In general, foreign borrowing is a source of diversification and thus risk reduction, but it can also spread unrest. By international standards, Norwegian savings banks are small. It can be costly to change a source of funding if one source should dry up. In the event of considerable financial unrest in international financial and capital markets, savings banks may be affected. Today, the shocks are often global. If the current high credit growth continues, financial stability in Norway will be threatened. We will become more vulnerable to all kinds of shocks. I have already touched upon the weak outlook for the global economy. There is also reason to expect considerable structural changes in the business 8  8  Income here is defined as household disposable income before deduction of gross interest expenses. BIS Review 86/2001  sector, for example, when economic resources have to be transferred to the public sector and other sheltered sectors. Restructuring may take place within established companies, but may also take place in a far less controlled manner and result in losses for banks and other lenders. Policy challenges Like banks and other market participants, the authorities also learn from crises. I will discuss three areas in which we have learned important lessons. First, economic policy must be oriented towards stable economic development. An inappropriate economic policy has been a contributing cause of crises both in Norway and abroad.
Svein Gjedrem: Is the financial system stable? Speech by Mr Svein Gjedrem, Governor of Norges Bank, at the 2001 Annual Meeting of the Norwegian Savings Banks Association, Haugesund, 18 October 2001. Please note that the text may differ slightly from the actual presentation  *  *  *  Introduction The role of the financial industry in the economy has become increasingly important over the last decades. Deregulation and technological advances have increased the industry’s opportunities and scope to channel savings to various projects. Strong competition has induced the industry to make use of these new opportunities. The range of saving and financial instruments is becoming ever wider. Systems and financial instruments for managing and controlling risk are becoming more advanced. As a result, it has become easier for households and enterprises to decouple consumption and investment from current income. In the second half of the 1990s, in particular, international capital 1 markets have become more integrated. It has been easier for growing economies to finance investments through a balance-of-payment deficit and foreign capital. At the same time, countries with high savings can increasingly diversify their investments. Globalisation places increasing demands on the business sector’s ability to adapt. New products and technology squeeze out old solutions. This creative destruction, as Schumpeter called it, may foster a more efficient distribution of resources and higher economic growth in the long run. A rapidly changing environment places considerable demands on the financial industry. The financial prospects for a project must be assessed in relation to risk.