In its bi-annual Financial Stability Report, Norges Bank assesses vulnerabilities and risks in the financial system. In the Report for the second half of 2023, particular weight is given to analyses of households and firms.  

“Interest rates have risen further both abroad and in Norway, and there is still a heightened risk of financial system vulnerabilities amplifying an economic downturn. In the face of high inflation and higher interest rates, some households and firms may experience problems servicing their loans, but cost increases are manageable for most borrowers. Norwegian banks are solid and well equipped to absorb higher losses”, says Deputy Governor Pål Longva, adding:  

“The financial system in Norway is resilient, and the overall financial stability outlook has not materially changed since the previous Report in May”.  

Over the past two years, the cost of living for Norwegian households has risen owing to higher inflation and higher interest rates. Households with high debt-to-income ratios are particularly affected by higher interest rates. Norges Bank’s analyses show that the vast majority of households can service debt in the face of higher costs, but many will likely have to tighten consumption. Household financial wealth has risen over many years, which has provided households with a solid foundation to meet higher living costs.  

Most firms are expected to be able to manage higher interest expenses, but debt-servicing capacity varies across sectors. Commercial real estate (CRE) firms are highly indebted, but higher rental income means that most CRE firms will likely be able to cope with higher interest expenses. Over the past year, commercial property prices have fallen and are expected to fall somewhat further ahead. In CRE, lower equity ratios and profitability will make rolling over maturing loans more demanding. If both rental income and property prices should fall markedly, many CRE firms will have problems servicing debt, and bank losses may be substantial. 

Norwegian banks are profitable and satisfy capital and liquidity requirements by a solid margin. Banks’ profitability is the first line of defence against losses. In the event of a sharp economic downturn, banks may need to draw on the capital they have built up to cover credit losses. Banks can absorb substantial credit losses while still maintaining lending. The countercyclical capital buffer rate of 2.5 percent contributes to this resilience.