The countercyclical capital buffer is intended to strengthen banks’ solvency and mitigate the risk that banks amplify an economic downturn. The countercyclical capital buffer is intended, in principle, to range between 0 percent and 2.5 percent. Norges Bank will normally set the buffer rate in the upper part of this range. In the event of particularly high cyclical vulnerabilities, the countercyclical capital buffer rate may be set above 2.5 percent. If a downturn will or could cause a marked reduction in credit supply, the countercyclical capital buffer rate should be lowered. Norges Bank sets the countercyclical capital buffer rate each quarter. 

Economic growth in Norway is low, but economic activity has been slightly higher than expected in the beginning of the year. The employment rate remains high but has edged down over the past year. Registered unemployment is low. Market policy rate expectations and long-term interest rates have risen since January.  

For many years, debt rose faster than household income. In recent years, debt growth has been slower than income growth and is now appreciably lower than its historical average. However, many households are highly indebted and must therefore spend more of their income on interest expenses when interest rates rise. So far, the vast majority of households have been able to service their debt in the face of higher interest rates and high inflation. This is in part due to the fact that they are employed and have accumulated ample savings over the past ten years. 

House price inflation was low in 2023 and lower than household income growth. So far in 2024, house price developments have been strong. Low new home sales and weak profitability of new projects owing to higher interest rates and high construction costs contribute to lower residential construction activity than observed for some time. 

The share of Norwegian firms facing debt collection cases has increased further over the past six months, particularly in the real estate sector. The share of bankruptcies has recently risen somewhat but remains lower than before the pandemic. 

Commercial property selling prices have fallen over the past two years. This reflects higher yields. Rising rents have curbed the fall. In 2024 Q1, selling prices were unchanged. A number of CRE firms have been adversely affected by weaker earnings and lower equity ratios over the past two years. Some of the firms have drawn on financial buffers, raised more equity or sold off property to be able to continue operations. However, there are not clear signs that property sales driven by financial problems in individual firms have amplified the fall in commercial property prices. High employment and growth in rental income have enabled most CRE firms to cope with higher interest expenses so far. 

There is still a heightened risk of financial system vulnerabilities amplifying an economic downturn in the Norwegian economy, leading to bank losses (see Financial Stability Report 2024 H1). A higher interest burden has increased the risk that more households will be unable to service their debt. Many households have drawn on accumulated savings. In isolation, this suggests that households would be more vulnerable if, for example, unemployment were to rise sharply or if interest rates were to rise further. If consumption is then tightened to a substantial degree, corporate earnings and debt-servicing capacity may fall. Many CRE firms will have problems servicing debt if rental income proves markedly lower than expected, for example if employment declines markedly. 

Firms and households have ample access to credit. In the bond market, credit premiums have fallen since January, and issue activity has picked up. In Norges Bank’s bank lending survey for 2024 Q1, banks reported unchanged credit standards. This means that banks’ credit assessments are not stricter than before, but higher interest rates have limited how much households and firms can borrow. Slower household credit growth likely reflects reduced credit demand owing to higher interest rates and low new home sales, while slower growth in credit to non-financial corporates is likely ascribable to lower business investment. 

The capital requirements reflect the vulnerabilities in the Norwegian financial system. The countercyclical capital buffer rate of 2.5 percent helps banks to preserve their resilience. The solvency stress test in Financial Stability Report 2024 H1 shows that banks can absorb large credit losses, while still having the capacity to lend, and thus not amplify an economic downturn.

The Committee unanimously decided to keep the countercyclical capital buffer rate at 2.5 percent.

Ida Wolden Bache 
Pål Longva 
Øystein Børsum 
Ingvild Almås 
Steinar Holden

2 May 2024