Norway’s financial system coped well with the global financial crisis and has further increased buffers to deal with potential shocks, but significant financial imbalances have also built up since then. Favorable macroeconomic conditions in recent years have helped maintain financial stability. However, the prolonged period of low interest rates and high oil prices have fueled credit and asset price growth, leading to higher vulnerabilities. The housing market is estimated to be overvalued by 25–60 percent, and, at about 220 percent, the household debt-to-disposable income ratio is among the highest in the world. To finance this increase in lending to households, banks have relied extensively on wholesale funding. At the same time, Norway’s close regional and global interconnectedness is a source of potential spillover risks. Stress tests suggest that under severe macroeconomic shocks banks and life insurers could face important but manageable capital shortfalls. A combination of severe shocks—including protracted low oil prices and a sharp contraction in house prices—could result in an aggregate capital shortfall for banks of up to 4.6 percent of GDP over five years. This requires continued action to ensure adequate capital buffers, including through discretionary requirements under Pillar II of the capital framework. Norwegian banking groups also face liquidity gaps in domestic currency and are exposed to maturity mismatches and rollover risks, due to their reliance on currency swaps. Insurers’ solvency ratios would decline sharply under a combination of severe shocks under the Solvency II framework, although the rule for the transition to Solvency II would significantly reduce the immediate need for insurers to raise capital. The Financial Supervisory Authority of Norway (FSA) should continue to constrain dividend distribution by weakly capitalized insurance institutions and ensure that the insurance businesses of conglomerates are adequately capitalized on a solo basis.