In most cases, this will have consequences for output, employment and inflation. Financial stability therefore fosters price stability. In Norway, the authorities’ work on financial stability is divided between the Ministry of Finance, the Banking, Insurance and Securities Commission and Norges Bank. The Ministry of Finance is responsible for establishing a framework which ensures that Norway has a financial industry that functions smoothly. The Banking, Insurance and Securities Commission is responsible for supervising the financial sector. Norges Bank shall foster robust and efficient payment systems and financial  1  See for example Ferguson (2002): "Should Financial Stability Be an Explicit Central Bank Objective?". This article was presented at the IMF conference, Challenges to Central Banking from Globalized Financial Markets, on 17 September 2002. BIS Review 25/2003  1  markets, i.e. foster financial stability. This is in accordance with the Norges Bank Act and the Payment Systems Act. Primarily, we wish to avoid instability in the financial system. A number of instruments are available, including regulation of financial markets, oversight and shaping the financial infrastructure. Norges Bank’s instruments are primarily the interest rate, banks’ borrowing facilities, including requirements for collateral that can be accepted to secure such lending, and its oversight of the payment systems. We are also obligated to alert the Ministry of Finance when we assess the situation as cause for concern. The Financial Stability reports are an important tool. Norges Bank can also serve as the lender of last resort.

This is reserved for very special situations where financial stability may be threatened. Without financial institutions and financial markets that function smoothly, the effects of interest rate changes on inflation and employment will be unstable and uncertain. Low and stable inflation provides households and enterprises with a clear indication of changes in relative prices. This makes it easier for economic agents to make the right decisions and contributes to price stability in financial and property markets. Low and stable inflation therefore provides the best foundation for financial stability. The two objectives normally underpin each other. Previous financial crises in Norway From history, we know about a number of financial crises in Norway. During the time of the silver and gold standard prior to 1914, banking crises occurred relatively frequently and were mainly regional. This is an indication that banks at that time were small and locally anchored. Therefore, the crises did not spread through the banking system. Many Norwegian banks experienced liquidity and solvency problems in 1857 following the collapse of the US railroad industry, in 1864 in Oppland, in 1886 in Arendal and in Kristiania (now Oslo) in 1899-1905. The Norwegian author Alexander Kielland depicts the local financial bubble in Stavanger in the 1880s in his book Fortuna. There was a surge in credit growth and speculation in commercial bills that did not represent actual values. Speculation formed the basis for quick gains and it all ended in bankruptcies and banks that failed.