has remained fairly stable in recent years. private enterprises borrow less in the domestic bond market than enterprises in other countries. particularly in the us, lending through these markets is well established. the financial system in norway is largely dominated by banks. banks have a total market share of over 50 per cent, while mortgage companies and finance companies have a combined share of 14 per cent. growth in financial markets makes it easier to channel savings surpluses to customers with sound investment plans. it also makes it easier to diversify risk. both enhance the economy ’ s growth potential. at the same time, a larger financial sector may increase the consequences of financial instability for the real economy. 1 / 6 as a result of globalisation, debt and financial assets are now more widely distributed across countries. home bias has declined. this has reduced the risk in the financial system and improved the relationship between risk and return. the government petroleum fund has contributed to a sharp decline in home bias in norway. in recent years, norwegian life insurance companies have also invested more of their capital abroad. tendency towards larger entities and increased concentration national consolidation in the past few years, domestic mergers and acquisitions have been a central feature of the european banking industry. concentration, which can for example be measured by the size of the five largest credit institutions, varies considerably across countries. however, concentration generally appears to be higher in small countries than in large ones. it is not particularly high in norway, and is lower than in denmark, finland and sweden. developments in the number of credit institutions are another measure of market consolidation. the total number of credit institutions in the euro area has been sharply reduced over the past eight years. the number has declined from 29 institutions per million inhabitants in 1997 to 21 in 2004. the high level of concentration in small countries may be an indication that there are economies of scale in the financial industry. in large countries, even banks with small market shares can achieve economies of scale. large credit institutions offering a range of services can also achieve economies of scope by selling several types of product to the same customer. norway has more banks per capita than the euro area, and the number of banks has remained fairly stable over the past few years. one reason may be that bank alliances have allowed smaller banks to benefit from economies of scale and scope. this occurs in part through integrated technology and product development solutions, and the sharing of knowledge and expertise. in addition, the number of foreign operators in norway has increased. concentration in the banking industry also results

risk associated with a loan while the actual loan remains on the balance sheet. this makes it easier to diversify and manage risk. a credit default swap is a type of credit insurance contract linked to one or more loans. the purchaser of the contract is guaranteed payment if the loan defaults. the contract issuer must pay. collateralised debt obligations, or cdos, are another popular instrument. simplified, this is often a corporate loan that has been transferred from a bank and split into tranches with varying risk profiles. debt instruments are issued for the various tranches. if the loan defaults, the first losses will be incurred by the lowest tranche ( which has the highest risk ). the bank that has transferred the loan often holds this tranche. the tranche that incurs losses last will thus be very secure. the return in the 3 / 6 various tranches will naturally be related to risk. in this way, it is possible to create many different combinations of risk and return and tailor them to individual investors. synthetic cdos involve credit default swaps rather than loans. this makes it even easier to achieve the combination of risk and return the investor is seeking. in the global market, banks are net buyers of risk protection, whereas insurance companies are net sellers. nevertheless, the majority of transactions are between banks and not between banks and insurance companies. in terms of financial stability, there are both advantages and disadvantages to these new instruments. among other things, they allow the transfer of risk to market participants that are willing to bear it. such participants are often specialised and well equipped to bear the risk. if the credit risk is spread to market participants outside the banking sector, banks ’ risk exposure is reduced. disadvantages arise if there is a concentration rather than a diversification of risk on the buyer side. if individual market participants take on too much risk, their counterparties ( such as banks ) may be exposed to losses. there is always a risk that buyers lack sufficient knowledge of new products. another problem has been that the new markets ’ infrastructure has not kept pace with turnover so that operational risk in the system has increased. risk management implies that investors take into account how risk and return are correlated for different investments. normally, such assessments are based on correlations under normal circumstances, and the challenge lies in dealing with a completely different correlation during a crisis. new instruments can make such risk management more demanding. there may be poor liquidity in these markets and this can increase price