Results in Norwegian banks are better than they have been for several years. Loan losses have dropped sharply. The solid profits achieved are enabling banks to increase their financial strength.

More moderate wage growth, strong productivity growth, low interest rates and a marked economic upturn are improving corporate profitability. Low investment and a sound ability to finance investments with their own capital have resulted in very low and at times negative growth in enterprise sector debt over the past year. As a result of sound developments in the sector, banks' credit risk associated with loans to enterprises is assessed as relatively low, and somewhat lower than half a year ago.

Household debt is continuing to increase at the same pace as previously. House prices are also rising rapidly. As a result of strong growth in financial assets, low interest rates and a cyclical upturn, banks' credit risk associated with loans to households is assessed as relatively low in the short term.

Households' persistently high borrowing is an element of uncertainty a few years ahead. Households' financial situation appears sound, because their housing wealth and financial assets have risen more than their debt since the early 1990s. But there is a risk that house prices and prices for financial assets may fall. Moreover, the increase in debt and assets is unevenly distributed among income and age classes. Those with lower income have increased their debt burden most since the end of the 1980s, and have also reduced their financial reserves.

Financial Stability 2/04 contains special analyses of: developments in derivative markets, how Norwegian enterprises hedge against exchange rate fluctuations, and how lending to small enterprises is dealt with in the new capital adequacy regulations.

For further information, please contact Kristin Gulbrandsen, Executive Director (Tel. +47 22 31 60 92) or Arild J. Lund, Director (Tel. +47 22 31 61 44).

Financial Stability 2/2004