UPDATE 1-Norway seeks to cut money market risk premiums

Wed Oct 6, 2010 12:33pm EDT

* C.bank: Interbank premiums higher in Norway than elsewhere

* To set volume limit on bank deposits in c.bank at key rate

* Additional deposits would be placed at reduced rates

* C.bank seeks commercial bank help on clearer NIBOR rules

(Recasts with central bank announcement)

By Wojciech Moskwa

OSLO, Oct 6 (Reuters) - Norway's central bank on Wednesday announced plans to increase money market efficiency by curbing risk premiums that boost lenders' financing costs and limit the redistribution of liquidity within the banking system.

"Risk premiums in money markets have generally been higher in Norway than in other countries, also in the post-crisis period," Norges Bank Governor Svein Gjedrem said in a statement.

"The measures aim to boost activity in the short-term money market, enhance transparency and accessibility in interest rate determination and reduce money market premiums," Gjedrem added.

Gjedrem said he had sent a letter to an organisation representing Norwegian banks and insurers to consult on changes to the system for borrowing and deposit facilities offered by Norges Bank.

"Under the new system, a defined volume of banks' deposits in Norges Bank (a quota) will bear interest at a rate equivalent to the key rate," the central bank said in a statement.

The interest rate given by the central bank on banks' deposits in excess of this quota will be lower.

"This will enhance the redistribution of liquidity in the interbank market and boost activity in the shortest segment of the money market," Norges Bank said.

Norway's key rate stands at 2 percent, while NIBOR money market rates range between 2.22 percent and 2.41 percent OIBOR= for deposits lasting up to 14 days. This compares to a 2.13 percent rate given by the central bank for two-week liquidity injections.

Norges Bank has also sent a letter to the banking group calling for more cooperation in "establishing a more transparent and accessible system" for NIBOR calculations.

"This is an open consultation. We invite the banks to work constructively with Norges Bank to enhance the efficiency of the Norwegian money market," said Gjedrem. (Editing by Susan Fenton)