Financial Stability 1/2003
Banks' losses increase, but the outlook for financial stability remains satisfactory
As expected, banks’ losses have increased over the past year, but are
still moderate from a historical viewpoint. We must expect that losses will
continue to increase somewhat in the period ahead. This is partly because
the internationally exposed sector is experiencing problems, but it also reflects
the impact of a period of considerable optimism, strong investment growth
and high debt growth in many enterprises. When the downturn began, certain
investments proved to be unprofitable and some enterprises have had problems
servicing debt. We recognise these developments from previous economic cycles
both in Norway and other countries. Projects started during an upturn do not
always subsequently prove to be viable.
Will the increase in banks’ losses lead to a new banking crisis? This
is unlikely. The situation for banks today is far better than it was prior
to the banking crisis in the early 1990s. First, banks have more equity now.
In addition, experience from the previous crisis has resulted in improved
risk management. Therefore, banks’ losses are not expected to increase
as much this time as in the beginning of the 1990s – even in the event
of weaker-than-expected economic developments.
Banks in other countries have also shown greater risk awareness, and losses
so far have been relatively small. A proposal for new capital adequacy regulations
for banks has been presented by the Basel Committee. The objective of the
proposal is to achieve greater correspondence between the capital adequacy
requirement and the risk associated with banks’ activities. The new
regulations should contribute to underpinning the improvement in risk management
demonstrated by banks over the past ten years. The total capital adequacy
requirement for Norwegian banks will probably be reduced as a result of the
new regulations. This is because a large share of Norwegian banks’ loan
portfolios consists of housing loans. In the new regulations, housing loans
are regarded as less risky and capital adequacy requirements are therefore
lower. Through greater correspondence between capital and risk and improved
risk management systems, it is likely that these changes will contribute to
a more robust financial system.
The unrest in connection with the Finance Credit case last autumn showed that
uncertainty about a bank’s financial position will quickly lead to liquidity
problems in banks that have a substantial share of short-term financing. Pressure
from the market will quickly prompt the necessary adjustments. Problems in
individual banks have already resulted in some restructuring in the banking
sector and there may be more. However, this does not currently represent a
threat to the stability of the financial system as a whole.
On balance, the outlook for financial stability is considered to be satisfactory.
The outlook is, however, somewhat weaker than in the November 2002 Financial
Stability report due to the increased risk of loan losses.
Norges Bank has commissioned three independent experts to assess the Financial
Stability reports in relation to similar publications from other central banks
and to suggest improvements. An external evaluation of this kind is useful
and necessary in our efforts to further develop these reports. The expert
group’s evaluation is included as an annex to this report.
Jarle Bergo