Financial Stability 2/2001
Satisfactory financial stability, but increased uncertainty
Uncertainty about economic developments has increased after the terrorist attacks
against the US. The outlook for stability in the financial system is more uncertain
than before. In Norway, enterprises in particular are vulnerable in the event
of a recession. Debt as a share of value added is currently at about the same
level as at the beginning of the 1990s. Although enterprises have increased
their equity ratio in recent years, they are still dependent on high earnings
in order to service debt. A number of businesses are feeling the effects of
declining demand. At the same time, increasing costs are squeezing earnings.
The risk of lending to the enterprise sector has therefore increased.
Lending to the household sector is generally not as vulnerable. Debt as a share
of income is lower than at the beginning of the 1990s. The prospects for employment
and income are relatively favourable, although there is a risk of increased
unemployment in connection with shifts from exposed to more sheltered industries.
The savings ratio has been high for a long time, and households have accumulated
substantial fixed and financial assets. However, differences in financial position
between various age and income groups have increased.
Banks have maintained satisfactory earnings and financial strength despite
strong growth in lending. The outlook is more uncertain and banks can expect
weaker results. Loan losses are still at a low level and must rise substantially
before stability in the banking sector is weakened significantly. Substantial
losses on securities in the insurance sector have a negative impact on profits
in financial conglomerates. The increased uncertainty indicates that banks should
improve cost control, place emphasis on safeguarding assets in loan portfolios
and adjust growth in lending to earnings and equity supply. Overall, stability
in the financial system is still considered to be satisfactory.
Svein Gjedrem
© 2001 Norges Bank webmaster@norges-bank.no