The uncertainty in international financial markets has been reduced even though the US equity market still represents an element of uncertainty.

Credit growth has generally slowed the past year, and the risk of growing imbalances as a result of sharp credit growth has therefore diminished. Growth in domestic credit has edged up the last two months, but on the basis of Norges Bank's projections for developments in the real economy credit growth is expected to show a declining trend in the period ahead.

In general, households' financial position is solid. Indicators for both the interest burden and the debt burden point to a continued sound debt-servicing capacity for most households.

An analysis of the situation in the enterprise sector shows that enterprises' debt-servicing capacity has deteriorated. The sharp growth in enterprise sector debt in recent years and squeezed profitability in several industries have increased financial exposure. Accounts figures for 1998 show that there was a pronounced rise in debt for enterprises with weak earnings and weak or negative equity capital. This is primarily due to a deterioration in the financial position of existing borrowers. With regard to financial stability, developments in the industries property management, shipping and pipeline transport and construction are particularly worth noting.

The results in commercial and savings banks so far this year show a clear improvement compared with the same period in 1998. The increase in credit risk associated with loans to the enterprise sector has so far not resulted in a marked rise in the magnitude of non-performing loans or book losses. The balance sheet structure has also shown a more favourable development than earlier, which has contributed to limiting financial exposure in banks. In Norges Bank's view, the financial strength of the banking system is satisfactory. However, the improved results this year are to some extent due to factors that cannot be expected to make the same contribution in the years ahead. Measures must probably be introduced in a number of institutions if banks are to maintain their financial strength in the slightly longer run.

The report also describes the preparations for the year 2000 in the financial sector. Norges Bank does not expect the turn of the millennium to result in serious disturbances in the financial system.