to stabilise the finan-cial system. The Commission also proposes that thegovernment should confer responsibility on NorgesBank for setting the countercyclical capital bufferfor banks and should also consider providing NorgesBank with the authority to issue regulations for newresidential mortgage loans.

Both under the standing lending facility and inthe management of crises, Norges Bank requirescollateral for loans provided to banks and otherfinancial undertakings. Under the Norwegian sys-tem of government, Norges Bank may not providesolvency support. If the need to provide extensiveliquidity support to banks over an extendedperiod should arise again, the government shouldassume this responsibility, as it did under the 2008crisis.

One of the main objectives of economic policyis to achieve stable and solid economic growthwith high employment and low unemployment.The level of employment is primarily determinedby structural conditions. The quality of education,gender equality, the tax system, the social securitysystem and the pension system, the adaptability ofbusiness and labour and wage and income forma-tion are of essential importance. The most impor-tant contribution the central bank can make to ahigh and sustainable path for activity is to safegu-ard financial stability and price stability. Wheninflation is expected to be low and stable, mone-

tary policy can give more weight to stabilising out-put and employment. Even if the Bank cannotcompensate for structural and incentive shortco-mings, the Bank’s response to an economic down-turn or financial crises will influence activity andemployment for a long time. Therefore, theCommission is of the view that the central bankshould otherwise contribute to high and stable out-put and employment.

11. The purpose of Norges Bank proposed bythe Commission is in the form of a general state-ment. The government should therefore, as necess-ary, further specify Norges Bank’s objectives underthe act. One of these objectives will be expressedin a mandate specifying the operational target ofmonetary policy, but mandates can also be laiddown for other areas. The objectives will alsoserve as a reference in the evaluation of theBank’s use of instruments and should, in the viewof the Commission, be assessed at regular inter-vals, for example every five years. The govern-ment should establish these objectives in a trans-parent manner. The Bank must have the oppor-tunity to express its opinion before a decision ismade, and the matter should be submitted to theStorting shortly after the decision is made. This isin line with the formal requirements for the instru-ction of the central bank today.

The central government administration is chi-efly organised in a line structure from the minis-try to subordinate agencies. The governance ofNorges Bank currently deviates to some extentfrom this system and does so under the proposalpresented here. Instruments are delegated di-rectly to the Bank by the Storting through theNorges Bank Act, while the government issuesthe mandate specifying the objective of monetarypolicy and for other areas where necessary. TheCommission proposes that Norges Bank should notin any other way be subject to instruction as to itsactivities except in extraordinary circumstances.This gives Norges Bank a high degree of auto-nomy in its use of monetary policy instrumentsand its work on financial stability. The thresholdfor instruction only applies to the conduct of mo-netary policy and work on financial stability, andotherwise areas where the central bank derivesits authority from the Norges Bank Act, as is thecase today. In cases where Norges Bank’s autho-rity has been delegated under common adminis-trative law, a general power of instruction will ap-ply, as it does today. The Commission nonethelessproposes that the same protection against instru-ction that applies to monetary policy and the workon financial stability should also apply if the autho-


rity to set the countercyclical capital buffer andany other macroprudential instruments are dele-gated to Norges Bank as proposed by theCommission.

12. The Commission proposes that NorgesBank’s duty to submit matters of particular impor-tance to the Ministry of Finance before a decisionis made, should no longer apply. The Bank shouldinform the Ministry of Finance about matters ofimportance. The Commission presumes that itwould be useful for the Minister of Finance andthe Governor to continue to meet on a regularbasis.

The Bank should also inform the public aboutthe basis of the decisions made by the Bank to fulfilits objectives. Providing information on the Bank’sconsiderations facilitates evaluation of the Bank’sdecisions. Transparency also promotes trust inthe central bank and predictability with regard tothe Bank’s response pattern. A committee compo-sed of external members serving on a part-timebasis would provide more channels of communi-cation than currently used by the ExecutiveBoard. Committee members other than theGovernor and the Deputy Governor could expresstheir opinion in oral and written public statementsand testify before the Storting’s Standing Commit-tee on Financial and Economic Affairs. Moredetailed minutes including members’ individualassessments could also be published. TheCommission does not specify in the proposed acthow Norges Bank should inform the public aboutits activities. The assessment and development ofthis task should primarily be entrusted to theBank.

13. Technological innovation has led to sub-stantial changes in the monetary and paymentsystems. The definition of money and legal tenderis likely to change in the years ahead. NorgesBank must take on a leading role in this area. Thesolutions that may be forthcoming are not withinthe scope of the Commission’s mandate. In time,developments will likely require changes in legis-lation, including the central bank act.

There is a need for a form of legal tender bac-ked by the central bank to underpin trust inmoney and enable it to fulfil its role in the econ-omy. Today, banknotes and coins are defined aslegal tender in Norway and other countries. Untilwe know more about further developments,banknote and coins should continue to be legal ten-der in Norway. Norges Bank should have the soleright to issue banknotes and coins. In the proposalon the new central bank act, Norges Bank is requ-ired to oversee the payment system and other ele-

ments of the financial infrastructure, includingcontributing to contingency solutions. NorgesBank is also given the authority to require thebanks to distribute cash for contingency purpo-ses.

14. Like many other central banks, NorgesBank has budgetary autonomy, which isuncommon in other parts of public administration.The Commission proposes, on the basis of an overallassessment, that Norges Bank should continue tohave budgetary autonomy. Such autonomy may beperceived as important to the Bank’s freedom ofmanoeuvre in monetary policy and in its work onfinancial stability. In view of the Bank’s financialposition, such freedom of manoeuvre requiresstrict budgetary discipline on the part of the Bankand close monitoring by the Ministry of Finance.

Norges Bank’s profit should accrue to thegovernment according to rules laid down by theGovernment. In the proposal on the new centralbank act, the Government should ensure that theBank has adequate equity to achieve its objecti-ves. The Bank decides on the level of foreignexchange reserves and other assets necessary forthe fulfilment of the Bank’s monetary policy obje-ctives and its work on financial stability.

15. The Commission proposes including a pro-vision in the act allowing the Government to dele-gate the performance of financial services for thegovernment, as previously, to Norges Bank. Theservices currently performed by the Bank includethe administration of the government’s consolida-ted account and government debt. According tothe proposal, Norges Bank may still not extendcredit directly to the government. The Bank admi-nisters the rights and fulfils the obligationsensuing from Norway’s membership of the Inter-national Monetary Fund (IMF). To fulfil its purpo-ses, Norges Bank may also under the Commission’sproposal become a party to international agree-ments, as long as collateral is required for any cen-tral bank credit provided.

1.2 More about the Commission’s proposals

1.2.1 Purpose and functions

The Commission proposes that a clearer dis-tinction be made in the new central bank act bet-ween Norges Bank’s purpose and the tasks thebank is required to perform to achieve its objecti-ves than in the current Act (Section 1). TheBank’s purpose must also be consistent with theinstruments at its disposal.


