- The environment has become more demanding for Norwegian banks too, says Deputy Governor Jan F. Qvigstad. Nonetheless, the outlook for the financial system in Norway is still satisfactory. It is too early to say whether the financial turbulence is over. The turmoil may persist, and new waves may emerge. Even if the turmoil should abate, we must expect normal risk premiums to be somewhat higher from now on. Households and enterprises must be prepared for the possibility that borrowing will be more expensive.

Four conditions in particular must be closely monitored:

• Market turbulence poses a challenge to banks’ liquidity management. The scale of short-term funding has increased somewhat in the past year due to limited access to long-term funding. This increases liquidity risk.
• The problems in the US housing market and the ensuing turmoil in money and credit markets, along with tighter bank credit standards, increase the uncertainty about global economic developments. A global downturn might lead to lower earnings in Norwegian firms and higher losses in Norwegian banks.
• Household debt is still growing rapidly. With low saving and uncertainty in the housing market, there is a risk of an abrupt rise in the saving ratio. A sudden change in household expectations about their own financial position ahead may also lead to a change in saving behaviour, which will reduce corporate earnings.
• Banks have sizeable loans to the property industry. Market prices for commercial property have risen substantially in the past few years, partly based on expectations of continued solid growth in rental income. If these expectations are not met, property companies’ profitability may be reduced. The optimism and the rise in prices in the commercial property market seem, however, to have abated since 2007. Banks have become more reluctant to lend to the property industry.

The Report includes boxes on the following themes: Norges Banks survey of bank lending, stress testing of bank losses and results, and central bank measures to address liquidity problems at banks. 

• Financial Stability 1/08

For more information, please contact:
Director Birger Vikøren, Tel. +47 22 31 61 42
Assistant Director Snorre Evjen, Tel. +47 22 31 65 70.