Internationally, the main factor that may weaken financial stability is a sharp decline in share prices. In recent months, international stock markets have been marked by price volatility. Among financial institutions, life insurance companies are the most exposed to a pronounced fall in share prices, while the direct effect on Norwegian banks will be relatively limited because of their small shareholdings. Growth in credit from domestic sources is rising. However, growth in credit from foreign sources has shown a marked contraction, resulting in slower growth in total credit the last six months. The distribution by borrowing sector shows that credit growth has increased in the household sector and slowed in the enterprise sector. Credit risk in the enterprise sector has increased as a result of the strong growth in debt in recent years. The debt burden in the enterprise sector is now at the same level as at the end of the 1980s. On the other hand, the outlook for the Norwegian economy is more favourable than projected earlier and growth in debt shows signs of slowing. This has reduced the probability of financial problems in the enterprise sector compared with the situation prevailing six months ago. On balance, Norges Bank still judges the credit risk in parts of the enterprise sector to be relatively high.

Household loan debt has increased in recent years, albeit at only a slightly faster pace than income. Even though the debt burden is expected to increase in the period ahead, the credit risk associated with the household sector is still considered to be moderate.

Financial institutions, with the exception of finance companies, recorded a marked improvement in performance in 1999. The positive results are partly ascribable to securities gains and an improvement in underlying earnings in the form of a reduction in costs as a percentage of total assets. Losses remain low. Although some of the improvement is due to factors that cannot be expected to make a positive contribution every year, underlying earnings were solid last year.

Norges Bank's calculations indicate that earnings and return on equity may deteriorate somewhat in the years ahead if banks do not implement measures to address the challenges they are facing. However, earnings are deemed sufficient to maintain a satisfactory capital adequacy ratio, given the assumption of moderate lending growth ahead.