The Commission proposes that in Section 1-2,Norges Bank’s purpose should be to maintainmonetary stability, promote financial stability andotherwise contribute to high and stable outputand employment (see discussion in 1.1.2). Thecentral bank has a particular responsibility for thepayment system in that it issues payment instru-ments and has a direct responsibility for the cen-tral settlement system for interbank payments.The Commission therefore proposes that this taskbe specifically mentioned in the purpose section.

The purpose section should be supplementedby an additional section describing the centralbank’s areas of responsibility and instruments(see Section 1-3 in the proposed central bank act).This will in turn provide the basis for more detai-led rules concerning the Bank’s responsibilitiesand instruments in a later section of the act.Section 1-3 should establish Norges Bank as theexecutive and advisory authority for monetarypolicy. Norges Bank should also have executiveand advisory authority for the work on financialstability. The Bank should organise the centralsettlement system, oversee the payment systemas a whole and have the sole right to issuebanknotes and coins. Norges Bank is the bankers’bank and the government’s bank, and it shallensure that asset management is conducted in anappropriate and efficient manner. Even if the Bankis relieved of the responsibility of managing theFund, it has an important responsibility for themanagement of foreign exchange reserves. Inaddition, the Commission proposes that the gene-ral clause in the current Act stating that the Bankmay implement any measures customarily or ordi-narily taken by a central bank should be retained.This provision safeguards the need for somedegree of flexibility for Norges Bank in adaptingto changes in the tasks the Bank is to and must beable to perform in support of its objectives.

The Commission proposes that the currentprovision concerning the monetary unit and itsinternational value should be largely retained in anew central bank Act, cf the proposed Section 1-9.The choice of exchange rate regime must at thesame time be considered in the context of themonetary policy framework. The Norwegiankrone has been allowed to float freely since 2001.The exchange rate regime is an important part ofour economic system. The authority to choose theexchange rate regime should lie with the govern-ment and it should not be possible, as it is now, todelegate this authority to the Ministry of Finance.This also means that the exchange rate regime

will be adopted by the same authority that adoptsthe monetary policy mandate.

1.2.2 Relationship between the central bank and government authorities

The Commission has discussed the relationshipbetween Norges Bank and the Storting, thegovernment and the Ministry of Finance. The cur-rent Sections 2 and 3 of the Act regulates theBank’s duty to present submissions, and concer-ning instruction and the Bank’s reporting, advi-sory role and duty to provide information.

The Commission proposes that a provisionshould be included in Section 1-4, first paragraph,of the new central bank act permitting the Govern-ment to make decisions regarding the Bank’sobjectives (see 1.1.2). As mentioned, NorgesBank will be given the opportunity to express anopinion before the decision is made and the mat-ter should be submitted to the Storting shortlythereafter. These objectives could typicallyinclude the current monetary policy regulation,but objectives could also be set for other areas.The objectives must be based on the purpose ofthe Bank’s operations as stated in the Act (cf pro-posed Section 1-2).

The Commission’s proposal to prohibit thegovernment from issuing instructions to NorgesBank except under extraordinary circumstanceshas been included in Section 1-4, second para-graph (see 1.1.2). The Commission proposes thatthis provision should have the same scope as thecurrent power of instruction and include the sameformal requirements. The power of instructionover the central bank currently available to theGovernment has never been used in individualmatters or in the case of disagreement with theBank. Nonetheless, there is a possibility thatsituations could arise where Norges Bank’s contri-bution must be viewed in a broader context andwhere other considerations will have to be givenweight than those that can be anticipated whenthe Bank’s purpose is formulated.

The proposal reflects the Commission’s opi-nion that the threshold for instruction should behigh. The Commission argues that with this addi-tion, the degree of autonomy conferred on NorgesBank will be approximately on a par with centralbanks in other open economies. This will give theBank a framework that is familiar in an internatio-nal context. With a high threshold for instruction,the Ministry of Finance and the government havesomewhat more leeway to evaluate the Bank’s useof judgement.


The Commission also proposes that NorgesBank’s duty to advise the government on econo-mic policy should be retained under the new act(cf proposed new Section 1-5). As is the casetoday, this duty applies in particular to the areas ofeconomic policy that affect Norges Bank’s objecti-ves of price stability and financial stability whenthe Bank finds that the instruments available to itare not adequate. Norges Bank’s duty to notify theMinistry of Finance about matters of importanceshould be included in Section 1-6 of the proposednew central bank act and the Bank’s duty toinform the public in Section 1-7.

The Commission proposes that the currentprohibition on extending credit to the governmentin Section 18 be retained in Section 3-8 of the newAct. An important reason for the independence ofcentral banks is to prevent the government frombeing able to fund its activities by printing money.This prohibition will not prevent the Bank fromtrading in government securities in the secondarymarket as part of the conduct of monetary policy.

1.2.3 Monetary policy and financial stability

The central bank’s role as bankers’ bank is set outin Sections 19-22 of the current Norges Bank Act.This role is important in enabling Norges Bank toperform its tasks in in the area of monetary policyand financial stability. Banks’ holdings of depositsin accounts at Norges Bank are today the mostimportant channel for the conduct of monetarypolicy, particularly through setting the interestrate on the deposits at the central bank. The hol-ding of these accounts at the central bank is alsoan important precondition for ensuring an effici-ent payment system and for helping to stabilisefinancial markets and financial institutions in a cri-sis situation. It is proposed that its role as bankers’bank, etc., be retained in Section 3-1 in the pro-posal on a new central bank act.

According to current law, the right to hold anaccount at Norges Bank is largely confined tofinancial undertakings with a bank license. Theright to hold an account at Norges Bank appliesboth to Norwegian banks and Norwegian bran-ches of foreign banks. A more limited right is con-ferred on banks that are authorised to providebanking services from an established place ofbusiness in other EEA countries. In special cases,other undertakings may also be granted the rightto hold an account at the central bank.

The Commission proposes that Norges Bankto fulfil its purposes be granted a general right tooffer undertakings in the financial sector to hold

an account at the Bank. This means that the Bankcan offer more undertakings than earlier to holdan account if the Bank judges that this facilitatesthe conduct of monetary policy or enhances theefficiency of the payment system.

Norges Bank sets the terms and conditions fordeposits from and credit to financial underta-kings. Such terms and conditions include interestrate terms and other conditions. The terms andconditions can vary according to the type of finan-cial undertaking.

The practice whereby Norges Bank requiresadequate collateral for all credit should be esta-blished by law. The collateral requirement for cre-dit should also apply to loans on special terms, i.e.loans provided by the Bank as lender of last resortin a crisis situation (S-loans). The collateral requi-rements for S-loans are also in line with currentpractice. Norges Bank should continue to acceptthe loan portfolios as collateral and be given legalprotection for that without having to satisfy thesame statutory requirements that apply to otherlenders.

The Commission also proposes that NorgesBank should be granted the right to use reserverequirements as part of liquidity management, i.e.that it set minimum requirements for depositsfrom undertakings that hold an account at NorgesBank. This is an instrument that most other cen-tral banks can use.

The Commission proposes to retain NorgesBank’s right to trade in financial markets and toissue its own debt instruments, etc. These areinstruments that Norges Bank has not used frequ-ently in the conduct of monetary policy, but whichcould become relevant in certain situations. Othercentral banks have, for example, bought long-term securities to influence market interest ratesand supply liquidity to the general public. Manycentral banks trade in their own debt instrumentsto manage liquidity in the banking system.

