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International Monetary Fund. European Dept.


The COVID-19 pandemic has caused dramatic loss of human life and major damage to the European economy, but thanks to an exceptionally strong policy response, potentially devastating outcomes have been avoided.

International Monetary Fund. Monetary and Capital Markets Department
Norwegian banks and other financial institutions rely heavily on capital markets for liquidity and risk management. Liquidity conditions in the Norwegian financial sector are affected by central bank operations and the lending and funding activities of financial institutions, both domestically and abroad. Nearly 40 percent of the funding of Norwegian banks is obtained from market sources, using commercial paper, covered bonds, and senior unsecured bonds issued both domestically and abroad. Correspondingly, money markets, foreign exchange (FX) swap markets and bond markets are crucial to the credit intermediation process and a dislocation in these markets—the inability of financial institutions to roll over, or obtain new, funding—could have significant consequences for financial stability. Against this background, this note analyzes core funding markets for Norwegian banks and assesses Norges Bank’s capacity to manage systemic liquidity conditions and counteract liquidity shocks in normal times and in times of stress.
Andreas Fagereng, Luigi Guiso, Mr. Davide Malacrino, and Luigi Pistaferri
We provide a systematic analysis of the properties of individual returns to wealth using twelve years of population data from Norway’s administrative tax records. We document a number of novel results. First, during our sample period individuals earn markedly different average returns on their financial assets (a standard deviation of 14%) and on their net worth (a standard deviation of 8%). Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes. Third, returns are positively correlated with wealth: moving from the 10th to the 90th percentile of the financial wealth distribution increases the return by 3 percentage points - and by 17 percentage points when the same exercise is performed for the return to net worth. Fourth, wealth returns exhibit substantial persistence over time. We argue that while this persistence partly reflects stable differences in risk exposure and assets scale, it also reflects persistent heterogeneity in sophistication and financial information, as well as entrepreneurial talent. Finally, wealth returns are (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.
Abdullah Al-Hassan, Sue Brake, Mr. Michael G. Papaioannou, and Martin Skancke
Commodity-based sovereign wealth funds (SWFs) have been at a crossroads following the recent fall in commodity prices. This paper provides a framework for commodity-based SWF management, focusing on stabilization and savings funds, by (i) examining macrofiscal linkages for SWFs; (ii) presenting an integrated sovereign asset and liability management (SALM) approach to SWF management; and (iii) applying this framework to a scenario where assets are being accumulated and to a scenario where the SWF is drawn on to cover a financing gap due to lower commodity prices.
Mr. Michael G. Papaioannou, Mr. Joonkyu Park, Jukka Pihlman, and Han van der Hoorn
This paper (i) provides evidence on the procyclical investment behavior of major institutional investors during the global financial crisis; (ii) identifies the main factors that could account for such behavior; (iii) discusses the implications of procyclical behavior; and (iv) proposes a framework for sound investment practices for long-term investors. Such procyclical investment behavior is understandable and may be considered rational from an individual institution’s perspective. However, our main conclusion is that behaving in a manner consistent with longterm investing would lead to better long-term, risk-adjusted returns and, importantly, could lessen the potential adverse effects of the procyclical investment behavior of institutional investors on global financial stability.
Mr. Udaibir S Das, Miss Yinqiu Lu, Mr. Michael G. Papaioannou, and Iva Petrova
Country practices towards managing financial risks on a sovereign balance sheet continue to evolve. Each crisis period, and its legacy on sovereign balance sheets, reaffirms the need for strengthening financial risk management. This paper discusses some salient features embedded in in the current generation of sovereign asset and liability management (SALM) approaches, including objectives, definitions of relevant assets and liabilities, and methodologies used in obtaining optimal SALM outcomes. These elements are used in developing an analytical SALM framework which could become an operational instrument in formulating asset management and debtor liability management strategies at the sovereign level. From a portfolio perspective, the SALM approach could help detect direct and derived sovereign risk exposures. It allows analyzing the financial characteristics of the balance sheet, identifying sources of costs and risks, and quantifying the correlations among these sources of risk. The paper also outlines institutional requirements in implementing an SALM framework and seeks to lay the ground for further policy and analytical work on this topic.
Mr. Manmohan Singh and Mr. Peter Stella
Between 1980 and before the recent crisis, the ratio of financial market debt to liquid assets rose exponentially in the U.S. (and in other financial markets), reflecting in part the greater use of securitized assets to collateralize borrowing. The subsequent crisis has reduced the pool of assets considered acceptable as collateral, resulting in a liquidity shortage. When trying to address this, policy makers will need to consider concepts of liquidity besides the traditional metric of excess bank reserves and do more than merely substitute central bank money for collateral that currently remains highly liquid.
Iva Petrova, Jukka Pihlman, Mr. Peter J Kunzel, and Miss Yinqiu Lu
While SWF investment objectives to some extent reflect inherent characteristics, notable differences in strategic asset allocation (SAA) exist even amongst SWFs of similar types. Even so, this paper shows that the global crisis may have changed SWF’s asset allocations in ways that may not be ideal or justified in all cases and that a review of investment objectives may be warranted. It also argues for regular macro-risk assessments for the sovereign, the continued importance of SWFs as a stabilizer in international capital markets, as well as the active role they could play in international regulatory reform.
Aaron Howard Clifford Brown, Mr. Michael G. Papaioannou, and Iva Petrova
This paper analyses the links between the investment strategies of a commodity-based SWF and the macroeconomic framework of the owner country. We examine some basic macrofinancial linkages of an SWF's strategic asset allocation (SAA) strategies with regard to the government budget, monetary policy, and exchange rate movements. Based on a simple Markowitz-model framework, which integrates the specific objectives and constraints facing an SWF and the country's specific characteristics and macroeconomic vulnerabilities (especially in relation to commodity prices and prospective defined liabilities), we derive an SAA. The asset-liability methodology that is applied in the selection of an SWF SAA also allows assessing whether (i) the SAA adequately takes into account the country-specific risks and vulnerabilities, and (ii) its objectives and macrofinancial constraints are consistent. Some analytical and practical issues in determining an SAA model are also discussed, along with key effects of a financial crisis.
International Monetary Fund
This paper presents for the approval of the Executive Board a draft borrowing agreement between Norges Bank and the Fund. On March 28, the Finance Minister of Norway announced that the Ministry of Finance and Norges Bank (the central bank of Norway) were exploring a possible Norwegian contribution of up to 30 billion Norwegian kroner (about US$4.5 billion or SDR 3 billion) of financial resources to the IMF to support the Fund’s ability to provide timely and effective balance of payments assistance to its members in the current crisis. Staff and Norges Bank representatives have now reached agreement on a draft borrowing agreement, the text of which is set forth in the Attachment (“the Agreement”).