svein gjedrem : risk and growth in the financial industry speech by mr svein gjedrem, governor of the central bank of norway, at the annual meeting of the norwegian savings banks ’ association, bergen, 27 october 2005. the speech does not contain assessments of the economic situation or the monetary stance. please note that the text below may differ slightly from the actual presentation. the charts in pdf - format can be found on the central bank of norway ’ s website. references can be found on the central bank of norway ’ s website. * 1. * * introduction over the past decades, debt and financial assets have risen sharply worldwide. the financial system serving lenders and borrowers has also expanded. the number of participants in these markets has soared, some new operators have appeared and a broad range of instruments has emerged. growth in financial markets provides the basis for more efficient use and distribution of capital and for improved risk management. developments in the financial industry have thus contributed to stronger and more stable economic global growth over the past decades. new instruments have increased banks ’ possibilities of managing risk, among other things credit risk associated with lending. in many countries, growth in household borrowing has been high for several years. in norway, mortgage loans account for an increasing share of banks ’ balance sheets. i will now discuss different aspects of this. 2. developments in the financial sector scale and size of the various markets financial markets have expanded strongly in many countries, partly as a result of extensive deregulation in the financial sector in the 1970s and 1980s. technological advances reduced the effect of regulation and have, together with institutional changes, made it possible for market participants to respond in improved and more efficient ways. credit institutions ’ total assets have increased sharply over the past few years in all countries in the comparison. banks ’ total assets, as a share of gdp, are not particularly high in norway compared with other countries, even though banks are the main lenders to norwegian households and enterprises. this may be because norwegian banks extend few loans to the public sector and to foreign borrowers compared with banks in other countries, and because norwegian enterprises borrow from foreign credit institutions more than enterprises in other countries. banks ’ total assets have increased while the number of employees and person - hours has declined. productivity growth has been strong. direct mediation of assets and liabilities through the securities market has also increased. nevertheless, bonds and notes do not account for more than about 7 per cent of domestic debt. this share

at zero would enable us to bring the real interest rate down to 2 percentage points below its equilibrium level. 1 2 in norges bank ’ s assessment, monetary policy has sufficient room for manoeuvre with an inflation target of 2 percent. first, international experience has shown that the room for manoeuvre in monetary policy is not exhausted when the policy rate is close to zero. i will come back to this. second, our calculations show that over the past 20 years, the real interest rate has normally remained less than 2 percentage points away from its estimated equilibrium level. 3 this may suggest that a real interest rate that is 2 percentage points below equilibrium has in most cases provided sufficient economic stimulus. chart : the real interest rate minus the neutral real interest rate however, both in 2004 and following the financial crisis in 2008, the real interest rate was almost 2 percentage points lower than the estimated normal interest rate, with a somewhat larger gap after the fall in oil prices in 2014. looking back, we can safely say that the norwegian economy fared relatively well through these downturns, with some help from other factors. after the financial crisis, high oil investment cushioned the downturn, and in 2014 a weaker krone gave the economy an extra boost. in addition, fiscal policy provided substantial support in both cases. a future severe downturn could have a greater impact, with more pronounced declines in both employment and inflation. we must therefore take into account that situations could arise that require measures other than cutting the policy rate towards zero. so we should examine the contents of the monetary policy toolkit in norway and ask not only when the tools should be used, but also how far the limits of monetary policy should be stretched in such a situation. the policy rate the policy rate is the key monetary policy instrument. monetary policy is effective when changes 2 / 9 bis central bankers'speeches in the policy rate pass through to market rates. monetary policy is more effective when central banks successfully influence interest rate expectations. a downturn in the norwegian economy should initially be countered by lowering the policy rate. owing to the characteristics specific to the norwegian credit market, policy rate cuts quickly result in lower borrowing costs for households and enterprises. one characteristic is that most households prefer floating - rate loans. we need look no further than to sweden to find a considerably lower share of floating - rate loans than in norway. in the uk and germany, only a small minority show the same preference as norwegian households. chart : share of