Norway’s foreign exchange reserves areowned and managed by Norges Bank. TheCommission proposes that ownership be establis-hed by law and that the reserves managementfunction be assigned to Norges Bank in order toserve the Bank’s purposes (see Section 3-2 of theproposal on a new central bank act). Norges Bankalso decides, as mentioned, the size of the reser-ves. The reserves shall in particular serve as acontingency when financial stability is threatened.Nor can the possibility be excluded that the reser-ves may be needed to influence the Norwegiankrone exchange rate. Moreover, the reserves


shall be used to meet the Bank’s internationalcommitments, in particular to the IMF.

1.2.4 The payment system

Section 1 of the current Norges Bank Act conferson Norges Bank chief responsibility for promo-ting an efficient payment system. A stable pay-ment system is of particular value in and of itselfand is a precondition for financial stability. Withthe appropriate supervision and regulation, thepayment system should function even in times ofunrest and turbulence in financial markets. As thebankers’ bank, Norges Bank operates the centralsettlement system, Norges Bank’s settlement sys-tem (NBO). The Bank is the supervisory andlicensing authority for interbank systems underthe Payment Systems Act. Under Section 1 of thecurrent Norges Bank Act, the Bank monitorsdevelopments in other payment and settlementservices.

The Commission is of the view that NorgesBank’s responsibility for the payment systemshould be part of the Bank’s purpose, cf proposednew Section 1-2. To specify and strengthen theBank’s legal basis in this area, the Commissionproposes that a new provision concerning NorgesBank’s responsibility for overseeing the paymentsystem be included in the act (see proposed newSection 3-3, second paragraph). Norges Bankshall also provide for stable and efficient systemsfor interbank payment, clearing and settlement,including the responsibility for operating the cen-tral settlement system (see new Section 3-3, firstparagraph).

Norges Bank currently has the sole right toissue banknotes and coins, and the Bank decidestheir denomination and design. Today, banknotesand coins account for a small and decreasing pro-portion of means of payment. Nonetheless, theCommission stresses the importance of some spe-cific features of banknotes and coins issued by thecentral bank.

For the public, cash represents claims on Nor-ges Bank, while bank deposits are claims on pri-vate banks. Confidence that deposit money canquickly and simply be converted into a correspon-ding amount in cash has been important for thepublic’s trust in deposit money as a generallyaccepted means of payment. Confidence in depo-sit money also depends on appropriate regulationsand oversight arrangements that foster a robustbanking sector. In crisis situations, trust in bankscan be impaired, and demand for low-risk, liquidsavings instruments may increase. Cash can then

be important as a contingency payment solution.The Commission proposes that Norges Bank’sexclusive right to issue Norwegian banknotes andcoins should be retained in Section 3-4 of the newact. The Commission is also of the view that thecentral bank should continue to decide the deno-mination and design of banknotes and coins to beput into circulation.

Current Section 14 establishes by law thatNorges Bank’s banknotes and coins are legal ten-der. This means that anyone who owes money willalways be able to settle his or her payment obliga-tions towards the payment recipient usingbanknotes and coins, as will those with outstan-ding claims, unless otherwise agreed between theparties. Some have argued that banknotes andcoins should no longer be legal tender. Banknotesand coins usually involve higher costs for banksand other firms than electronic payment instru-ments. Banknotes can also be regarded as avehicle for facilitating tax evasion and other typesof criminal activity. At the same time, banknotesand coins are still widely used and are particularlyimportant for clubs and associations etc. and forindiviuals who for different reasons do not haveaccess to a bank account or a payment card. Cashalso functions as a contingency payment solutionin the event of a failure in payment system techno-logy or in times of economic crisis. Cash alsoplays a role in protecting privacy as payments can-not be tracked in the same way as electronic pay-ments. The Commission proposes in Section 3-5of the new central bank act that the provision defi-ning banknotes and coins as legal tender shouldbe retained. According to Section 16-4 of the Acton Financial Undertakings and Financial Groups,banks are required to accept cash from customersand make deposits available to customers in theform of cash to meet customer expectations andneeds. Norges Bank’s power to instruct banks toensure cash distribution for contingency purposesis included in Section 3-3, third paragraph, of theproposed act, cf 1.1.2.

The Commission does not exclude the possibi-lity that demand for cash will gradually dwindleand that payments will be made almost exclusi-vely electronically or digitally. This would raisethe issue of whether an electronic or digital formof legal tender should be established. Centralbanks in many countries, including Norges Bank,are assessing this matter. The work is at an earlystage. The Commission assumes that an issue ofmost types of electronic or digital central bankmoney to the public will require a legislative


amendment based on a separate, extensive reporton this matter.

1.2.5 Other functions

Norges Bank is the government’s bank and theadministrator of Norway’s commitments as amember of the International Monetary Fund(IMF). The Commission also discussed provisi-ons relating to international agreements and thegovernment’s right to introduce protective measu-res in the event of balance of payments problemsetc.

As mentioned in 1.1.2, the Commission propo-ses including a provision in the act allowing theGovernment to delegate the provision of financialservices for the government, as previously, toNorges Bank (see Section 3-7).

It is also common in other countries for thecentral bank to perform financial services for thegovernment, although to a varying extent. Thenew act should not hinder the performance ofbanking services for the government by agenciesother than the central bank if this is consideredappropriate in the future.

The scope of these services should be clearlydefined, for example in the mandate or writtenagreements between the Ministry of Finance andNorges Bank. Norges Bank’s remuneration forthese services should also be included in the agre-ement. The current practice of cost coveragebased on efficient operation should be retained.

Current Section 28 provides that the Govern-ment should have the right to implement necessaryprotective measures if capital inflows and outflowscould lead to substantial problems in the balance ofpayments or significant disturbances in capitalmarkets. The Commission proposes that the provi-sion on protective measures, with some adjust-ments to the wording, be retained (see Section 3-9in the proposal on the new central bank act).

Norges Bank engages in extensive internatio-nal activities. The Bank is a member of the Bankfor International Settlements (BIS), cooperateswith other central banks and takes part in a rangeof international fora and working groups. Accor-ding to current Section 25, Norges Bank is alsorequired to administer the rights and fulfil theobligations ensuing from Norway’s membershipof the IMF. The Commission proposes that thetask of administering Norway’s membership ofthe IMF is retained in the new central bank act(see Section 3-10).

Current Section 26 provides for Norges Bankto enter into agreements on deposit, credit and

guarantee arrangements with other central banksas well as with international economic organisati-ons and institutions provided that its claims aresatisfactorily secured and the agreements areapproved by the Government. The approval requi-rement is particularly included to address the con-sideration that such agreements «in reality couldaffect economic and political relations betweenNorway and other states».1

Norges Bank’s international agreements varywidely in nature. Norges Bank concluded agree-ments with other central banks such as the Fede-ral Reserve and the ECB when the financial crisiserupted in 2008. The object was to stabilise finan-cial markets, and the agreements formed part ofNorges Bank’s conduct of monetary policy and itswork to promote financial stability. It was impor-tant to conclude the agreements quickly. TheCommission is of the view that this type of agree-ment should not be subject to approval by theGovernment.

