Financial Stability 1/2002
Satisfactory financial stability
The international financial system has proved to be reasonably robust to the
problems of recent years. The cyclical downturn in the largest industrial countries,
the crash in the technology shares market, the events of 11 September, Argentina’s
default on its government debt and the Enron case do not seem to have diminished
to any great extent the ability of the financial sector to channel savings into
investment projects and distribute risk. An important reason for this is that
financial institutions were generally highly capitalised. New tools to improve
risk management may also have made a positive contribution. Substantial reductions
in interest rates in many countries have eased debt servicing and contributed
to stabilising the markets over the last eighteen months.
The extraordinary liquidity, in domestic and foreign currency, supplied by
several central banks immediately following the events of 11 September helped
to ensure that markets functioned smoothly. Markets in Norway functioned satisfactorily
at this time, and there was no need for Norges Bank to supply extraordinary
liquidity. However, extraordinary liquidity supplied in foreign currency is
one of the instruments available to the central bank, although it must be reserved
for very special situations. In Norway, the use of this instrument would have
to be based on an assessment of the stability of Norwegian financial markets
and the Norwegian payment system.
The outlook for financial stability in Norway has improved since last autumn.
The cyclical turnaround in the global economy and high oil prices have boosted
optimism. The prospects for future earnings and income now seem better than
six months ago. However, debt growth, particularly in the household sector,
is still high. The household debt burden is still lower than it was at the end
of the 1980s, although it is high compared with the household debt burden in
other countries. Although the enterprise debt burden is also high, credit risk
is not considered to have increased in the short-term due to an improved equity
situation. In the slightly longer term, persistently strong credit growth may
lead to financial imbalances and increased credit risk. On the whole, the outlook
for financial stability is considered satisfactory.
Jarle Bergo
© 2002 Norges Bank webmaster@norges-bank.no