Indicators of financial imbalances
Norges Bank's assessment of financial imbalances is based on a broad range of indicators. Particular weight is given to developments in four key indicators. Norges Bank has also developed a ribbon heatmap for assessing systemic risk in the Norwegian financial system. The heatmap complements the four key indicators in the assessment of financial imbalances. Norges Bank also uses other indicators, such as estimated crisis probabilities and reference rates for the countercyclical capital buffer.
Norges Bank's advice on the countercyclical capital buffer is based on four indicators of a build-up of financial imbalances (see Criteria for an appropriate countercyclical capital buffer):
- The ratio of total credit (C2 households and C3 enterprises in mainland Norway) to mainland GDP
- The ratio of house prices to household disposable income
- Commercial real estate prices
- The wholesale funding ratio of Norwegian credit institutions
The four indicators provide signals of vulnerabilities and have historically risen ahead of periods of financial instability. The key indicators are compared with historical trends. The gap between the key indicators and the estimated trends can serve as a measure of financial imbalances. There will not be a mechanical relationship between the indicators, the gaps and Norges Bank's advice on the countercyclical capital buffer. The advice will also build on the Bank's professional judgement.
Credit1) mainland Norway as a share of mainland GDP.
Credit gap. Total credit mainland Norway as a share of mainland GDP. Deviation from estimated trends.1) Percentage points.
House prices relative to disposable income1). Index. 1998 Q4=100.
House prices relative to disposable income as deviation from estimated trends.1) Percent.
Commercial property price indicator. Deflated by the GDP deflator.
Commercial property price gap. Real commercial property prices as deviation from estimated trends.1) Percent.
Banks1) wholesale funding ratio. Percent.
Wholesale funding gap. Banks' wholesale funding ratio as deviation from estimated trends.1) Percentage points.
Norges Bank has developed a ribbon heatmap as a tool for assessing systemic risk in the Norwegian financial system. The heatmap tracks developments in a broad range of indicators for three main areas: risk appetite and asset valuations, non-financial sector vulnerabilities (household and corporate) and financial sector vulnerabilities. Developments in each individual indicator are mapped into a common colour coding scheme, where green (red) reflects low (high) levels of vulnerability. The heatmap thus provides a visual summary of current vulnerabilities in the Norwegian financial system compared with historical episodes. Composite indicators are constructed by averaging individual indicators. Many of the indicators were high prior to the banking crisis in the early 1990s and before the financial crisis in 2008. For a detailed discussion of the heatmap and the individual indicators, see A Heatmap for Monitoring Systemic Risk in Norway.
Composite indicators in the heatmap
The Basel Committee on Banking Supervision has proposed a simple rule for calculating a reference rate for the countercyclical capital buffer (a buffer guide) based on the credit-to-GDP ratio (see Guidance for national authorities operating the countercyclical capital buffer). The reference rate is calculated using both a one-sided HP filter and a one-sided HP-filter augmented with a simple projection.
Norges Bank has developed early warning models for financial crises based on credit and property price developments. The models are described in the September 2014 Monetary Policy Report (page 40) and in Bubbles and crises: The role of house prices and credit. Estimated crises probabilities are based on a large number of combinations of explanatory variables and trend estimation models.
Reference rates for the countercyclical capital buffer under alternative trend estimates. Percent.
Estimated crisis probabilities based on various model specifications.
- Data series (XLSX 60.4 Kb)