Satisfactory outlook for financial stability, but increased uncertainty in the longer term
The overall outlook for financial stability is considered to be satisfactory, said Deputy Governor of Norges Bank Jarle Bergo in connection with the presentation of the Financial Stability 1/2006 report on Tuesday, 6 June. There seems to be little risk of a crisis in Norway's financial system in the next few years. Because of the long period of strong debt growth and asset price inflation, however, the uncertainty as to the outlook for financial stability in the longer term is somewhat larger than it was six months ago.
Banks' results are solid, mainly as a result of very low loan losses and reduced costs. Banks' financial strength is satisfactory. Intensified competition has contributed to lower interest margins. Strong lending growth is nevertheless holding up banks' net interest income. Strong credit growth is increasing the potential of loan losses and making it more important to monitor credit risk when assessing financial stability.
Corporate profitability was solid in 2005. The number of bankruptcies is continuing to fall. Growth in corporate debt has increased. With a high equity ratio and continued solid profitability in the corporate sector, the credit risk associated with loans to the corporate market is assessed as relatively low.
On the whole, households' financial position is strong. Interest rates are still low and income is rising. Housing wealth and financial assets have continued to increase. Unemployment has declined and is now lower than projected six months ago. The household debt-to-income ratio is high. Because of continued low interest rates, the interest burden is now low, but will increase as the interest rate reaches a more normal level. A larger number of households may then find it difficult to service their debt. Overall, the credit risk associated with loans to household is nevertheless considered to be relatively low.
The themes presented in more detail in this issue of the Financial Stability report include, among others, the following: long-term real interest rates and house prices, household financial margins and banks' pricing of corporate loans.
For further information, please contact Kristin Gulbrandsen, Director (tel. +47 22 31 60 92) or Birger Vikøren, Director (tel. + 47 22 31 61 42).
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