NORGES BANK PAPERS NORWAY’S FINANCIAL SYSTEM NO. 2 | 2016 AN OVERVIEW Norges Bank Papers no. 2 | 2016 NORGES BANK PAPERS NO 2 | 2016 NORWAY’S FINANCIAL Norges Bank SYSTEM Address: Bankplassen 2 Postal address: Postbox 1179 Sentrum, 0107 Oslo Telephone: +47 22316000 Telefax: +47 22413105 Email: [email protected] Website: www.norges-bank.no ISSN 1894-0277 (online) ISBN 978-82-7553-920-3 (online) 2 NORGES BANK PAPERS Contents NO 2 | 2016 NORWAY’S FINANCIAL Preface and reader’s guide ............................................................................................. 6 SYSTEM 1. The financial system .............................................................................................. 7 1.1. Providing economic agents with borrowing and saving opportunities ........... 8 1.2. Payment systems .......................................................................................... 10 1.3. Risk management ......................................................................................... 11 1.4. Supervision and regulation of the financial system ...................................... 12 Box: Risks in Norway’s financial system ............................................................ 12 1.5. International perspectives ............................................................................. 14 2. Financial markets ................................................................................................. 15 Box: Turnover in securities – exchange-traded and OTC ................................... 15 2.1. Money market............................................................................................... 16 2.1.1. Money market participants ................................................................... 17 Box: Liquidity ...................................................................................................... 17 2.1.2. Unsecured money market instruments ................................................. 18 Box: Norges Bank’s liquidity management and overnight lending rate .............. 19 2.1.3. Short-term paper and Treasury bills ..................................................... 21 2.1.4. Secured money market instruments ...................................................... 21 Box: Derivatives .................................................................................................. 22 2.1.5. Money market reference rates .............................................................. 24 2.1.6. Interest rate derivatives market ............................................................ 25 2.2. Bond market ................................................................................................. 27 Box: Bond yields and bond risk premiums .......................................................... 27 2.2.1. Key concepts in the bond market ......................................................... 28 2.2.2. Norwegian bond issuers ....................................................................... 30 Box: Norwegian banks’ and mortgage companies’ bond funding abroad ........... 31 Box: Secured funding .......................................................................................... 33 2.2.3. Bond investors ...................................................................................... 35 2.2.4. Primary bond market ............................................................................ 36 2.2.5. Secondary bond market ........................................................................ 37 2.2.6. Other bond market participants ............................................................ 39 2.3. Foreign exchange ......................................................................................... 39 Box: Currency codes (ISO 4217) ........................................................................ 40 2.3.1. FX market ............................................................................................. 40 2.3.2. FX market instruments ......................................................................... 41 2.3.3. Trading structure and turnover in the FX market ................................. 41 2.3.4. FX for travel and holidays .................................................................... 44 2.4. Equities ......................................................................................................... 44 2.4.1. Corporate structure and funding ........................................................... 44 3 2.4.2. Equity market ....................................................................................... 45 NORGES BANK PAPERS NO 2 | 2016 2.4.3. Size of the Norwegian equity market ................................................... 46 NORWAY’S FINANCIAL 2.4.4. Issuers ................................................................................................... 48 SYSTEM 2.4.5. Investors ............................................................................................... 48 2.4.6. Equity indices on Oslo Børs ................................................................. 49 2.4.7. Equity-related derivatives ..................................................................... 50 3. Financial undertakings ......................................................................................... 52 Box: Act on Financial Undertakings and Financial Groups ................................ 52 3.1. Financial groups ........................................................................................... 53 3.2. Banks ............................................................................................................ 54 Box: Commercial and savings banks ................................................................... 55 Box: Evolution of the Norwegian banking sector over the past 50 years ............ 56 3.2.1. Banks’ tasks .......................................................................................... 56 Box: What is money? .......................................................................................... 59 Box: Definitions of money .................................................................................. 60 3.2.3. Structure of Norway’s banking sector .................................................. 61 3.2.4. Banks’ assets and funding .................................................................... 63 3.2.5. Regulating banks – why and how? ....................................................... 66 3.2.6. Capital adequacy regulation ................................................................. 68 3.2.7. Liquidity regulation .............................................................................. 69 3.2.8. Deposit insurance in Norway ............................................................... 69 3.2.9. Crisis management of banks ................................................................. 70 3.3. Mortgage companies .................................................................................... 71 3.3.1. Covered bond mortgage companies ..................................................... 71 3.3.2. Other mortgage companies ................................................................... 72 3.5. Government lending schemes....................................................................... 73 Box: Government lending institutions ................................................................. 73 3.6. Insurance companies .................................................................................... 75 3.6.1. Types of insurance ................................................................................ 75 Box: The pension system in Norway ................................................................... 76 Box: Regulation of insurance companies ............................................................ 81 3.7. Pension funds ............................................................................................... 81 3.8. Mutual funds................................................................................................. 83 ............................................................................................................................. 84 3.8.1. Types of fund based on underlying asset ............................................. 84 3.8.2. Passive and active funds ....................................................................... 86 3.8.3. Regulation of securities funds .............................................................. 87 3.9. Other financial undertakings ........................................................................ 87 3.9.1. Finance companies ............................................................................... 87 3.9.2. Securities firms ..................................................................................... 88 4 3.9.3. Investment companies .......................................................................... 88 NORGES BANK PAPERS NO 2 | 2016 3.9.4. Venture capital companies ................................................................... 88 NORWAY’S FINANCIAL 4. Financial infrastructure ........................................................................................ 89 SYSTEM 4.1. Retail payment services ................................................................................ 90 Box: The Single Euro Payments Area (SEPA) .................................................... 90 4.1.1. Cash .....................................................................................................