Norwegian Financial System Warned of Vulnerabilities in Latest Report

The case is updated.

On Thursday, Finanstilsynet presented the report “Financial outlook”, which is published twice a year. Here the inspectorate points to the dangers that the Norwegian economy may face in the future.

High debt in households and high property prices are still the most important vulnerabilities in the Norwegian financial system, according to the report.

At the same time, the supervisory authority points out that Norwegian banks are particularly vulnerable if there is an economic setback. Underlying vulnerabilities in the banking sector can quickly lead to flight in customer deposits and solvency problems in banks in a way that can affect the financial system, both nationally and internationally, the report says.

– On average, Norwegian banks have good profitability and satisfy regulatory capital and liquidity requirements. The level of activity in the Norwegian and international economy is still high, but there is a significant risk of an economic setback combined with persistently high inflation, so-called stagflation, it says further.

Financial instability

The Norwegian Financial Supervisory Authority warns that such a development internationally could cause major losses and unrest in the financial markets, and affect the Norwegian economy and the Norwegian financial system.

In the report, the supervisory authority points out that strengthened banking supervision and stricter capital requirements in the wake of the financial crisis have contributed to more robust banks. Nevertheless, several years of very low interest rates and easy access to credit have led to vulnerabilities in the form of debt build-up and high property prices – thereby increasing the risk of financial instability.

The supervisory authority writes that it expects Norwegian banks to exercise caution in dividend payments and possible repurchases of own shares.

Hit particularly hard

Norwegian households’ debt burden is historically high. The debt has increased considerably in recent years, and with the frequent interest rate hikes that have taken place since autumn 2021, many households are particularly vulnerable in the event of a further loss of income or a fall in house prices.

Finanstilsynet has also carried out sensitivity analyzes which show that many of the borrowers will be hit particularly hard by an interest rate increase.

It also points to the fact that the term of the loans is significantly shorter than the funding need, and that some banks have a significant amount of loans with interest-free or very low installments.

According to the supervisory authority, the banks have justified the short term on the grounds that it provides an opportunity to set new terms or terminate the agreement in the event of weaker-than-expected development. As a result of the term being significantly shorter than the repayment period, the banks face a “significant credit risk”, the report states.

In the previous report, published in December last year, the inspectorate pointed to the households’ high debt load and housing prices, which have increased a lot over time. It warned that rising interest rates and economic uncertainty entail an increased risk of a sharp fall in house prices.

At the same time, the supervisory authority warned of an increased risk of “stagflation”. This means that the economy stagnates while inflation remains high. In such a scenario, monetary policy authorities will have limited opportunities to counteract an economic setback by stimulating demand for goods and services, the supervisory authority wrote at the time.