Norges Bank also entered into a multi-yearcredit agreement with the Central Bank of Icelandin 2008. The object of the agreement was prima-rily to support the Icelandic government in itswork to stabilise economic developments. TheNorwegian government and the Storting agreedto provide a government guarantee.

The Commission proposes that key parts ofcurrent Section 26 are retained in the new act (seeproposed new Section 3-10). The requirement thatclaims must be satisfactorily secured must beretained. If Norges Bank is in doubt about thesecurity provided, the Bank must request agovernment guarantee, and the government andStorting must come to a decision on the agree-ment.

1.2.6 Duty of confidentiality, administrative procedures etc.

The Commission notes that the Public Adminis-tration Act and the Freedom of Information Actare applicable to Norges Bank’s activities.

This means that the general provisions of thePublic Administration Act concerning administra-tive procedures, impartiality requirements, dutyof secrecy, etc, apply to the Bank’s activities. TheCommission proposes that the new act clarifiesthat the right of appeal under the provisions of thePublic Administration Act is excluded for decisi-ons concerning central bank loans and accountmanagement (see Section 5-1). These instruments

1 Proposition No. 25 to the Odelsting (1984–85) p. 109.


are used to achieve the Bank’s objectives in thearea of monetary policy and financial stability. Theauthority of the Ministry of Finance to overrulethe Bank is regulated in the new act by Section 1-4, second paragraph on instruction.

Under the Freedom of Information Act, thepublic has right of access to case documents, jour-nals, etc. The Commission proposes that prepara-tory documents exchanged between Norges Bankand the Ministry of Finance and Norges Bank andFinanstilsynet (Financial Supervisory Authority ofNorway) may be exempted from publicdisclosure.

1.3 Organisation of Norges Bank and the management of the GPFG

1.3.1 Introduction

The Commission is tasked with assessing whet-her the organisation of Norges Bank is suited toits assigned functions. The Commission is also toassess the Bank’s relationship to the Ministry ofFinance, the Government and the Storting.

Under the terms of the mandate, the Commis-sion is to present proposals for governancemodels for Norges Bank, both where the Fundremains under the management of Norges Bankand where the Fund is separated from NorgesBank. The Commission is also to present pro-posals for a governance model for investmentmanagement in the case where the Fund is sepa-rated from the Bank.

In all of the models it is clearly specified thatNorges Bank is the central bank of Norway andthat central banking functions are regulated bythe central bank act. The Bank shall be a separategovernment-owned legal entity with the capacityto be a party to legal proceedings.

1.3.2 Norges Bank’s central banking functions

In the Commission’s proposed governance modelfor Norges Bank’s central banking functions(model A1), the management of the Fund is notunder the Bank. In its choice of model, theCommission has given weight to the evolution ofthe Bank’s functions over the past decades andhas also drawn on lessons learned by other cen-tral banks and organisations of other types.

This is the background for the Commission’sproposal for the establishment of a monetarypolicy and financial stability committee (see draftChapter 2 of the Act). An important precondition

for conferring the responsibility for interest ratesetting and other instruments on an independentcentral bank is a sufficiently high level of professi-onal competence among the members of the deci-sion-making body. Committees therefore ordina-rily comprise experts in the relevant fields. Inaddition to persons from the Bank’s senior mana-gement, suitable members may be persons fromacademia and persons who have otherwise acqui-red relevant insight (see 1.1.1).

The Governor and the Deputy Governor, whoare the chair and vice chair of the committee andthe external members, are appointed by theGovernment. One member, who is an employee ofthe Bank, is appointed by the board (see Section2-6 on the appointment and composition of thecommittee in the proposal on a new central bankact). The committee’s functions are presented inSection 2-7.

The committee shall not have administrativeresponsibility for the central bank. This will beconferred on a Norges Bank board, which willalso be given the responsibility for those centralbanking tasks that are assigned to the currentExecutive Board, but will not be assigned to thecommittee (see point 6 in Section 1.1.1). The tasksof the board are set forth in Section 2-4.

The board shall consist of seven members allof whom are external and independent of theadministration, cf the requirements under thegeneral rules and regulations for corporate gover-nance and control; see proposed Section 2-3 rela-ting to the appointment and composition of theboard. Members of the board should be well acqu-ainted with Norges Bank’s role in economic policyand as a whole have insight into central bankingfunctions. There should also be members withmanagement and administrative experience, andit would be advantageous for the board as a wholeto have expertise in law, economics and accoun-ting. The Governor prepares matters for theboard and implements the board’s decisions. TheGovernor is the external representative of theBank (see draft Section 2-11).

The proposed act provides a fairly general des-cription of the division of responsibilities betweenthe committee and the board. The Commission isof the view that the committee and the boardshould draw up detailed guidelines for the divisionof responsibilities. If necessary, the Governmentmay issue a further clarification of the commit-tee’s tasks.

In the view of the Commission, Norges Bank’sindependent position, budgetary autonomy andimportant role in society require in particular that


the Bank be subject to adequate control and over-sight. The proposed governance model providesclear lines of responsibility for overseeing theBank.

The Supervisory Council currently fills afunction as an independent oversight body, owingin part to the Governor’s dual role as both chair ofthe Executive Board and general manager of cen-tral banking operations. The Supervisory Councilalso approves the Bank’s budget. With an inde-pendent board granted responsibility for over-sight of daily management and operations in otherrespects, there is no longer a need for a separateoversight body at the Bank. Oversight of theboard’s activities will then be assigned to theMinistry of Finance and will no longer be perfor-med by a body in the Bank. Currently, the Minis-try of Finance also evaluates the ExecutiveBoard’s use of judgement in monetary policy, itswork on promoting financial stability and invest-ment management. The Ministry of Finance’sresponsibility for overseeing the board and eva-luating the Bank’s goal performance in the areasof responsibility of the board and the committee isset forth in Section 4-1 of the proposed new cen-tral bank act (see also Section 1.1.1). The duty toreport to the Storting is set out in Section 1-8.

With a model without a supervisory council,the Commission has considered whether the Stor-ting should also participate in the appointment ofmembers of the board. However, such a sharedappointment function would result in blurred linesof responsibility, while in the view of the Commis-sion, the control function of the Storting can bestbe addressed in other ways. The Storting willreceive reports from the Ministry of Finance andthe Office of the Auditor General. The StandingCommittee on Finance and Economic Affairs mayenhance and strengthen the current hearing insti-tute for the Bank’s management by increasing thefrequency of hearings. The Commission’s pro-posal for governing bodies at the Bank providesfor hearing others than the Governor. The Stan-ding Committee on Finance and Economic Affairsmay also consider hearing the Governor andDeputy Governor after being appointed and per-haps also other members of the monetary policyand financial stability committee and the boardchair. The Ministry should evaluate monetarypolicy objectives and objectives in other areas inaccordance with Section 1-4 of the act on a regularbasis, for example every five years and present itsevaluations to the Storting.

