For better or for worse, we are increasingly exposed to developments in other countries. The banking crisis taught us how costly financial crises can be. We brought the crisis on ourselves. Many other countries have experienced similar problems. The root of the crises can be traced back to overly zealous financial market participants with reduced risk awareness. The authorities’ role is to prevent crises in the financial system and - if they still occur - handle them with a view to reducing the adverse effects and the likelihood of their recurring. In view of the globalisation of financial markets, international cooperation in this area is crucial. The financial system is also important with regard to Norges Bank’s conduct of monetary policy. By setting the terms for banks’ deposits/loans in the central bank, Norges Bank influences the level of interest rates. Monetary policy is also dependent on financial stability. However, monetary policy is not the topic today. I will focus on the issue of financial stability. 2. What is financial stability? Financial stability is the absence of financial crises. The root of a crisis is that exuberance, optimism and greed take precedence over risk and return considerations when investment decisions are taken. The price of financial assets and property rises. Bank loans and household and corporate debt increase. As a result, all agents become more vulnerable if the situation is perceived as taking a turn for the worse. This may in turn trigger a plunge in property and equity prices.

Before the settlement is finalised, Norges Bank verifies whether the banks have sufficient funds in their accounts in Norges Bank. The introduction of collateral requirements for banks’ loans has lowered the risk assumed by Norges Bank. Supervision has been substantially strengthened since the banking crisis. The Banking, Insurance and Securities Commission’s resources have been increased. Greater emphasis is placed on on-site supervision. The methodology for document-based supervision has been improved. Internal control routines have been enhanced. International surveillance cooperation has also been strengthened. In addition, the authorities have become more aware of the importance of monitoring the financial system. The aim is to identify emerging tensions and possible sources of system failure at an early stage. 4. Prevention work in Norges Bank  The work undertaken by Norges Bank to maintain financial stability can be divided into three areas of activity: •  continuous monitoring of factors that affect financial stability;  •  work to reduce the risk in payment systems and increase their robustness; and  •  assess the effects of monetary policy and economic policy in general. Surveillance Surveillance primarily consists of analyses of the relationship between macroeconomic developments and the financial strength of financial institutions. Norges Bank’s analyses are presented in semi-annual reports on financial stability, called “Financial Sector Outlook”. Experience shows that effective surveillance requires more than monitoring the earnings and capital adequacy of banks and other financial institutions. Developments in other markets must also be monitored.