High debt levels and high property prices pose a significant risk to economic and financial stability in Norway. The rise in household debt has for several years outstripped income growth, resulting in a higher than ever debt burden, as measured by the ratio of debt to disposable income. The debt levels of Norwegian non-financial firms, measured as a share of GDP, are also at a historically high level. Prices of residential and commercial properties have risen steeply for several years, especially in the Oslo region.
Many households have a high debt burden and small financial buffers.
“A large proportion of households are vulnerable to declining incomes and rising interest rates. High debt levels mean that even a moderate rise in interest rates will lead to a significantly higher interest burden,” says director general Morten Baltzersen.
The residential mortgage lending regulations have contributed to tighter lending practices. The growth in households' overall debt has nevertheless remained high.
The rise in households’ consumer loans has slowed somewhat, although annual growth remains high. Both non-performing loans and loan losses are on the increase. The new debt information undertakings will provide better information about customers' overall consumer debt and strengthen the basis for banks’ credit assessments.
“There is a risk that vulnerable households will take out consumer loans at high interest rates that they are subsequently unable to service. This could result in loan losses and loss of reputation for banks and a heavy personal burden for the individual borrower,” says Baltzersen.
House prices in Norway have grown markedly over a long period and are now at roughly the same high level as before the price fall in 2017. The growth in housing prices has been moderate in the recent period, and the regional differences in price developments have diminished. Commercial property prices have also risen steeply for several years, especially in the Oslo region.
“Prolonged strong price growth has contributed to heightening the potential fall in the property markets. Rising collateral values provide scope for increased borrowing, which in turn will push up prices. High price and debt growth over a long period may cause imbalances to build up and increase the risk of losses for banks and life insurers,” says Baltzersen.
Due to low loan losses and profitable operations, Norwegian banks have been able to meet higher capital requirements largely through retained profits. The banks’ own funds as a share of total assets have increased over the past ten years, and the banks meet new liquidity requirements. The share of long-term market funding has risen. Norwegian banks are thus better positioned to provide credit in the event of an economic setback and increased losses.
A number of Norwegian banks, especially the largest ones, obtain a significant share of their funding in the Norwegian and international money and capital markets. This makes the banks vulnerable to market turbulence. There has been an appreciable increase in banks’ residential mortgage lending in recent years, both in absolute terms and as a share of total lending. This increase is largely financed through the issue of covered bonds (OMF). In addition, banks have invested heavily in covered bonds issued by other banks. Developments in house prices thus have a strong bearing on the banks' credit and liquidity risk.
Finanstilsynet’s stress test for 2019 shows that many banks may be strongly affected in the event of a serious setback in the Norwegian economy. The likelihood of this scenario materialising is low, but not unrealistic.
“Finanstilsynet’s stress test shows that several banks will not be compliant with the regulatory capital requirements at the end of the period. The calculations underscore the need for banks to maintain their capital adequacy ratios,” says Baltzersen.
Financial markets and financial institutions are affected by both physical climate change and the transition to a low-emission society. The risk of financial instability depends on how suddenly climate change occurs and how quickly the transition to a low-emission economy takes place. The integration of climate risk in supervisory activity is high on the agenda of financial supervisory authorities in a number of countries, and work is in progress to develop supervisory tools to monitor climate risk. Finanstilsynet is involved in this work through the European supervisory cooperation and the Network for Greening the Financial System (NGFS).
The capital adequacy of life insurers has been strengthened in recent years, and they are compliant with the Solvency II requirements that came into effect in 2016. It has been challenging for insurers to achieve the guaranteed return on their investments due to the low interest rate level. The results of the EIOPA stress test 2018 show that the European insurance sector is vulnerable to negative market developments.
New solvency requirements for pension funds entered into force on 1 January 2019. The new requirements are a simplified version of Solvency II aimed at capturing risks across the entire business. This will provide a better basis for the pension funds’ risk management and assessment of capital needs. Overall, pension funds meet the new solvency requirements, although there are wide differences between the pension funds.