2021 NORWAY’S FINANCIAL SYSTEM AN OVERVIEW Key figures – Norway’s financial system GDP Government Pension Cash in Loans from financial institutions (gross domestic product) Fund Global (GPFG) circulation to private individuals, businesses and local governments 3 413bn 10 914bn 41bn 5 828bn GDP (mainland) 3 043bn Total domestic bonds Oslo Børs market Bank Average daily turnover in outstanding capitalisation deposits the foreign exchange market 2 439bn 2 778bn 2 930bn 257bn Number of Total assets of Card transactions Debt-to-GDP banks insurance companies per capita per annum ratio 134 1 982bn 456 229% Norway’s financial system Norges Bank Address: Bankplassen 2 Postal address: P.O. Box 1179 Sentrum, 0107 Oslo Telephone: +47 22316000 Telefax: +47 22413105 Email: [email protected] Website: http://www.norges-bank.no ISSN 2535-4078 (online) Contents PREFACE AND READER’S GUIDE 7 THE FINANCIAL SYSTEM 8 The primary tasks of the financial system 9 Providing consumers and businesses with borrowing and saving opportunities 9 Providing payment services 11 Risk management 12 Box: What is money? 12 Supervision and regulation of the financial system 13 Box: Risks in the financial system 14 International cooperation 15 1 FINANCIAL MARKETS 17 1.1 Money markets 17 1.1.1 Money market participants 18 Box: Turnover in securities: exchange-traded and OTC 18 Box: Liquidity 19 1.1.2 Unsecured money market instruments 20 1.1.3 Short-term paper and Treasury bills 20 Box: Norges Bank’s liquidity management and overnight lending rate 21 1.1.4 Secured money market instruments 22 Box: Derivatives 24 1.1.5 Money market reference rates 25 1.1.6 Interest rate derivatives market 26 1.2 Bond market 27 1.2.1 Key concepts in the bond market 27 Box: Bond yields and bond risk premiums 28 Box: Secured funding 30 1.2.2 Norwegian bond issuers 31 Box: Norwegian Banks’ and mortgage companies’ bond funding abroad 32 1.2.3 Bond investors 34 1.2.4 Primary bond market 35 1.2.5 Secondary bond market 36 1.2.6 Other bond market participants 37 1.3 Foreign exchange 37 1.3.1 FX market 38 1.3.2 FX market instruments 38 Box: Currency codes (ISO 4217) 38 1.3.3 Trading structure and turnover in the FX market 39 1.3.4 FX for travel and holidays 41 1.4 Equities 41 1.4.1 Corporate structure and funding 42 1.4.2 Equity markets 42 1.4.3 Size of the Norwegian equity market 43 1.4.4 Issuers 44 1.4.5 Investors 45 1.4.6 Equity indexes on Oslo Børs 45 1.4.7 Equity-related derivatives 46 2 FINANCIAL INSTITUTIONS 47 Box: Financial Institutions Act 47 2.1 Norges Banks’s balance sheet and the financial system 48 2.2 Financial groups 49 2.3 Banks 50 Box: Consumer credit 51 Box: Evolution of the Norwegian banking sector over the past 50 years 52 2.3.1 Banks’ tasks 53 Box: Creating money 54 Box: Definitions of money supply measures 55 2.3.2 Structure of Norway’s banking sector 56 Box: Norway’s banking sector is relatively small 57 2.3.3 Banks’ assets and funding 59 Box: Deposit platforms 60 2.3.4 Regulating banks – why and how? 61 2.3.5 Capital adequacy regulation 62 2.3.6 Liquidity regulation 63 2.3.7 Deposit guarantees in Norway 63 2.3.8 Bank recovery and resolution 64 2.4 Mortgage companies 65 2.4.1 Covered bond mortgage companies 65 2.4.2 Other mortgage companies 65 2.5 Government lending schemes 66 2.6 Insurance companies 66 Box: Government lending institutions 67 2.6.1 Types of insurance 68 Box: The pension system in Norway 69 2.7 Pension funds 72 Box: Regulation of insurance companies 72 2.8 Mutual funds 73 2.8.1 Mutual funds classified by asset 74 2.8.2 Other classifications of mutual funds 75 2.8.3 Regulation of mutual funds 76 2.9 Other financial institutions 76 2.9.1 Finance companies 76 2.9.2 Securities firms 76 2.9.3 Investment companies 77 2.9.4 Venture capital companies 77 2.9.5 Crowdfunding 77 3 FINANCIAL INFRASTRUCTURE 79 3.1 Retail payment services 80 Box: Single Euro Payments Area (SEPA) 80 3.1.1 Cash 81 3.1.2 Payment cards 82 Box: How does a BankAxept card payment work? 83 3.1.3 Bank transfers 85 Box: Real-time settlement of payments 85 Box: Revised Payment Services Directive (PSD2) and the Interchange Fee Regulation 86 3.2 Interbank systems 87 3.2.1 Norges Bank’s settlement system (NBO) 87 3.2.2 The Norwegian Interbank Clearing System (NICS) 89 Box: Central bank digital currencies 89 3.2.3 Foreign exchange settlement risk and the CLS foreign exchange settlement system 90 Box: Herstatt risk 90 3.3 Securities settlement (VPO) 91 Box: TARGET2-Securities (T2S) 91 3.3.1 How are trades made? 92 3.3.2 How does securities settlement work? 92 3.4 Central counterparties 93 3.4.1 Use of central counterparties 93 3.4.2 Central counterparties and financial stability 94 3.4.3 Central counterparties and systemic risk 95 Box: European legislation on securities and derivatives 96 APPENDIX 1: REGULATION OF FINANCIAL MARKETS AND TRADING VENUES 97 APPENDIX 2: CAPITAL AND