The financial system is somewhat less vulnerable
“The financial system is somewhat less vulnerable than at the time of publication of the November 2010 report. Domestic macroeconomic conditions have improved, resulting in lower loan losses and solid earnings for banks”, says Deputy Governor Jan F. Qvigstad in connection with the publication of the May 2011 Financial Stability report.
Banks have used their solid earnings to strengthen equity capital. This has made them more robust. The largest banks continue to have the lowest Tier 1 capital ratio.
“Banks still rely to a considerable extent on short-term market funding, a large share of which is raised abroad. Renewed turbulence in financial markets abroad may curtail access to funding. Meeting the new Basel III liquidity standards will make banks more robust to disturbances in financial markets”, says Qvigstad.
A high and rising debt burden makes households vulnerable to a loss of income or a marked rise in interest rates. This represents a future risk in the financial system. In an international context the risk weights on residential mortgage loans in the large Nordic banks are very low. As a result, banks need little equity capital to provide such loans. Efforts should be made, in cooperation with the authorities in other Nordic countries, to enable the introduction of a lower limit on banks’ risk weights for residential mortgage loans.
“The Basel Committee has recommended a gradual phasing-in of the new capital and liquidity standards by 2019. Norges Bank recommends that the new Basel III requirements be incorporated into Norwegian law as quickly as practically possible. The transition period should be shorter than that recommended by the Basel Committee”, says Qvigstad.
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