Satisfactory financial stability, but increased uncertainty
“There is greater uncertainty, but the stability of the financial system is still satisfactory”, says Central Bank Governor Svein Gjedrem.
On Thursday 29 November Norges Bank presented the report Financial Stability 2/2001.
The report shows that growth in credit to municipalities, non-financial enterprises and households has declined somewhat since the May report, following a long period of strong credit growth. Overall debt in the enterprise and household sectors has more than doubled in five years. At the same time, earnings and income developments have been satisfactory. Enterprises have increased their equity and households their wealth. However, the debt burden has increased, particularly in the enterprise sector.
Enterprise sector debt as a share of value added is currently at about the same level as at the beginning of the 1990s. Although enterprises have increased their equity ratios in recent years, they are still dependent on high earnings in order to service debt. A number of industries are feeling the effects of declining demand. At the same time, increasing costs are squeezing earnings. Moreover, uncertainty regarding future developments has increased since the terrorist attacks on the US in September. The risk of lending to the enterprise sector has therefore increased.
Lending to the household sector is not as vulnerable. Debt as a share of earnings is lower than it was in the early 1990s, and the outlook for employment and earnings is relatively favourable. The saving ratio has been high for a long time, and households have accumulated substantial fixed and financial assets. However, differences in financial position between various age and income groups have increased.
Banks have maintained satisfactory earnings and financial strength despite strong growth in lending. Prospects are more uncertain, and banks can expect weaker results than we have seen in recent years. Losses are still low at a low level and must rise substantially before stability in the banking sector is weakened significantly. Substantial losses on securities in the insurance sector have a negative impact on profits in financial conglomerates. Overall, Norges Bank still considers the stability of the financial system to be satisfactory.
For further information, please contact Executive Director Jon A. Solheim (tel. 22 31 63 36) or Director Thorvald Grung Moe (tel. 22 31 60 97).
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