Financial Stability 2/2002
The outlook is somewhat less favourable
The value of equities worldwide has fallen by more than 40 per cent since peaking
early in 2000. There has been a substantial reduction in the wealth of enterprises,
households and financial institutions. Nevertheless, the international financial
system has been fairly solid in this period, with the exception of the Japanese
banks, which have struggled for a long time with a large volume of non-performing
loans. International banks have become more skilled at risk diversification
over the last ten years, and they have introduced new risk management systems.
More credit is being channelled through securities markets and new financial
derivatives have increased the possibility of managing risk. There have been
few signs of financial panic. Willingness to take risks has declined considerably
after a period of excessive optimism at the end of the 1990s. A more cautious
attitude toward risk-taking is probably healthy, but the pendulum can also swing
too far.
In Norway, life insurance companies and pension funds in particular have reduced
their risk-taking. Life insurance companies have reduced the equity share in
their portfolios and shifted to bonds. The Norwegian bond market is small and
few issuers have a high credit rating. Therefore, Norwegian companies have to
a large extent placed funds with sound foreign borrowers through the Eurokrone
bond market, a market for NOK-denominated bonds which are sold outside of Norway.
So far this year, Eurokrone bonds for more than NOK 40bn have been issued.
A bond market that functions smoothly may improve the diversification of risk.
In Norway, a larger bond market will reduce the heavy concentration of credit
risk that currently exists in the banking system. The Storting has recently
adopted amendments to the Financial Institutions Act. The amended act allows
for securitisation and the issue of asset-backed bonds and will make it more
attractive for banks to finance lending by issuing bonds. This should stimulate
the Norwegian bond market.
Securities markets are completely dependent on transparency and having the
same information available to everyone. If market participants act on the basis
of incorrect information, risk may increase rather than be reduced. The accounting
and auditing scandals in the US have already prompted the authorities to take
initiatives that are intended to increase the reliability of the information
that is published. The Finance Credit case in Norway shows how risk in the financial
market increases when many participants act on the basis of incorrect and insufficient
information.
So far, the decline in the equity market, weaker international growth prospects
and higher interest rates in Norway have had little effect on the willingness
of Norwegian borrowers to incur debt. Household borrowing in particular is high.
Due to their financial strength, Norwegian banks are well equipped to face less
favourable economic developments.
Overall, we consider the outlook for financial stability to be satisfactory.
Due to the increase in debt burdens in households and enterprises, however,
the outlook in our view is less favourable now than it was six months ago.
Svein Gjedrem
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