Figure 1.1 Proposed governance structure for Norges Bank’s central banking operations (Model A1).

Board for Norges Bank

external members only7 members

Norges Bank Central Banking

Operations (headed by the Governor)

Internal audit

Storting

Monetary policy and financial stability

committeechaired by the

Governor 5 members (3+2)

Government/Ministry of Finance

Office of theAuditor General

External auditor


1.3.3 An investment management entity separated from Norges Bank

The Commission proposes a governance modelfor the management of the GPFG separated fromNorges Bank, model A2. A government-ownedstatutory entity will safeguard the specificities andadjustments that are or may be needed for thegovernance and investment management of theFund. Such an entity will provide a fairly uniformframework for the management of the two parts ofthe Government Pension Fund (cf the Act on Fol-ketrygdfondet (Government Pension Fund Nor-way)).

The fundamental governance principles forthe investment management entity are laid downin the proposed act on the basis of the current Acton Folketrygdfondet. The division of roles bet-ween the Storting, the Ministry of Finance andthe investment management entity should notentail any substantial change as a consequence ofa separation from Norges Bank (cf Section 1.1.1).

The investment management unit at NorgesBank, NBIM, can as an organisation be retainedbroadly as is, but in a separate entity delinkedfrom the Bank (cf Section 1.1.1). The Commissionassumes that all of NBIM, including the realestate investment unit NBREM, will then be trans-ferred from Norges Bank to the new entity.

The board of the entity will be responsible forgenerating value and overseeing investmentmanagement. As the highest decision-makingbody, the board is to ensure that the entity is orga-nised appropriately and to approve plans, budgetsand guidelines for the entity. The board will over-see daily management and operations in otherrespects. By formulating strategies and providingleadership, the board will promote a high-qualityinvestment management organisation with ahealthy culture. The choice of general manager istherefore important, at the same time as the gene-ral manager requires guidance and support tomeet the defined objectives and generate value forthe Fund’s owners.

The board of the entity should have speciali-sed competence in finance and investment mana-gement. Moreover, the board needs to have athorough understanding of the Fund’s role in theNorwegian economy and economic policy. Mem-bers with management experience in similar busi-nesses and in risk management but also in othersectors will be an asset to the board. There arefurther considerations that may suggest the possi-bility of appointing English-speaking membersand thus of establishing English as the board’sworking language. Nevertheless, reporting to theMinistry of Finance and to the public must be inNorwegian. The Commission is of the view thatseven is an appropriate number of members.

Figure 1.2 Government-owned statutory entity for the GPFG (the Norwegian Government Investment Fund, NGIM), (Model A2).

Storting

Administration (headed by general manager)


Board for investmentmanagement7 members

Internal audit


External auditor


The entity reports to the Ministry of Finance,which oversees the board compliance and gover-nance and evaluates the entity’s goal perfor-mance. The Storting controls the entity by meansof its deliberations on the Ministry’s white papersand reports by the Office of the Auditor General.In connection with such deliberations, the Stor-ting may hear the chair of the board and the gene-ral manager, along with the Minister of Finance.The Storting may also consider whether it wouldbe beneficial in its work relating to oversight ofinvestment management for the chair of the boardto appear before the Standing Committee onFinance and Economic Affairs immediately afterbeing appointed.

1.3.4 Norges Bank with the GPFG under the management of the Bank

The Commission presents two alternative gover-nance models where the Fund remains under themanagement of Norges Bank (cf Section 1.1.1).As mentioned, one model, model B, is based onthe Commission’s proposed governance modelfor central banking functions, but with the addi-

tion of a separate board for investment manage-ment.

The board for investment management will bethe highest decision-making body for the manage-ment of the Fund and will be chaired by theGovernor. The Deputy Governor is vice chair, andin addition there will be five external members.The board will be responsible for value generationfrom investment management and for overseeinginvestment management activities.

This model entails a number of challenges andasymmetries. The Government appoints bothboards at Norges Bank, but the Ministry ofFinance does not oversee the board for invest-ment management. The Ministry of Finance willoversee the board for Norges Bank, designate anexternal auditor and approve the accounts for cen-tral banking operations, but the board for NorgesBank will oversee the board for investment mana-gement. At the same time, the internal auditfunction under the board for Norges Bank willonly apply to central banking operations. TheGovernor will chair the monetary policy commit-tee and serve as general manager of central

Figure 1.3 Governance model for Norges Bank where the GPFG remains under the management of the Bank – model B.

Board for Norges Bank

external members only7 members

Norges Bank Central Banking Operations

(CBO) (headed by the Governor)

Internal audit (CBO)

Storting

Monetary policy and financial stability




Board for investmentmanagementchaired by the


Norges Bank Investment Management

(IM) (headed by the CEO of

NBIM)

Norges Bank Real Estate

Management

Internal audit (IM)

External auditor



banking operations, but chair the board for invest-ment management.

The other alternative governance model if theFund remains under the management of theBank, model C, is more similar to the currentgovernance model, with a board and supervisorycouncil, but with the addition of a monetary policyand financial stability committee (see Section1.1.1). Owing to the board’s responsibility formanagement of the Fund, the board must be chai-red by the Governor. The composition of theboard in other respects must be adjusted to reflectthe board’s professional responsibility for invest-ment management and the professional and admi-nistrative responsibility for central banking opera-tions, but where the responsibility for monetarypolicy and work on financial stability is transfer-red to the committee. This will reduce the scopeof responsibilities and tasks for members of theboard, but not for the Governor.

The tasks and responsibilities of the Supervi-sory Council will be by and large retained in thismodel, but with some changes. In the opinion ofthe Commission, a supervisory body will be ableto discharge its duties better and more efficiently

with fewer members than currently. The Commis-sion proposes reducing the number of membersfrom 15 to seven, but they will still be appointedby the Storting. As is the case today, the supervi-sory council will not have oversight responsibilityfor the board’s or committee’s use of judgement,and should not have responsibility for operationaldecisions at the Bank.

1.3.5 The Commission’s assessments and recommendations

To assess the alternative governance models, theCommission discusses a number of importantconsiderations that good governance modelsshould safeguard:– The organisation of Norges Bank and the

management of the Fund must be assessed inthe light of Norway’s traditions in the areas ofconstitutional law and public administrationpolicy.

– The lines of responsibility must be clearly defi-ned.

– The entities must enjoy the necessary legiti-macy and trust. A widely accepted organisatio-

Figure 1.4 Model based on the current governance structure with the addition of a monetary policy and financial stability committee and a supervisory council (model C).

Boardchaired by the

Governor 7 members

Norges Bank Central Banking

Operations (headed by the Governor)

Storting


Supervisory Council 7 members

Monetary policy and financialstability



Norges Bank Real Estate

Management

Norges Bank Investment Management

(headed by the CEO ofNBIM)

External auditor


Internal audit


nal model, a high degree of credibility and agood reputation are important.

– The entities must be transparent– The entities should be organised in accordance

with principles for good governance. The orga-nisation and governance framework must faci-litate the work of Norges Bank and the Fundwith a view to attaining the objectives definedby the Storting and the Government.

