Risk Outlook – June 2025

”As a small, open economy, Norway and the Norwegian financial industry are vulnerable to international setbacks and turmoil. As a result of changes in the threat landscape, it is important to reduce vulnerabilities and enhance resilience, also in areas such as cybersecurity, technological dependencies and other operational risks,” says Finanstilsynet’s Director General, Per Mathis Kongsrud.

Experience from previous crises shows that it can be particularly challenging to deal with incidents that are compounded by or originate from imbalances in the domestic economy. High household debt and elevated residential and commercial property prices remain the key vulnerabilities in the Norwegian financial system. Many borrowers take out large loans relative to income and the value of their property.

On average, commercial real estate (CRE) companies have high debt levels. The companies' interest expenses have increased strongly since late 2021, and their debt servicing capacity has clearly weakened.

”The yield on commercial real estate is still low compared with the risk-free interest rate. If interest rates remain high, commercial property prices could fall further. Many Norwegian banks have a significant loan exposure to CRE companies,” says Kongsrud.

Overall, Norwegian banks are well capitalised, profitable and competitive. The rising interest rate level has helped boost banks' net interest income, while losses have remained low. Norwegian banks' return on equity over the past couple of decades has been higher than in our neighbouring countries, while their market shares have been maintained.

This year's stress test of Norwegian banks is based on a scenario of geopolitical fragmentation, a global trade war and the introduction of high tariff barriers between countries. The Norwegian economy is severely affected, and banks' loan losses increase significantly. Losses are high, particularly on corporate loans. 

”This year's stress test of Norwegian banks shows that banks could be hit hard by a severe economic shock. The capital adequacy ratios of most of the largest Norwegian banks fall below the overall CET1 capital requirement. The stress test and developments in the risk landscape underline the importance of maintaining strong solvency and liquidity levels in banks and other financial institutions,” says Kongsrud.   

Norwegian life insurers and pension funds generally have strong solvency levels. In the first quarter of 2025, their results were affected by geopolitical turbulence and announcements of increased tariffs, which led to a drop in the value of shares, a significant decline in returns and reduced buffer funds. Life insurers have diversified portfolios, with foreign assets representing approximately half of their investments. Pension institutions have achieved good returns in recent years, partly due to the depreciation of the Norwegian krone.

The profitability of non-life insurers has declined over the past two years due to several weather-related claims and strong cost growth. The tightening of terms contributed to better results in 2024 and improved profitability from insurance operations in the first quarter of 2025. Thus far this year, negative investment income has nevertheless had a severe impact on pre-tax profits.

Among policymakers, supervisory authorities and supranational organisations, there is a growing awareness of the need to simplify financial market regulation, which over time has become very extensive and detailed. Both nationally and internationally, efforts are being made to assess and implement simplifications in regulations, supervisory practice and reporting, and to provide better guidance.

”In Finanstilsynet's opinion, any regulatory streamlining should safeguard the key objectives of the regulation within the framework of international standards,” says Kongsrud.