As shown in Chart 3, there was also a clear build-up of financial vulnerability in Norway prior to the financial crisis.   The rise in both house prices and debt in Norway was on a par with countries that were much harder hit by the crisis.   In addition, Norwegian banks had also increasingly financed strong lending growth over a long period with market funding, of which a considerable share was shortterm funding. The Norwegian banking sector became increasingly dependent on well functioning international money and capital markets, enabling banks to roll over their funding. Nonetheless, the liquidity crisis never developed into a solvency crisis in Norway. Perhaps financial sector operators had learned from the previous banking crisis and engaged in more responsible banking during the upturn. Furthermore, they were subject to stricter banking regulation in some areas. But other factors also played a role.   Macroeconomic developments after the outbreak of the financial crisis were more favourable in Norway than in other countries. The decline in output and the rise in unemployment were far more limited. Because of particular features of the industry structure in Norway, it took time for the full impact of the international downturn to reach our economy. In the meantime, an expansionary monetary and fiscal policy had begun to take effect. Against the background of relatively favourable macroeconomic conditions, the vulnerability related to a high household debt burden and elevated house prices never translated into higher losses for banks.
In some countries the authorities already have the option of splitting up a bank and subsequently selling it in parts, or the option of transferring vital parts to a bridge bank for continued operation. A newer instrument in the international debate is what is called internal recapitalisation – or bail-in. Internal recapitalisation means in principle that debt is converted into equity capital. This can provide a basis for the bank to continue operating. Creditors have to take the losses and the authorities do not have to provide capital. With such a crisis management system, lenders will have a stronger financial incentive to monitor banks’ risk-taking. They can price funding so that it reflects to a further extent the risk taken by banks. This will reduce the risk of excess debt growth and lessen the likelihood of crisis. Conclusion As I mentioned by way of introduction, our most important task in the work on financial stability is to contribute to containing imbalances and secure a robust financial system. Prevention is thus a key component of the work: that is to say prevention by means of a sound, general framework that does not stimulate risk-taking among financial market participants; prevention through surveillance of financial imbalances and through active use of instruments when we see clear signs of a build-up of serious imbalances. It is unlikely that we will be fully immune to financial instability. But with solid work in the area of prevention we will be better poised, also in turbulent times. Thank you for your attention.