“The financial system in Norway is robust. The vast majority of households and firms are able to service debt in the face of higher costs. However, there is considerable uncertainty surrounding economic developments. It is therefore important to maintain the resilience of the financial system”, says Governor Ida Wolden Bache.

Default rates are low

High inflation and rising interest rates have led to tighter finances for most households in recent years, and for some this has been difficult to manage. Even though costs have increased, a vast majority of households have been able to service their debt. This partly reflects the fact that many households are employed and most had financial buffers they could draw on when costs rose.

There are now prospects for both real wage growth and lower lending rates, which will boost households’ purchasing power and make it easier to service debt. At the same time, unemployment will likely edge up to approximately pre-pandemic levels.

Debt is rising more slowly than income

The high debt-to-income ratios of many households is a key financial system vulnerability.

“Debt has risen less than income in recent years. Such a development may reduce the vulnerability of households to interest rate increases or a loss of income. On the other hand, household vulnerabilities may increase again if looser financial conditions result in rapidly rising house prices and debt”, says the Governor.

Somewhat improved commercial real estate prospects, but still challenging for real estate developers

Norwegian banks’ commercial real estate (CRE) exposures are substantial. Higher interest rates have weakened CRE firms’ profitability. However, high employment and growth in rental income enable most firms to cover higher interest expenses with current earnings.

At the same time, the share of bankruptcies among Norwegian firms has risen since the beginning of 2023. In particular, the rise has been pronounced among real estate developers. The analyses in this Report indicate that the corporate bankruptcy rate in Norway is likely to rise somewhat further, especially in the real estate sector.

Risk of negative events that could weaken financial stability

Geopolitical tensions are higher than they have been for a long time. New shocks abroad may have consequences for the financial system in Norway.

In a turbulent world, the risk of targeted cyber attacks increases. Attack surfaces expand as a result of rapid technological advances and increasing financial system interdependencies. Climate change also makes the economy more vulnerable, both through the transition needed to cut emissions and because climate change increases the frequency of extreme weather events.

Countercyclical capital buffer unchanged at 2.5 percent

Norwegian banks are solid. This is important for financial stability. Banks’ losses are low, and banks satisfy capital and liquidity requirements. Creditworthy firms and households have ample access to credit. Norges Bank’s Monetary Policy and Financial Stability Committee sets the level of the countercyclical capital buffer each quarter. At its meeting on 25 November, the Committee decided to keep the buffer rate unchanged.

“It is important to set requirements that stipulate how much capital and liquid assets banks are required to hold. As Norwegian banks satisfy such requirements by a solid margin, they are more resilient to losses. The countercyclical buffer rate of 2.5 percent helps maintain bank resilience”, says Governor Wolden Bache.