This definition is more passive in terms of implying how one should act under normal circumstances, but has the advantage of focusing on the situations we attempt to avoid. The latter definition is related to the high costs of financial instability in the last few decades. Costs in terms of loss of GDP can be substantial. A study of the economic costs of banking crises concluded that even though such crises have been less frequent in high-income countries than in low-income  1  See for example Schinasi, Garry J. (2004). ”Defining Financial Stability”. IMF Working Paper No. 04/187  BIS Review 34/2005  1  countries, they have persisted over a longer period and average total output losses have thus been higher.2 The preferred definition of financial stability varies across countries. Recognising the need for a relevant operational definition regardless of the current situation in the financial system, the Central Bank of Norway has chosen to adopt the broad definition of financial stability. How do the authorities analyse financial stability? Given an understanding of what financial stability should imply, the authorities can analyse potential threats to financial stability. There are two complementary approaches: In the first approach, we need to focus on risk factors originating within the financial system. Institutions, markets and infrastructures are continuously faced with risk factors such as credit, liquidity and market risks. Analyses have become even more challenging in recent years as the financial system has become more complex and interwoven both across industries and borders.
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