mr gjedrem focuses on the issue of financial stability : experiences and challenges speech given by mr svein gjedrem, governor of the central bank of norway, at the annual meeting of the norwegian savings banks association, held in sandefjord on 21 october 1999. ( shortened version ) 1. introduction every day around nok150 – 200 billion change hands through the banks ’ accounts in norges bank. in the course of a week, payments corresponding to our gross national product for an entire year have passed through norges bank ’ s settlement system. these payments involve all types of transaction, from a 10 kroner ice cream purchase to securities transactions where a single transaction may involve billions of kroner. the banks play a pivotal role in the payment system. deposits are now the predominant means of payment. payment settlement is the banks ’ most important function besides channelling funds from savers to borrowers. in other countries, securities markets are of growing importance. they are taking over an increasing share of banks ’ credit intermediation. this may also occur in norway. securities are also increasingly serving as collateral in payment settlement. these three elements - payment and settlement systems, banks and other financial institutions, and securities markets - make up the financial system. every day we experience how dependent a developed economy is on the smooth functioning of this system, i. e. on financial stability. the volume of foreign payments is substantial and on the rise. banks and securities markets are becoming ever more closely integrated. 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

##2k problem. this is reflected in money market rates. norges bank ’ s instruments are effective in terms of rapidly supplying large quantities of liquidity if this should prove necessary. the central bank will supply sufficient liquidity to the money market in connection with the year 2000, as we normally do throughout the year. should it prove necessary to depart from the collateral requirement, a risk premium will be applied. 8. conclusion to sum up and conclude : norges bank places emphasis on promoting financial stability. as a result of the banking crisis, norges bank has strengthened its surveillance of the financial sector. in cooperation with other public authorities in norway and internationally, we will contribute to developing framework conditions for financial institutions and financial markets that reduce the likelihood of future crises. a priority task is to enhance the resilience of the payment and settlement system in the face of a crisis situation. it is still likely that financial crises will recur. in the last 20 years, three quarters of imf member countries have experienced a banking crisis. not even a perfectly healthy macroeconomic policy and the development of an effective supervisory system constitute a guarantee against crises if the banks fail to exercise sound banking. herd mentality and over - optimism that are rapidly reversed seem to be a recurrent phenomenon. systems and contingency schemes are therefore required to handle crises in order to limit the adverse effects and reduce the risk of recurrence. the most important preventive measure is to promote sound banking. subject to the statutory rules applying, the responsibility for sound banking primarily rests with the banks themselves.