Financial Stability 2/2000
1 Summary
Norges Bank: Financial stability 2/2000
High credit growth ...
Growth in overall credit to mainland Norway has increased so far this year. Credit growth
has been particularly strong from domestic sources, with banks making a substantial contribution.
At end-September 2000, private and municipal gross domestic debt was a little over 12% higher than
at the same time the previous year. This is the highest annual growth since 1988. Debt both in
non-financial enterprises and households has increased sharply. Credit growth has been appreciably
higher than GDP growth, which means that domestic participants have increased their total debt burden.
... higher debt burden and decreasing net lending in households ...
Towards the end of 1999 and in 2000, households' debt burden has increased substantially for the first
time for several years, as a result of both high - and increasing - debt growth and slower growth in
disposable income. According to recent financial market statistics, the sharp rise in new debt,
coupled with a levelling off in gross investment in financial assets, has resulted in the lowest
level of net lending since 1990. There is a degree of uncertainty with regard to the latest observations,
but the figures may indicate a change in households' financial adjustment. Although certain groups of
households have considerable debt and a high interest burden, the credit risk associated with households
as a whole is still considered to be relatively small.
Part of the growth in new household loans is closely related to the marked rise in resale home prices
and housing wealth in recent years. The interest rate rises in 2000 may contribute to a slower rise
in house prices. This will reduce the risk of exaggerated corrections in the housing market.
... credit risk linked to the enterprise sector remains relatively high
Total enterprise debt continues to rise, and the debt burden is currently approaching the
levels seen in the late 1980s. On the other hand, enterprises' equity ratios rose in the
course of the 1990s. Enterprises' 1999 accounts showed higher earnings than in the previous
year, and the volume of debt in weak enterprises was reduced. As a result, enterprises are
now better equipped to cope with a cyclical turnaround than they were in the late 1980s.
Developments in a selection of listed companies in the first half of 2000 may indicate somewhat
weaker earnings in 2000 than in 1999.
The credit risk associated with enterprise debt is considered to be somewhat lower than it
was one year ago. However, the high debt burden means that enterprises are vulnerable to
developments which erode earnings.
Good results for banks in the first nine months of 2000 ...
Banks achieved good results in the first nine months of 2000, although results were somewhat
weaker than in the same period in 1999. Intense competition for deposit and loan customers
is leading to pressure on margins. The result is that banks' financing costs are rising and
net interest income is falling. Banks have managed to offset part of this loss of income by
limiting growth in costs. Accounting figures for the first three quarters of 2000 suggest
that banks are gradually benefiting from rationalisation measures introduced over the past
few years. As a result of the strong lending growth, average capital adequacy in banks has
fallen, despite good results.
... but banks' liquidity risk has increased somewhat
As a result of decreasing deposit-to-loan ratios, banks have had to finance lending to an
increasing degree in money and capital markets. A large portion of this takes the form of
short-term borrowing, and an increasing number of banks are turning to foreign funding
sources. A trend towards increased financing through bond markets will reduce the
liquidity risk.
The Banking Law Commission is discussing the possibility of allowing banks and
mortgage companies to issue asset-backed bonds or to securitise parts of their
loan portfolio. If the proposal is adopted, this will reduce the need for financing
from foreign sources.
Continued strong earnings are important to secure banks' access to financing
Banks' vulnerability to trends in international money and capital markets has grown
in recent years, partly as a result of the marked rise in foreign debt. In order to
ensure the necessary confidence, it is essential that banks succeed in maintaining
satisfactory earnings. Stiff competition and expectations of a more normal loss
level mean that banks need to improve earnings in areas other than conventional
deposit and loan activities and cut costs further.
Reduced risk in payment systems
Banks have now introduced procedures which have eliminated the previous practice
of advance crediting for large parts of the transactions in domestic payment settlements.
This has reduced credit exposure substantially. However, banks still have relatively
large exposures in foreign exchange settlements. A survey of Norwegian banks' total
exposures against other banks in foreign exchange settlements shows that ongoing exposures
amount to more than three times their total core capital. However, the average exposure
duration for each position is relatively short, roughly 1½ days. An important measure
for reducing credit risk in foreign exchange settlements is the Continuous Linked Settlement
(CLS) system, which will introduce simultaneous foreign exchange settlement, thereby in
theory eliminating credit risk in such transactions. Norges Bank is working for the
inclusion of NOK in CLS in the course of 2002.
Continued uncertainty internationally
2000 has seen wide fluctuations in international equity markets. Even though equity
prices have dropped since the peak level in March, particularly in the IT sector,
high pricing in equity markets continues to be an important source of uncertainty
internationally. The telecommunications sector has borrowed heavily to fund
investment and acquisitions. This has increased banks' and other investors'
exposure to this sector. The rising current account deficit in the US is also
creating uncertainty about international developments. In Japan, the situation is
marked by continued weak earnings and financial vulnerability in enterprises and
financial institutions alike. Four life insurance companies have gone bankrupt this
year. There is also uncertainty regarding developments in some emerging economies.
This applies, for example, to South Korea, where one of the largest enterprises has
gone bankrupt, and Argentina, which needs to refinance considerable loans in the
coming period.
Satisfactory stability in the financial system
In the short term, the total risk in the banking sector is considered to be relatively
limited. In the slightly longer term, special attention should be given to the relatively
high credit risk in enterprises and continued high liquidity risk in connection with
substantial foreign debt. The macroeconomic outlook does not suggest the likelihood
of disruptions that will have any significant effect on financial stability.
An orientation of monetary policy with a view to fulfilling the fundamental
preconditions for exchange rate stability will reduce the likelihood of abrupt,
sharp changes in interest rates and economic activities which in turn could affect
the stability of the financial system.
Chart 1.1 Chart
1.2 Chart 1.3 Chart
1.4
© 2000 Norges Bank
webmaster@norges-bank.no