– The composition and competence of the board(or boards) and executive management mustreflect the tasks involved and the specificitiesof the activities. While central banking is agovernment task, management of the Fund is aprofit-maximising activity.

– On average, several persons collectively makemany decisions better than a single person.

Considerations for GPFG:– It is important to ensure the stability of the

organisation and the framework for the mana-gement of the Fund and Norges Bank

– The board and senior management for invest-ment management must have the competenceand will to manage the activity with a view toachieving the highest possible return at a care-fully weighed risk level.

The proposed governance models are assessedagainst these criteria:

All the governance models (A – C) have attri-butes enabling them to meet important criteria foran appropriate governance model for NorgesBank and the management of the Fund. At thesame time, some of them have various drawbacks.It is the view of the Commission that several of thecriteria suggest that the current organisationshould be changed.

All of the models largely conform to Norway’sconstitutional law traditions. They also addressthe requirement for democratic control of centralbanking and the Fund. Furthermore, in all of themodels it is proposed that key decisions are to bemade by a group of people on a committee or aboard and not only by a single person.

The scope of the Executive Board’s and theGovernor’s tasks is currently substantial. Moreover,decisions pertaining to central banking functionsrest largely with the Governor and DeputyGovernor. The establishment of a monetary policyand financial stability committee will serve tostrengthen the expertise of the decision-making bodyfor monetary policy and work on promoting finan-cial stability. As stated, the part-time externalmembers can be on an equal footing with central

bank management in preparing the committee’sdeliberations. With part-time external members,the risk of conflict with other business or occupati-onal roles is also reduced.

Furthermore, in models A and B, the board forNorges Bank is independent of the administra-tion. This provides clear lines of responsibility fromthe Bank to the Ministry of Finance and the Stor-ting. Oversight of the board for Norges Bank isthen the responsibility of the Ministry of Finance.Nevertheless, in model B, the lines of responsibi-lity are blurred in that the Ministry of Finance, asrepresentative of the owner of the Fund, does notoversee the board for investment management,but the board for Norges Bank does. This is consi-dered to be a weakness of model B.

In the light of the substantial scope of responsibi-lities and tasks, it will be demanding to composespecialised boards that will both have responsibi-lity for central banking functions and the Fund (cfSection 1.1.1). If the management of the Fund isseparated from Norges Bank, the governancebodies in model A can be tailored to the tasks ofeach activity. There is also a separate board forinvestment management in model B, but thescope of the Governor’s responsibilities in thismodel will continue to be substantial. In addition,the work on central banking tasks could bestrengthened by a separate organisation for thesefunctions.

For the same reason, the objective of the highestpossible return at a carefully weighed risk level is anargument in favour of a separation. Specialisedboards with the competence and culture for gene-rating value will better guide the activity towardsthis objective. This in turn is an argument infavour of models A or B.

An important reason that Norges Bank wasinitially chosen as investment manager was theBank’s high degree of legitimacy and credibility. Inprinciple this may be an argument for retainingthe Fund under the management of Norges Bank(cf models B and C). On the other hand, both cen-tral banking functions and the management of theFund have become more complicated with newdemands on the board and management. Greatercomplexity increases the risk of negative inci-dents, accompanied by a loss of credibility andreputation. For that reason, with both functionscombined at Norges Bank, the risk also increasesthat negative incidents in investment managementwill damage the central bank’s reputation and viceversa.

As investment manager, Norges Bank haslikely contributed to a stable operating framework


for investment management. The threshold forreplacing the board or general manager of a cen-tral bank if investment management results in los-ses is likely to be high. Such stability is important.At the same time, the Commission has not foundan organisational model for Norges Bank thatwould not fairly rapidly again raise the question asto whether the solution is appropriate. In the viewof the Commission, a proposal for a new organisa-tion delinked from the Bank will be better suitedto settling the issue of organisation in the periodahead. Models B and C may be perceived as fairlycomplicated and not particularly transparent.They could easily be viewed as only a first steptowards separating the Fund from the Bank.

After the examination of different governancemodels, the Commission recommends that themanagement of the GPFG be separated from NorgesBank as described in model A. This solution is con-sistent with the criteria stated above. An invest-ment management entity can then be establishedwith an organisational framework that is suited forits purpose. The sole task of the organisation andthe board will be to manage the Fund. Centralbank management will have increased capacity tofollow up the conduct of monetary policy and thework on financial stability and the payment sys-tem.

A separation process must be carried out in anefficient manner (cf Section 1.1). The Commissionis also proposing a strengthening of the formal fra-mework for the GPFG.

1.3.6 Some amendments to the Government Pension Fund Act

The Government Pension Fund Act is a keycomponent of the economic policy framework inNorway. Saving in the Fund has made it possibleto separate oil revenue spending from currentrevenue flows. The Fund currently helps tofinance a substantial portion of the welfare state’sexpenditures. Separation from the Bank shouldnot in itself change the role of the Fund in econo-mic policy.

The Commission proposes a number ofamendments to the Government Pension FundAct. These amendments will reinforce the Fund’scurrent framework and is independent of theorganisational solution for investment manage-ment.

The Commission proposes strengthening theformulation of objectives in the Government Pen-

sion Fund Act concerning the Fund’s role as asource for financing the welfare state across gene-rations. This is achieved by an investment mana-gement strategy that seeks to attain the highestpossible return at an acceptable risk while promo-ting responsible investment. This is therefore pro-posed for insertion as a new Section 2 of the Act.

The Fund is a savings instrument for Norway.This implies that it must be invested outside Nor-way. Investing abroad is also a precondition forthe Fund’s role as a fiscal policy instrument. Atthe same time, it facilitates investment diversifica-tion and risk reduction. The Commission propo-ses enshrining in law a provision to the effect thatthe Fund shall invest outside Norway and in fore-ign currency in a draft new Section 6 of the Act onthe Government Pension Fund.

It is furthermore important that the Fund isbuilt up to reflect real government saving. Thereis little purpose in building up and maintaining afund if at the same time the government borrowsto finance a portion of its expenditure. TheCommission therefore recommends enacting as anew Section 7 a provision barring the governmentfrom financing government budget expenditureby borrowing as long as there is capital in theFund.

These provisions are set out in earlier legisla-tive proposals and are already part of manage-ment practice or set out in the management man-date laid down by the Ministry of Finance. Enshri-ning them in law serves to strengthen the opera-ting framework.

The fiscal rule, which states that fiscal spen-ding of petroleum revenues shall not exceed thereal return on the Fund over time, is not suited tobeing enshrined in law in the same manner. Thesize of the withdrawal in a particular year must beapproved by the Storting on the recommendationof the Government as part of the budget process.The fiscal rule is intended to apply as an averageover time. For a particular year, a considerablediscrepancy may arise between the amount trans-ferred from the Fund and the expected long-termreal rate of return. This may reflect developmentsin the domestic economy or unexpectedmovements in the value of the Fund. Both the fis-cal response to cyclical fluctuations and the paceof withdrawal readjustment will require a well-con-sidered use of judgement that is not suited tobeing regulated by legislation.


Chapter 2

Excerpts from the draft act on Norges Bank and the Monetary System, etc.

