The Financial Market in Norway: Risk Outlook:
“Kredittilsynet is encouraging the banks to turn to the Government Finance Fund in order to secure a robust basis on which to meet firms’ and households’ credit needs,” said Kredittilsynet’s director general, Bjørn Skogstad Aamo, when the report ‘The Financial Market in Norway 2008: Risk Outlook’ was presented today. “It is important to avoid a tightening of the credit supply that could intensify the downturn in the Norwegian economy and expose banks to heavier losses. At the same time the banks need to assess borrowers’ creditworthiness properly so as to avoid bigger problems later,” said Mr Skogstad Aamo.
Kredittilsynet’s report on the financial market gives an overview of financial institutions’ results for 2008 and of various types of risk facing the banks and insurance companies in light of developments in the Norwegian and international economy. It also reviews the international financial crisis and trends in the economy and markets in 2008.
The present international financial crisis, probably the most serious since the 1930s, has caused a severe setback in both the international and Norwegian economy. In 2008 Kredittilsynet asked several of the larger banks to raise capital targets as well as actual capital levels. Bank losses and bailouts in other countries have heightened the levels of bank capital required by the market. In Norway too there is a risk that banks’ capital situation may gradually constrain lending to the point where the economic downturn is reinforced.
“The proposal to establish a Government Finance Fund to supply capital to banks is well conceived”, says Mr Skogstad Aamo. "The fund has an important role in reducing the uncertainty surrounding banks’ access to capital. A number of banks can also play a part in ensuring that larger firms obtain debt financing from the Government Bond Fund, thereby taking some of the burden off the banks in ensuring necessary credit flow to the economy ,” continues Mr Skogstad Aamo.
Banks’ results in 2008 were significantly down on the previous year, both because of securities losses and rising loan losses. Even so, 25 of the 30 largest banks reported a net profit. Many years of strong lending growth followed by an economic downturn have increased banks’ credit risk. Banks’ profitability is under pressure, and bank lending rates need to reflect the risk inherent in lending if the banks are to maintain satisfactory earnings and financial positions ahead.
“Business loans in particular are where banks should expect higher losses ahead. While rising unemployment may create debt problems for some households, interest rate cuts have reduced the vulnerability of most households,” said Mr Skogstad Aamo. Although Norway is still likely to avoid a banking crisis, the possibility that some banks will encounter problems in 2009 or 2010 cannot be ruled out, and in some cases structural measures may need to be considered.
“Insurance companies and pension funds performed poorly in 2008 due to the stock market slump. Life insurers’ buffer capital shrank. However, they also reduced asset risk by heavily divesting and by hedging their equity portfolios. A continued weak trend in equity and real estate markets along with low interest rates will place heavy demands on life insurers’ risk management,” said Bjørn Skogstad Aamo.
The report "the Financial Market in Norway 2008: Risk Outlook" will be available in English within April 2009.
Contact persons:
Director General Bjørn Skogstad Aamo, phone + 47 22 93 99 29
Deputy Director General Emil Steffensen, phone + 47 22 93 98 70
--------------------------------------------------------------------
Contact person in the Communications Unit:
Head of Communications Kjetil Karsrud, tel. +47 22 93 99 34, mobile: +47 906 57 621
