Norges Bank's Role in the Event of Liquidity Crises in the Financial Sector

Abstract

Central banks have traditionally had a role as lender of last resort (LLR). This means that the central bank can supply extraordinary liquidity to an individual bank or the banking system when demand for liquidity cannot be met from other sources. This role has changed over time for Norges Bank. In the course of the past 30 years, the stance on extending loans on special terms (S-loans) to banks has become more restrictive. This is partly attributable to the liberalisation of credit markets and increased opportunities for banks to raise funds in the market. Following the banking crisis, Norges Bank’s attitude to providing extraordinary liquidity for the individual bank has remained unchanged. The Executive Board’s most recent review of the Bank’s role as LLR, in March 2004, confirms that extraordinary provision of liquidity should be reserved for situations in which financial stability may be threatened without such support. The review also clarified the Bank's reaction to different types of liquidity problems and its criteria for granting S-loans.