The share of fixed-rate mortgages in the household sector is falling and interest-only loans have become more common. Households are thus more exposed to unexpected interest rate changes. The interest burden is still low, but will increase as the interest rate level normalises. In the longer term, the high debt burden constitutes a source of uncertainty with respect to household consumption and saving.

Enterprise profitability is high. Over the past year, corporate debt has increased substantially, reflecting optimism in the business sector and higher fixed investment. The activity level in the commercial property market is high and prices have risen markedly. Returns in the property market are vulnerable to interest rate changes and fluctuations in the level of economic activity.

In Norway, banks have posted solid results in recent years, primarily reflecting very low loan losses. The low level of losses reflects low interest rates and solid growth in the Norwegian economy. The outlook for the Norwegian economy implies continued strong bank performance in the near term. Banks are nevertheless facing challenges. Many years of brisk lending growth has increased the potential for loan losses. Intense competition has contributed to lower interest margins and exerted downward pressure on banks' earnings. In addition, the transition to the new capital adequacy rules may present a challenge in a period of expansion with abnormally low loan losses. Against the background of high lending growth, banks should focus in particular on the quality of credit.

The themes presented in more detail in this issue of the Financial Stability report include, among others, the following: the implications of new capital adequacy rules for banks, house prices and housing investment, and the increased household debt burden in a number of countries.

For further information, please contact: Kristin Gulbrandsen, Executive Director, Tel. +47 22 31 60 92, or Birger Vikøren, Director, Tel. + 47 22 31 61 42

Financial Stability 2/2006