Financial Stability 1/2002
1 Summary
Uncertainty in international financial markets has diminished since last
autumn. The cyclical turnaround in the global economy has contributed to increased
optimism. In Norway, this has been amplified by high oil prices. The decline
in enterprise debt has levelled off, but household debt is still rising quite
sharply. Thus, total debt in Norway is still increasing at a fast pace. Banks’
earnings and financial strength are sound, and banks can absorb considerably
higher losses before equity is threatened. On the whole, the outlook for financial
stability is considered satisfactory.
Less uncertainty internationally
Due to the cyclical turnaround in the global economy, there is less uncertainty
in international financial markets than last autumn. At the beginning of the
year, stock markets had returned to levels prevailing before 11 September. Stock
markets have declined slightly so far this year due to uncertainty about the
intensity and duration of the turnaround and thus future corporate earnings.
There is still considerable uncertainty about the situation in Japanese banks.
The serious crisis in Argentina continues with no clear signs of improvement.
These problems have not had any particular spillover effects on other countries.
Chart 1.1
Somewhat sharper rise in debt in mainland Norway
Due in part to less uncertainty about international developments and more positive
household and enterprise expectations, growth in overall credit to mainland
Norway has edged up again in the last six months. Household debt continues to
rise sharply, but growth tended to slow somewhat in the first quarter of 2002.
Growth in enterprise debt slackened somewhat in the last six months, but picked
up again in March.
Rising debt burden in the household sector continues
Since 1999, the rise in household debt has been higher than income growth,
thus leading to a sharp rise in the household debt burden. The household debt
burden in Norway is high compared with other countries. On the whole, however,
it is still lower than at the end of the 1980s. The debt burden of low and middle
income households rose throughout the 1990s and is considerably higher today
than 10 to 15 years ago.
Chart 1.2
Greater financial wealth and rising house prices ensure that the financial
situation of households as a whole is relatively sound. Household financial
wealth has increased over a long period, but is unevenly distributed among household
groups. Households with high income increased their share of financial wealth
throughout the 1990s.
The higher debt burden of large household groups has reduced their ability
to withstand periods of interest rate increases or unemployment. On the other
hand, the nominal interest rate and thus the interest on a given debt burden
is lower now than it was 10 to 15 years ago. On the whole, credit risk in connection
with loans to the household sector is fairly low, and this is underpinned by
the high and rising share of mortgage-backed loans.
Chart 1.3
Strong demand for credit over the past few months seems to be related to households’
increasing adaptation of loan levels to higher house values. A continuation
of the sharp rise in household credit may gradually lead to imbalances in the
household sector, making it vulnerable to fluctuations in house prices.
Table 1.1
Rise in enterprise debt somewhat lower
Due to moderate growth in investment, the rise in enterprise debt has slowed.
Debt continues to rise more sharply than value added, but there are substantial
differences across sectors. Enterprise debt in the sheltered sector, including
services, property management and retail trade, continues to rise relatively
steeply, whereas the growth in debt in a number of exposed industries has slowed
markedly.
Mainland enterprises currently have a total debt burden on a par with the high
levels seen at the end of the 1980s. Banks’ total lending to the exposed
sector is considerably lower than to the sheltered sector. Although the exposed
sector is facing major challenges ahead, this sector represents a limited potential
loss for banks. Banks’ potential losses are greatest in connection with
loans to the sheltered sector, such as enterprises engaged in services and property
management. The high burden of debt means that these enterprises are dependent
on solid earnings in the years ahead in order to service loans.
For the enterprise sector as a whole, the equity situation improved throughout
the 1990s. Since earnings are generally expected to remain relatively high in
the future, credit risk connected with loans to the enterprise sector is considered
moderate.
Banks’ liquidity risk is somewhat lower …
Customer deposits and bond funding have increased somewhat as a share of bank
lending since the report in November. This has improved the liquidity situation.
On the other hand, short-term foreign debt has increased. Short-term financing
from abroad may be more volatile than comparable domestic financing and thus
a potential source of liquidity problems. Less uncertainty in financial markets
compared with last autumn means, however, that there is probably less risk than
before of problems in connection with foreign financing.
Chart 1.4
… and credit risk in the payment system is further reduced
Banks’ participation in the payment system may involve a substantial
credit and liquidity risk. Credit risk is now markedly reduced after Norwegian
banks, as of February this year, wait to credit customer accounts until they
have received confirmation that payment transactions have been settled in Norges
Bank. Previously, this only applied to the settlement of customer-related payments
(retail settlement), whereas now it applies to all payment settlements. Banks
have ample liquidity and extensive access to deposit securities to ensure the
completion of payment settlements. Therefore, this liquidity risk is still very
limited.
Satisfactory earnings and sound financial strength in banks
Banks’ underlying earnings (pre-loss operating profit as a percentage
of average total assets) declined somewhat last year. Combined with increased
book losses, this resulted in somewhat weaker operating profits than the year
before. The return on equity fell somewhat but is still fairly good, even compared
with large European banks.
Chart 1.5
Most large banks reduced lending growth in 2001. At the same time, aggregate
capital adequacy improved. Equity is now high compared with losses, especially
compared with the situation at the beginning of the 1990s. Estimates for the
eight largest bank conglomerates show that they can on average absorb considerable
losses, also in an historical perspective, before their core capital falls to
the statutory minimum level. Thus, the estimates show that losses may increase
considerably without causing an immediate risk to banks’ financial strength.
Financial stability remains satisfactory
Since the last report, the debt burden has increased in both the household
and enterprise sectors, although at a more moderate pace than before for enterprises.
All the same, credit risk is not considered to be higher in the short term due
to sharp growth in household real disposable income and a high equity ratio
in the enterprise sector, combined with an improved economic outlook both internationally
and in Norway. In the slightly longer term, persistently strong credit growth
may lead to financial imbalances and increased credit risk. On the whole, the
outlook for financial stability is considered satisfactory.
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