Chapter 1 General Provisions

Section 1-1 The central bank of Norway

(1) Norges Bank is the central bank of Norway.(2) The Bank is a separate legal entity with thecapacity to be a party to legal proceedings and isowned by the government.

Section 1-2 Purpose of Norges Bank

(1) The purpose of Norges Bank’s functions is tomaintain monetary stability and promote stabilityof the financial system and an efficient and securepayment system.(2) Norges Bank shall otherwise contribute tohigh and stable output and employment.

Section 1-3 Functions of Norges Bank

(1) Norges Bank shall be the executive and advi-sory authority for monetary policy.(2) Norges Bank shall further have executive andadvisory authority in the work to promote finan-cial stability.(3) Norges Bank shall issue banknotes and coins,promote the central settlement system and over-see of the payment system.(4) The Bank may receive deposits from andextend credit to banks and other financial under-takings. The Bank may trade in financial marketsand provide all forms of financial services.(5) The Bank owns the country’s official foreignexchange reserves.(6) The Bank shall ensure efficient and soundinvestment management.(7) The Bank may further introduce measuresthat are common or natural for a central bank.

Section 1-4 Decisions on the functions of the Bank

(1) The King in the Council of State may adoptresolutions regarding the objectives of the Bank.

The Bank shall be given an opportunity to expressits views before such resolutions are passed. TheStorting shall be notified of resolutions as soon aspossible.(2) Norges Bank may not be instructed as to itsactivities under the present Act except in extraor-dinary circumstance. Such resolutions must beadopted by the King in the Council of State inaccordance with the procedure set out in the firstparagraph.

Section 1-5 Advisory function

(1) The Bank shall express its views on matterssubmitted by the King or the ministry.(2) The Bank shall issue advice to the ministrywhen the attainment of the Bank’s objectivesrequires measures to be taken by others than theBank.

Section 1-6 Duty to inform the ministry

The Bank shall inform the ministry about mattersof importance.

Section 1-7 Information to the public

(1) The Bank shall inform the public about thebasis for decisions that the Bank takes to achieveits objectives.(2) The Bank shall ensure that indicativeexchange rates against the Norwegian krone areavailable to the public on all business days.

Section 1-8 Reporting to the Storting

(1) The ministry shall at least once a year reportto the Storting on the activities of Norges Bankand its supervision of the Bank.(2) The Office of the Auditor General shall controlthe minister’s exercise of authority pursuant to


the Act relating to the Office of the Auditor Gene-ral and the instructions laid down by the Storting.

(…)

Chapter 2 Organisation of Norges Bank

I. Introductory provisions

Section 2-1 Bodies of the Bank

(1) Norges Bank shall have a board and a commit-tee for monetary policy and financial stability.(2) The King in the Council of State may decidethat the tasks of the committee shall be dividedbetween two committees and determine the divi-sion of tasks between them.

(…)

II. Board of Norges Bank

Section 2-3 Composition of the board of Norges Bank

(1) The board shall consist of seven members.The members are appointed for a term of fouryears by the King in the Council of State. (…) TheKing in the Council of State appoints the chair andvice chair from among the members.

(…)

(3) The following persons are disqualified forappointment as members of the board:1. the Governor and Deputy Governor,2. staff of Norges Bank,3. government ministers,4. political staff of the ministries,5. ministry officials,6. staff of the Ministry of Finance or the Office of

the Prime Minister,7. members of the Storting,8. political staff of the Storting,9. committee secretaries of the Storting.10. (…)

(…)

(5) The ministry shall determine the remunera-tion of the members.

Section 2-4 Tasks of the board

(1) The task of managing Norges Bank shall beassigned to the board, with the exception of tasksthat, pursuant to the Act, are assigned to the

committee. The board shall ensure the soundorganisation of Norges Bank.(2) The board shall determine the plans and bud-get for the activities of the Bank. The ministryshall be informed of the approved budget. Theboard may lay down guidelines for the Bank’s acti-vities.(3) The board shall ensure that the Bank’s activi-ties, preparation of accounts and asset manage-ment are managed and controlled in a sound man-ner. The board shall oversee the daily manage-ment of the Bank and its activities. The boardshall not oversee the exercise of judgement of thecommittee.(4) The board may give instructions relating tothe daily management of the Bank.(5) The board shall have an audit committee. Themembers of the audit committee shall be appoin-ted by and from among the members of the board.The King may further specify rules relating to theaudit committee.(6) The board may appoint a committee fromamong board members to prepare matters for theboard.(7) The board may decide that commercial activi-ties that fall within the scope of this Act shall beperformed by companies that are partly or whollyowned by the Bank. The board represents theBank as owner at such companies.

(…)

III. Committee for monetary policy and financial stability

Section 2-6 Composition of the committee for mone-tary policy and financial stability

(1) The monetary policy and financial stabilitycommittee shall consist of five members andshould have the following composition:1. the Governor of the Bank,2. the Deputy Governor of the Bank,3. a member who is employed by Norges Bank

and who is appointed for a term of two years bythe board on the proposal of the Governor, butfor no longer than a total of six years.

4. two members who are appointed for a term offour years by the King in the Council of State.These members shall serve part-time at theBank. A member cannot be reappointed if theperson in question has served on the board foreight years or more at the beginning of the newterm. Should a member resign from the


committee, a new member may be appointedfor the remainder of the term.

5. In the event of a long period of absence, a newmember may be appointed temporarily.

(2) The Governor and the Deputy Governor shallserve as chair and vice chair of the committee.

(…)

(5) The ministry determines the remuneration formembers specified in the first paragraph no. 4.

Section 2-7 Tasks of the committee for monetary policy and financial stability

(1) The committee shall be responsible for theBank’s executive and advisory authority for mone-tary policy and the work on promoting financialstability.(2) The committee shall be responsible for theuse of instruments to achieve the objectives ofmonetary policy and financial stability. Thecommittee may for these purposes and in specialcircumstances depart from resolutions or guideli-nes adopted by the board. Wherever possible, theboard shall be given an opportunity to express itsviews before such decisions are made.(3) The committee shall inform the public of deci-sions taken by the committee and the basis for thedecisions.(4) The King in the Council of State may issuesupplementary rules on the delimitation of thecommittee’s tasks and responsibilities.(5) The committee shall be given an opportunityto express its views before the board considersmatters that affect the committee’s tasks andresponsibilities.(6) The committee shall adopt a contingency planfor financial crises. The board shall be given anopportunity to express its views before the plan isadopted.

(…)

IV. Daily management

Section 2-9 Appointment of the Governor and Deputy Governor

The Governor and Deputy Governor are appoin-ted by the King in the Council of State for a fixedterm of six years. They may be reappointed for afurther term of six years.

Section 2-10 Remuneration and pension

The remuneration and pension of the Governorand the Deputy Governor are determined by theministry.

Section 2-11 Tasks of the Governor as general manager

(1) The Governor shall be responsible for thedaily management of the Bank’s activities andshall follow guidelines and orders issued by theboard. The daily management does not comprisematters which by the Bank’s standards are of anunusual kind or major importance.(2) The Governor may further decide a matter onthe authorisation of the board or when measuresmust be taken and there is no time or opportunityto present the matter to the board. The Governorshall forthwith notify in writing the board of thedecision.(3) The Governor is the external representative ofNorges Bank.

