Kredittilsynet is responsible for supervising individual financial institutions, while Norges Bank analyses the stability of the financial system from a macro perspective, aiming at identifying developments that may lead to the build-up of excessive risk in the financial sector and the build-up of financial imbalances that may pose a threat to financial stability. Norges Bank also has special responsibility for the clearing and settlement systems and inter-bank payment systems. Should a situation arise where financial stability is threatened, Norges Bank and other authorities will, if necessary, implement measures to strengthen the financial system. Norges Bank may supply extraordinary liquidity to individual banks or to the banking system as a whole but only against proper collateral. The Ministry of Finance will be responsible for decisions where use of tax-payers’ money would be an issue. Norges Bank publishes an overall assessment of the outlook for financial stability in the biannual Financial Stability report. The conclusions in the report are summarised in a submission from the  4  BIS Review 106/2006  Bank’s Executive Board to the Ministry of Finance. The report is also intended to foster dialogue with the financial industry and to increase awareness of and foster debate on the importance of financial stability. Norges Bank has also developed a macroeconomic model to assess developments in financial stability based on the forecasts published in the Bank’s Inflation Report. Based partly on the results from this model, financial stability assessments are taken into account in the monetary decisionmaking process.

Our ambition must be to reduce uncertainty with regard to our own response pattern. Financial stability and monetary policy Financial stability means that the financial system is robust to disturbances in the economy and is able to channel funding, execute payments and redistribute risk in a satisfactory manner. Experience shows that the foundation for financial instability is laid during periods of strong growth in debt and asset prices. Banks play a central part in providing credit and executing payments and are therefore important to financial stability. Monetary and financial stability are both important for economic developments. In my view, they are often mutually reinforcing. Financial stability can be seen almost as a prerequisite for price stability. First, it promotes stable developments in financial markets, which is crucial to balanced economic growth. Second, financial stability supports the transmission mechanisms of monetary policy. Conversely, price stability has a positive influence on financial stability. A successful monetary policy will support financial stability by removing distorted price signals associated with high and volatile inflation. Low and stable inflation provides households and enterprises with a clear indication of changes in relative prices, enabling them to make better informed decisions. Allocation of resources will then be more efficient. The Norwegian financial system and its soundness In Norway, responsibility for financial stability is divided between Norges Bank, Kredittilsynet (the Financial Supervisory Authority of Norway) and the Ministry of Finance. To promote efficient cooperation, the regular exchange of information between these authorities is crucial and a framework for cooperation has been established.