Every saver and borrower exerts some influence on the market but naturally not to the same degree. The stage is set by the biggest players, be they individuals, companies or nations. The scope for economic policy Free capital mobility is sometimes criticised for encroaching on democracy and rendering economic policy less effective. Even in a world with integrated financial markets, economic policy is decided by the national political systems. They are free in principle to alter tax rates, boost public spending and adjust interest rates whenever they wish. In this direct sense, a more open economy does not mean that policy is restricted. In many ways, access to international capital can actually enlarge the scope for action. Unlike the case in earlier centuries, a country that is stricken today by severe crop failures, for instance, can borrow external funds to buy seed. Similarly, a country wishing to strengthen its growth potential by more than domestic saving permits can expand its production apparatus more rapidly with the aid of imported capital. At the same time, loans and other financial transactions do entail dependence. If a country’s economic policy does not inspire confidence, the consequences may be unfavourable. Perhaps investors will no longer be prepared to provide new loans and may even stop existing credits. Long bond rates are liable to rise, accompanied by a depreciating currency. Such reactions are the market’s way of passing judgement on economic policy and a country’s creditworthiness. This mechanism is the same as that for private borrowers.

Risk factors related to domestic conditions Events that have taken place abroad are actually more a liquidity crisis rooted in uncertainty about the valuation of assets and the distribution of losses among institutions than a crisis due to the size of the losses themselves. The credit risk for the more senior tranches of subprime CDOs is probably manageable. But we should not forget credit risk in the traditional sense when we assess risk elements. Loans to Norwegian households and enterprises account for approximately 70 per cent of banks’ balance sheets. Risk factors related to these customer groups are therefore very important to financial stability in Norway. Households Strong household debt growth and the sharp rise in house prices constitute a risk factor with regard to financial stability in Norway. Household debt growth has been high since 2000, primarily driven by low interest rates and a sharp rise in house prices and income. Loans secured on dwellings have shown high and increasing growth. Strong competition between banks has pushed down lending margins. The new capital adequacy rules (Basel II), which involve a substantial reduction in risk weights for mortgages, may also have contributed to the rise in mortgage growth and the decline in lending margins. Real house prices, deflated by consumer prices, building costs and house rents, are historically high. Deflated by disposable income, however, house prices have only risen moderately over the past ten years. In recent months, there have been signs of a slackening in the housing market. The rise in house prices has slowed.