policy. this objective is low and stable inflation. financial instability is often defined as the absence of financial stability. financial instability is characterised by unduly wide fluctuations in prices for assets such as dwellings, commercial property and securities, or failure in the functioning of financial institutions or financial markets. financial instability is characterised by disturbances in credit availability or the flow of capital. 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 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. 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

" kielland ’ s description of a financial crisis and the consequences were realistic. there was speculation then and there is speculation today, but in other kinds of financial instruments than at that time. the 1899 banking crisis in kristiania was the most serious of the regional crises. the crisis was particular to norway, following in the wake of the strong property boom and the subsequent crash in summer 1899. the next two banking crises, in 1920 - 1928 and 1988 - 1992, were far more severe than the earlier crises. there were particular reasons for each of the last three crises, but they also have much in common : asset prices rose quickly prior to crises. each cyclical upswing had its speculation objects. property prices and share prices for property companies rose to a very high level in the last half of the 1890s. share prices, particularly in shipping and whaling, rose dramatically during the first world war, then fell markedly afterwards. in the 1980s, prices for dwellings and commercial property increased rapidly. households and enterprises increased their debt more than their nominal income in the periods of expansion before the crises. high debt made them more vulnerable to loss of income or increases in real interest rates. the debt burden increased less in the 1890s and during the first world war due to a strong increase in nominal income. under the gold standard, however, periods of growth in nominal income were normally followed by periods with a fall in nominal income. the debt burden thereby increased when the economy declined. during the three banking crises, many banks had an aggressive lending policy. bank lending ( in constant prices ) increased sharply prior to the crises and decreased markedly afterwards. deflation in the 1920s led to a real increase in lending and debt. favourable financing terms for banks underpinned expansion during all three periods. in the second half of the 1890s and during the first world war, commercial banks expanded sharply by issuing new equity. savings banks were not as expansive. one reason for this may be that savings banks were subject to a certain degree of supervision and regulation. there was little regulation of commercial banks until the interwar years. in all three crises, the banks that were most expansive were also the most severely affected in the subsequent crises. in the 1980s, strong lending growth was primarily made possible by foreign funding. when foreign funding dried up, when confidence in the norwegian economy deteriorated, bank borrowing from norges bank increased sharply. in addition, collateral was not required – as it is now – as security for loans from norges bank. during