Preface

After five years of economic expansion, 1998 viewed as a whole brought steep interest rate increases, stockmarket falls and a slowdown in credit growth. A turnaround is clearly under way in the Norwegian economy. However, great uncertainty attaches to developments ahead. Both international and domestic conditions will influence the depth and duration of a possible recession marked by falling demand, output and employment.

In 1998 Kredittilsynet focused on preparing financial markets for the challenges that an economic reversal can bring. So far financial institutions have coped with the turbulence and the downturn without difficulties of note.

Developments in the securities market have not subjected securities funds to significant redemption pressures. While most investment firms are in a sound financial position and well in control of their activities, Kredittilsynet has kept a close watch on the liquidity of certain firms. Developments witnessed in 1998 call for a clarification of the statutory basis for this area of supervision.

Norwegian life insurance companies increased their equity investments in per cent of total assets from 9 per cent in 1994 to 24 per cent at the end of the first half of 1998, and were hard hit by the stockmarket decline in 1998. Thanks to their accumulation of buffer capital in recent years there was never any doubt about their ability to stand by their commitments to their customers, and there was no need for them to sell off Norwegian shares in the period share prices were at their lowest. In the years ahead, however, life insurance companies will need to replenish their buffer capital, particularly in view of market risk, which must be said remains substantial.

The vigorous growth in bank lending through 1997 and at the start of 1998, combined with narrowing interest margins, prompted clear warnings from Kredittilsynet about the consequences this could have for banks' financial position. The big commercial banks gave particular cause for concern. Banks with low equity capital and/or undergoing strong expansion were subject to inspections and other forms of monitoring. At the request of the Ministry of Finance consideration was given to tightening the requirements on banks' regulatory capital. Steps taken and warnings issued by the authorities, together with assessments by the banks' governing bodies, led the biggest commercial and savings banks to apply the brakes in the first half of 1998. Hence the growth in bank lending had already been substantially cut back before the rise in lending rates played its part in curbing demand during the autumn of 1998. Banks' acceptance of the need to restrain lending growth also laid the basis for wider interest margins and improved earnings.

In the years of strong lending growth banks accumulated substantial credit risks and they would have been well advised to exploit the long-lasting period of economic expansion to build up larger stocks of equity capital. With the prospect ahead of an appreciably weaker period for the Norwegian economy it will be important for owners, managers and staff at Norwegian banks to give priority to capital strength rather than to other goals. Improved earnings and moderate credit growth are needed if the banks are to handle satisfactorily the credit risk that has accumulated. Sound earnings and capital strength are a precondition for banks' ability to discharge their functions in the community and to carry on the business of lending in a normal manner in hard times when higher bank losses have to be reckoned with.

Preparations for dealing with computer-related problems associated with the transition to the year 2000 were important for all categories of institutions in 1998. Kredittilsynet's impression is that the majority and the biggest of the institutions, including the major data processing centres, are well placed to resolve the problems faced. Coordinating efforts with sectors responsible for energy supply and telecommunications is a further priority for 1999.

In 1998 Kredittilsynet considered and adopted a new strategy after a process in which staff, managers and the board of directors were all actively involved. The plan confronts the challenges associated with the rapid development of national and international financial markets, and the tasks that Kredittilsynet's organisation has to come to terms within order to meet these challenges.

An important objective has been to ensure that Kredittilsynet's broad compass and new responsibilities, including the authorisation and supervision of accountants, do not lead to reduced efforts in established areas of supervision. The uncertainty attached to developments in the national and international economy in coming years is expected to impose substantial demands on the scope and quality of supervision in the financial, insurance and securities areas. Kredittilsynet's new strategy is designed to cope with these challenges.

Oslo, 18 January 1999

Erling Selvig
Board Chairman

Bjørn Skogstad Aamo
Director General