(…)

Chapter 3 Norges Bank’s tasks and instruments

Section 3-1 Credit to and deposits from banks etc

(1) To fulfil its purposes, Norges Bank maya. receive deposits from and extend credit to

banks and other financial undertakings,b. buy and sell foreign exchange and financial

instruments and otherwise engage in transacti-ons involving these instruments,

c. issue and trade in its own financial instru-ments.

(2) The terms and conditions for deposits and cre-dit shall be laid down by Norges Bank.(3) To fulfil its purposes, Norges Bank may setminimum requirements for deposits from entitiesholding an account with the Bank.(4) When warranted by special circumstances,Norges Bank may grant credit on special terms.(5) Norges Bank shall require satisfactory collate-ral for credit. Norges Bank may by regulation laydown further rules on the pledging of collateral.(6) The requirement for the special consent of theborrower pursuant to Section 45 of the FinancialContracts Act shall not apply to the transfer or col-lateralisation of claims to Norges Bank in conne-ction with the provision of credit or other measu-res pursuant to this paragraph, or in connection


with the Bank’s subsequent transfer of suchclaims.

Section 3-2 The official foreign exchange reserves

Norges Bank shall determine the size of the offi-cial foreign exchange reserves and how they areto be invested. The reserves shall be available tofulfil the Bank’s purposes and internationalcommitments.

Section 3-3 Payment and settlement

(1) The Bank shall provide for a stable and effici-ent system for payment, clearing and settlementbetween entities with an account at Norges Bank.(2) The Bank shall oversee the payment systemand other financial infrastructure, hereunder con-tribute to contingency arrangements.(3) The Bank may lay down regulations to imple-ment this section.

Section 3-4 Issuance of cash as a means of payment

(1) Norges Bank shall have the sole right to issueNorwegian banknotes and coins. The Bank deter-mines the denomination and design of thebanknotes and coins.(2) The Bank may decide that other operatorsmay produce banknotes and coins.

Section 3-5 Legal tender

(1) The Bank’s notes and coins are legal tender inNorway. No one is obliged to accept in any onepayment more than twenty-five coins of each den-omination.

(…)

Section 3-7 Banker to the government

To the extent the King decides, the Bank shallcarry out banking transactions for the govern-ment, perform financial services for the govern-ment and render services in connection withgovernment debt issues and the management ofgovernment debt.

Section 3-8 Credit to the government

Norges Bank may not extend credit directly to thegovernment. Nevertheless, the Bank may extendcredit to the government that matures within onecalendar day.

Section 3-9 Protective measures

The King may decide on special measures whencapital flows to and from other countries mayresult in substantial balance of payments pro-blems or major disturbances to the financial sys-tem. The Bank shall be given the opportunity toexpress it views before such a decision is made.

Section 3-10 International agreements

(1) The Bank shall administer Norway’s rightsand obligations ensuing from membership of theInternational Monetary Fund.(2) To fulfil its purposes, Norges Bank may enterinto agreements on deposit, credit or guaranteearrangements with foreign central banks and withinternational organisations and institutions, provi-ded that its claims are satisfactorily secured.

Chapter 4 Supervision and control

Section 4-1 Supervision etc by the Ministry

The Ministry shall supervise the activities of theboard. The Ministry shall evaluate the Bank’s goalperformance.

Section 4-2 Annual report, annual accounts and minutes

(1) Norges Bank has a statutory obligation tokeep accounts in accordance with the AccountingAct and the Bookkeeping Act. The King may laydown regulations specifying rules for the Bank’sannual accounts, annual report and bookkeepingthat supplement or depart from the provisions inor pursuant to the Accounting Act or the Bookke-eping Act.(2) Each year, the board shall prepare an annualreport and annual accounts. The annual accountsrequire the approval of the Ministry and togetherwith the annual report shall be presented to theStorting.(3) The minutes of board and committee meetingsshall be submitted to the Ministry.

Section 4-3 Audit

(1) Norges Bank’s annual accounts shall be audi-ted by an accountant that is authorised pursuantto the rules in the Auditors Act. The Ministryshall elect an auditor and set the auditor’s fee.(2) The King may lay down regulations specifyingrules for auditing the Bank that supplement ordepart from the provisions of Auditors Act.

26 Official Norwegian Reports NOU 2017: 13 (Summary) 2017New central bank act

Section 4-4 Internal audit

(1) The Bank shall have an internal audit unit thatreports to the board.(2) The internal audit unit shall assess the Bank’sinternal control, procedures and other conditionsthat are important to the Bank’s operations.(3) The King may lay down regulations concer-ning the Bank’s internal control.

Section 4-5 The Bank’s equity and distribution of profit

(1) Norges Bank shall hold equity that is suffici-ent for fulfilling the Bank’s purposes.(2) The King in the Council of State shall lay downguidelines for the allocation and distribution of theBank’s profit. The Bank shall be given the oppor-tunity to express its views before the guidelinesare laid down. The guidelines shall be communi-cated to the Storting.

Draft amendments to other acts

The following amendments shall be made to ActNo. 123 of 21 December 2005 relating tothe Government Pension fund:

Section 1 Purpose of the Government PensionFund shall read:

The savings in the Government Pension Fundshall support the financing of the National Insu-rance Scheme’s expenditure on pensions. Thesesavings shall safeguard long-term considerations inthe use of the government’s petroleum revenues sothat petroleum wealth benefits both current andfuture generations.

New Section 2 shall read:

The objective of the investments in the Govern-ment Pension Fund is to attain the highest possiblereturn at an acceptable risk while promotingresponsible investment.

New Section 6 shall read:The Government Pension Fund Global shall

invest outside of Norway and in foreign currency inaccordance with further guidelines laid down by theMinistry.

Section 7 new second paragraph shall read:The government shall not finance government

budget expenditures by borrowing as long as there iscapital in the Government Pension Fund Global.

New Section 9 shall read:The Ministry shall evaluate the management of

the Government Pension Fund Global and report tothe Storing annually.

The following amendments shall be made toAct No. 17 of 10 June 2015 on financialundertakings and financial groups:

New Section 1-7, second paragraph, shall read:The King in the Council of State may confer on

Norges Bank the task of laying down a regulationon requirements for new residential mortgageloans. Section 1-4, second paragraph, of the NorgesBank Act shall apply accordingly.

New Section 14-3, seventh paragraph, shallread:

The King in the Council of State may confer onNorges Bank the task of preparing a decision basisand issuing decisions on the countercyclical capitalbuffer. Section 1-4, second paragraph, of the NorgesBank Act shall apply accordingly.

Published by: Norwegian Ministry of Finans

Public institutions may order additional copies from: Norwegian Government Security and Service OrganisationE-mail: [email protected]: www.publikasjoner.dep.noTelephone: + 47 222 40 000Print: 07 PrintMedia 05/2017 – Impression 50

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New central bank act - Regjeringen.no · 2017. 6. 23. · Official Norwegian Reports NOU 2017: 13...

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