Norway's financial industry has a solid footing, but is affected by the turbulence in international financial markets. Norwegian banks are impacted by reduced funding opportunities internationally. Falling share and fixed income values are reducing life insurers' return. A substantial setback in the international economy would also affect Norwegian business and industry, and potentially result in increased loan losses. In addition, pressures in the housing market and growing household indebtedness could lead to imbalances that threaten financial stability.
Today Finanstilsynet presents its report "Financial trends 2011". The report provides an update on the situation in the Norwegian economy and Norwegian financial institutions thus far this year, and the outlook ahead.
Norwegian financial institutions affected by international turbulence
The uncertainty surrounding the debt situation of a number of eurozone countries has increased over the summer, giving rise to substantial turmoil in international financial markets. Norwegian financial institutions' overall direct exposure to the debt-burdened eurozone countries is small, but the contagion effects via turbulent international money and capital markets will impact Norwegian banks and insurance companies, says Finanstilsynet's Director General, Morten Baltzersen.
Banks' access to funding with long maturities has become more of a challenge. Norwegian banks' funding is essentially raised in foreign markets, and so far they have benefited from lower risk premiums than have European banks in general. Banks have also been able to raise virtually normal volumes of capital in the Norwegian money market. Combined with larger liquidity reserves, more long-term funding and improved financial positions, Norwegian banks now appear collectively speaking to be better equipped to tackle lasting turbulence than they were in autumn 2008.
Life insurers are directly affected by changes in the securities markets, particularly stock markets. The stock market recovery in 2009 and 2010 contributed to improved results and to a strengthening of buffer capital. For insurers as a whole, buffer capital at end-June had reached the level in effect prior to the financial crisis in 2008. However, the negative trend in stock markets after mid-year has once again reduced buffer capital.
The low level of interest rates also poses challenges to life insurers, both with regard to their ability to honour their long-term obligations and to their compliance with the capital requirements imposed by the new solvency framework for insurers, Solvency II.
Household debt and house prices at a high level
Whereas sluggish growth, high unemployment and substantial government debt are in evidence in many countries in the western world, Norway is in an utterly different situation, with low unemployment and positive growth in household incomes and consumption. This development is fuelling pressures in the housing market and rapid growth in house prices. Household debt growth is substantial, and has for some time exceeded income growth.
Finanstilsynet's home loan survey of autumn 2011 shows that a large proportion of new mortgages have a high loan-to-value ratio, and this proportion is growing. In addition, an increasing share of mortgages are interest-only and repayment periods are lengthening. This limits households' space for action and heightens the risk of financial instability should an economic setback materialise.