Svein Gjedrem: Is the financial system stable? Speech by Mr Svein Gjedrem, Governor of Norges Bank, at the 2001 Annual Meeting of the Norwegian Savings Banks Association, Haugesund, 18 October 2001. Please note that the text may differ slightly from the actual presentation  *  *  *  Introduction The role of the financial industry in the economy has become increasingly important over the last decades. Deregulation and technological advances have increased the industry’s opportunities and scope to channel savings to various projects. Strong competition has induced the industry to make use of these new opportunities. The range of saving and financial instruments is becoming ever wider. Systems and financial instruments for managing and controlling risk are becoming more advanced. As a result, it has become easier for households and enterprises to decouple consumption and investment from current income. In the second half of the 1990s, in particular, international capital 1 markets have become more integrated. It has been easier for growing economies to finance investments through a balance-of-payment deficit and foreign capital. At the same time, countries with high savings can increasingly diversify their investments. Globalisation places increasing demands on the business sector’s ability to adapt. New products and technology squeeze out old solutions. This creative destruction, as Schumpeter called it, may foster a more efficient distribution of resources and higher economic growth in the long run. A rapidly changing environment places considerable demands on the financial industry. The financial prospects for a project must be assessed in relation to risk.

Surveys from the National Institute of Economic Research indicate that households expect rising interest rates in line with the Riksbank’s repo rate forecast. This is probably one reason why saving among households is at a historically high level. That said, however, there are a number of uncertainty factors to consider. … but major differences among different groups The aggregated figures conceal vary large differences among different households, a fact substantiated by the Riksbank’s analysis of data on individual households’ debt. 13 We can categorise households based on their indebtedness. Figure 8 shows how much an interest rate hike of 1 percentage point will subdue disposable income expressed as a percentage for all borrower households and for the most indebted. 14 For borrower households as a whole, disposable income will slow by just under 2 per cent. For the 10 per cent most indebted households, disposable income will slow by more than 6 per cent. The repo rate will be raised by about 1.5 percentage points during the three-year forecast period. See K. Blom and P. van Santen, “The indebtedness of Swedish households –-Update for 2017”, Economic Commentaries No. 6, 2017, Sveriges Riksbank. 14 The calculations only capture the dampening effect of rising interest expenses on disposable household income, as the data material does not contain details on households’ interest-bearing assets. See P. Gustafsson, M. Hesselman, and B. Lagerwall (2017), “How household cashflows and consumption are affected by higher interest rates?”, Staff Memo, Sveriges Riksbank. 12 13  10 [13]  Figure 8.