Financial Stability 1/2003
1 Summary
More bankruptcies and increased bank losses
Weaker economic developments in the Norwegian economy have contributed to a
sharp increase in the number of bankruptcies in 2002 and the first part of
2003. The internationally exposed sector has more serious problems than the
sheltered sector. The increased number of bankruptcies in some business sectors
must be seen in the light of the strong investment growth earlier. Periods
of expansion with high investment growth often lead to unsound investments
that become evident when there is a turnaround in the economy.
Chart 1.1
Weak macroeconomic developments and the fall in securities markets led to
a clear deterioration in banks’ results from 2001 to 2002. Banks’
recorded losses have increased sharply and were 0.6% of gross lending in 2002.
This is a moderate level from a historical perspective, but the trend is negative.
Losses on loans to Finance Credit and some fish-farming companies have been
particularly high. Increased defaults on corporate loans may indicate a general
deterioration in the quality of banks’ portfolios of loans to the business
sector. The losses have been particularly heavy for some small and medium-sized
banks. Despite the decline in banks’ results, their core capital ratio
is approximately unchanged.
Last fall, the Finance Credit case, among others, contributed to more expensive
and more difficult access to financing for some small and medium-sized banks.
Experience has shown that small banks with a low deposit-to-loan ratio may
be particularly exposed to liquidity problems if their capital adequacy is
not clearly higher than the minimum requirements. On the whole, however, banks
have increased their share of stable financing since the November 2002 Financial
Stability report. The deposit-to-loan ratio has increased somewhat. This has
helped to reduce the risk of liquidity problems.
Chart 1.2
Household debt burden is still increasing sharply
Weaker growth and weaker growth prospects have only resulted in a moderate
decline in growth in debt of the general public as a whole. The rise in household
debt in particular remains high, with an annual growth rate of nearly 11%
in March this year. The increase in house prices has slowed the last few years
and is now close to zero or slightly negative. When credit growth nevertheless
remains so high, it is partly due to the prolonged sharp increase in house
prices experienced earlier and to the fact that the number of dwellings sold
remains high. Many of the house sales that are now being completed contribute
to increasing debt for the participating parties on the whole. In addition,
high housing wealth allows households to borrow, using their dwellings as
collateral, for purposes other than housing investment.
Chart 1.3
Weaker outlook both internationally and in Norway
Forecasts for economic growth, both in Norway and internationally, have been
revised downwards recently. Internationally, the willingness to take risk
has been low and enterprises are refraining from undertaking new investment
that could fuel renewed growth. With the exception of Japan and Germany, banks
in most industrialised countries seem to be faring well. This may indicate
that with the help of improved risk management systems they were able to avoid
many unsound projects during the previous upturn. Although the forecasts for
growth have been revised downwards, the last months’ recovery in international
stock markets is an indication of greater optimism among market participants.
Chart 1.4
In Norway, the reduction in interest rates since the autumn of 2002 will strengthen
enterprises’ debt servicing capacity and in isolation contribute to
reducing the rise in the number of bankruptcies. Nevertheless, with continued
weak economic growth, we must expect a large number of bankruptcies and somewhat
higher losses on bank loans in the period ahead. Gross defaults on loans to
the corporate market have increased through 2002. During the last banking
crisis, loans to enterprises that manage commercial property accounted for
a considerable share of banks’ loan losses. Losses on such loans are
relatively small now. Lower rents and property prices and a higher number
of vacancies may indicate that losses in this sector will increase in the
period ahead.
On the whole, the credit risk on loans to enterprises in the exposed sector
is unchanged and relatively high. The credit risk associated with loans to
commercial property companies has increased, in particular to enterprises
engaged in the rental of office space. The credit risk on loans to other enterprises
in the sheltered sector has also increased, but the risk remains at a moderate
level.
Chart 1.5
The reduction in interest rates will also decrease the interest burden for
the household sector as a whole. However, high and growing debt makes households
vulnerable to an increase in interest rates or unemployment. The current situation,
with debt rising far more sharply than income, cannot be sustained over time.
The financial position of different household groups also varies widely. On
the whole, credit risk associated with household loans is moderate but somewhat
higher than in the November 2002 Financial Stability report.
Banks’ ability to withstand losses is relatively good …
Banks’ ability to withstand a serious economic shock depends, among other
things, on earnings before losses. Our calculations show that given the outlook
for economic developments presented in the March 2003 Inflation Report, banks
will be capable of maintaining a positive buffer capital (capital in excess
of statutory minimum requirements) even if results before losses are relatively
weak. It would take a pronounced economic downturn to deplete the buffer capital,
assuming that results before losses are maintained at the 2002 level.
Chart 1.6
…and the outlook for financial stability remains satisfactory
Banks are therefore reasonably well equipped to meet weaker macroeconomic developments.
The increased risk of loan losses is largely associated with loans to the
corporate sector. The household sector has become more vulnerable due to the
strong accumulation of debt. If households are compelled to reduce their high
level of debt, the corporate sector may experience a decline in turnover.
On the whole, the outlook for financial stability is satisfactory, but somewhat
weaker than six months ago.