Banks experience an increase in loan losses, but financial strength has not deteriorated
Weak macroeconomic developments and the fall in securities markets have resulted in a clear deterioration of banks' results. The projections for economic growth both in Norway and internationally have been revised downwards since the last Financial Stability report, but equity prices have risen since mid-March. Banks have maintained their financial strength and are relatively well equipped to meet weaker macroeconomic developments. The outlook for financial stability is therefore considered to be satisfactory, but somewhat weaker than six months ago, according to Deputy Central Bank Governor Jarle Bergo, who presented the report Financial Stability 1/2003 at a press conference on Wednesday, 21 May.
The reduction in interest rates in the last six months will ease the interest burden of the corporate and household sectors. In isolation, this will reduce the number of bankruptcies in the corporate sector. Nevertheless, with continued weak economic growth, a large number of bankruptcies and somewhat higher losses on bank loans must be expected in the period ahead. Lower rents and property prices and a higher number of vacancies may indicate that losses on loans to commercial property companies will increase. The credit risk associated with loans to other enterprises in the sheltered sector has also increased, but is still at a moderate level. The credit risk on loans to enterprises in the exposed sector is unchanged and relatively high.
Household debt is high and continues to grow rapidly. House prices are no longer increasing. When household credit growth nevertheless remains so high, it is partly due to the prolonged sharp increase in house prices experienced earlier and to the fact that the number of dwellings sold remains high. The current situation, where debt is rising at a much faster pace than income, cannot be sustained over time. On the whole, the credit risk on household loans is moderate but is considered to be somewhat higher than in the last Financial Stability report.
Norges Bank has commissioned a group of experts to assess the Financial Stability report in relation to similar publications from other central banks and to suggest improvements. The expert group's report is included as an annex to Financial Stability 1/2003.
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