LIQUIDITY REGULATION 99 APPENDIX 3: IMPORTANT FINANCIAL SYSTEM LEGISLATION 107 Preface and reader’s guide Norway’s financial system provides a general overview of the financial system in Norway, its tasks and how these tasks are carried out. This report is meant as a reference guide and textbook and is intended for a broad audience. The focus is on presenting the finan- cial system in a simplified manner. Financial system professionals will also be able to find useful information. Hyperlinks to other, more detailed Norges Bank publications and to other institutions have been inserted in the text, enabling the reader to delve more deeply into topics of interest. The introduction provides an overall overview of all the components of the financial system. Section 1 describes the various markets: the money, bond, foreign exchange and equity markets, and the financial derivatives markets. Section 2 discusses the most important financial institutions: banks, mortgage companies, insurance companies, pension schemes and various funds, etc. Section 3 describes the financial system infra- structure, which includes the payment system and systems for the payment and trans- fer of securities, foreign currency and derivatives. The aim of this report is to promote public understanding of the financial system. The report will be revised annually to ensure that it is kept up to date and maintains its relevance as a reference and textbook. Readers are encouraged to suggest improvements or report errors, ambiguities or inadequate explanations. All comments should be sent to: [email protected]. Oslo, June 2021 NORGES BANK NORWAY’S FINANCIAL SYSTEM 2021 7 Introduction The financial system The financial system plays an important role in the economy, with three primary tasks: • providing consumers and businesses with borrowing and saving opportunities, • providing payment services and • managing risk. In a well-functioning financial system, these tasks are performed securely and efficiently. A system that is resilient to shocks reduces the probability of financial crises. The financial system consists of many different institutions, markets and infrastructures. In this report, the financial system is divided into financial markets, financial institutions and the financial infrastructure (Table 1). The users of the system are more or less all the members of society: businesses, public undertakings and most private individuals. The definition of the financial system can be expanded to include, for example, institu- tions and mechanisms that provide security for contracts that are entered into, supply reliable information for effective credit intermediation and risk management and perform other functions such as supervision, regulation, registration of ownership rights, account- ing, auditing, or credit ratings and other financial analyses. Chart 1 shows a simplified diagram of the financial system. Consumers, businesses and other undertakings with savings are shown in the box at the top. Consumers, businesses and other undertakings as borrowers are in the box at the bottom. The middle segment shows the financial system, where savings are channelled into investment through markets and undertakings. In practice, the participants are generally both savers and Table 1 1. Financial markets 2. Financial institutions 3. The financial infrastructure Marketplaces for issuing Institutions such as Ensures that payments and trading financial banks, mortgage com- and trades in financial instruments. The proper- panies, pension funds, instruments are recorded ties of these instruments insurance companies, and settled. The legisla- may vary with regard to mutual funds, etc. They tion and standard agree- return, risk, maturity, etc. act as intermediaries ments governing these In financial markets, between economic processes are part of the savers can invest in cor- agents and play impor- financial infrastructure, porate equity or in debt tant roles related to the as are computer systems by lending directly to financial system’s main and systems of commu- various borrowers. tasks. nication between finan- cial system participants. NORGES BANK NORWAY’S FINANCIAL SYSTEM 2021 8 INTRODUCTION Chart 1 What happens in the financial system? Consumers, businesses and other undertakings with savings Inte- Returns Invest- Direct rest Depo- ments Pension / Pension / funding/ Pay- insurance insurance pay- sits ments in secu- investment ments rities payouts premiums THE Other financial Securities Insurance Banks FINANCIAL institutions markets companies SYSTEM Inte- Loans/ Inte- Divi- Capital Inte- rest leasing/ rest Pay- dend/ (via rest and credit and Loans ments coupon securi- and Loans commi- card commi- pay- ties commi- ssions financing ssions ments issu- ssions rance) Consumers, businesses and other undertakings as borrowers FINANCIAL INFRASTRUCTURE borrowers.