Financial Stability Report 2020, where Norges Bank assess the vulnerabilities and risks in the financial system, was published on Tuesday.

A partial lockdown of society after the Covid-19 outbreak led to a deep economic downturn. Extensive government support measures have helped to dampen the impact of the pandemic. The Covid-19 outbreak led to considerable financial market turbulence. Extraordinary measures by Norges Bank contributed to dampening the turbulence.

“Recently, infection rates have risen, both abroad and in Norway. There is considerable uncertainty regarding the future path of the pandemic and the impact on the economy and financial markets. This has weakened the financial stability outlook somewhat,” says Deputy Governor Ida Wolden Bache.

The key financial system vulnerabilities in Norway have long been high household debt, high house prices and high commercial property prices. These vulnerabilities have not changed substantially over the past year. House prices fell in the wake of the Covid-19 outbreak in March, but have since risen markedly. If house prices continue to rise rapidly, vulnerabilities may increase. Norges Bank supports a continuation of the requirements for prudent lending standards.

Banks’ credit losses have risen so far in 2020. Much of the losses have been on loans to oil service companies, which continue to face a difficult situation since the fall in oil prices in 2014. The industries so far hardest hit by the Covid-19 pandemic account for a small share of total bank lending. If the crisis persists and commercial property prices should fall markedly, losses may be substantially greater.

 “Improved regulation since the last crisis has increased financial system resilience. Norwegian banks are robust and well capitalised and are able to absorb losses that are likely to materialise without having to tighten lending. At the same time, the outlook for losses is more uncertain than normally,” says Wolden Bache.

Reference rates play a key role in the financial system. The ongoing work to replace Libor, the most important global reference rate, may also have consequences for the Norwegian Nibor. The work to facilitate use of the alternative reference rate Nowa is well under way. To minimise the risk associated with the transition to new reference rates globally, users of Nibor are urged to make the necessary preparations to be able to adopt Nowa.