This definition is more passive in terms of implying how one should act under normal circumstances, but has the advantage of focusing on the situations we attempt to avoid. The latter definition is related to the high costs of financial instability in the last few decades. Costs in terms of loss of GDP can be substantial. A study of the economic costs of banking crises concluded that even though such crises have been less frequent in high-income countries than in low-income  1  See for example Schinasi, Garry J. (2004). ”Defining Financial Stability”. IMF Working Paper No. 04/187  BIS Review 34/2005  1  countries, they have persisted over a longer period and average total output losses have thus been higher.2 The preferred definition of financial stability varies across countries. Recognising the need for a relevant operational definition regardless of the current situation in the financial system, the Central Bank of Norway has chosen to adopt the broad definition of financial stability. How do the authorities analyse financial stability? Given an understanding of what financial stability should imply, the authorities can analyse potential threats to financial stability. There are two complementary approaches: In the first approach, we need to focus on risk factors originating within the financial system. Institutions, markets and infrastructures are continuously faced with risk factors such as credit, liquidity and market risks. Analyses have become even more challenging in recent years as the financial system has become more complex and interwoven both across industries and borders.

Without formal supranational solutions in place, it is all the more important to ensure cooperation between the central banks and supervisory authorities involved. The fact that a large share of the financial institutions in the new EU member countries are foreign-owned makes this issue even more relevant. In June 2003, the governors of the Nordic central banks signed an agreement on the management of a potential financial crisis in a Nordic bank with activities in two or more Nordic countries. The agreement contains procedures for the coordination of crisis management between the central banks. The Nordic supervisory authorities have drawn up a similar cooperation agreement. One particular problem in the Nordic region is the differences in the countries’ deposit guarantee schemes. The different schemes vary both with respect to guaranteed amount and type of deposit covered. However, these differences are also widespread across Europe and some convergence of rules and operating procedures is certainly long overdue. What instruments are available to secure financial stability? Monitoring and analysis of the financial system result in an assessment of the current situation regarding financial stability. This leads to the question: what instruments are available to enforce and secure financial stability? We can distinguish between preventive measures and measures for crisis resolution. Of relevance to the latter is the role of the central bank as the lender of last resort. In some countries this role was the main reason for establishing the central bank in the first place.