The recovery is strengthening financial stability
The Norwegian financial system has weathered the pandemic well. At the same time, there is still a risk of shocks that could weaken financial stability. Vulnerabilities in the Norwegian financial system persist but have been met by measures to increase resilience. Norwegian banks are well-equipped to withstand a new downturn.
The reopening of society has resulted in a marked upswing in the Norwegian economy, and activity is now higher than before the pandemic. Pandemic-related uncertainty has receded.
“The recovery of the Norwegian economy has improved the financial stability outlook”, says Deputy Governor Ida Wolden Bache.
There is still a risk of shocks that could weaken financial stability. A resurgence of the pandemic may dampen the economic upturn, and a sudden rise in global interest rates and risk premiums could lead to shocks that spill over to the Norwegian financial system.
Norges Bank considers high household debt to be the main vulnerability in the Norwegian financial system. High debt makes households vulnerable to a loss of income, higher lending rates and a fall in house prices. Regulations, such as requirements for banks’ capital, liquidity and credit standards, increase bank resilience and reduce vulnerabilities. This helps dampen the impact of shocks and downturns.
Norwegian banks have ample access to funding and ample capacity to absorb losses. Banks’ credit losses have been lower than feared in 2020. Losses are expected to remain low, but the outlook is still somewhat more uncertain than normal.
“The stress test in this Report shows that the largest Norwegian banks can weather a sharp downturn without having to tighten lending substantially”, says the Deputy Governor.
Following the market stress in spring 2020, it has been discussed whether central banks should have instruments aimed at non-bank market participants. Banks’ crucial role in payment and credit intermediation is the reason that they are Norges Bank’s monetary policy counterparties and may obtain liquidity support if deemed necessary. Collateralised loans to banks are therefore Norges Bank’s preferred instrument in periods of market stress.
Cyber attacks are a potential threat to financial stability. It is therefore necessary to increase financial sector cyber resilience. There is also a need for expanded collaboration between various authorities and financial system participants. In September, Norges Bank approved the introduction of a framework for testing financial sector cyber resilience in collaboration with Finanstilsynet (Financial Supervisory Authority of Norway).
Climate change and the climate transition affect all segments of society. The analyses in this Report show that Norwegian banks’ direct exposure to transition risk appears to be moderate and their exposure to known physical climate risks is small. To ensure that information about climate-related risks facing firms and banks is comparable and reliable, it is important to continue to develop reporting standards.
The prevalence and market capitalisation of crypto-assets are increasing. Crypto-assets are not considered a threat to financial stability yet, but this can change in the future. Norges Bank and other central banks are therefore monitoring developments and assessing the need for regulation. International regulatory initiatives can help ensure that developments do not pose a threat to financial stability.
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