Weaker financial stability outlook
Spillovers in both Europe and globally from the ongoing war in Ukraine and the after-effects of the Covid-19 pandemic are considerable. There is substantial uncertainty about the economic outlook. The Norwegian financial system has so far coped well with the situation, but the financial stability outlook has weakened.
High inflation, higher interest rates and a weaker growth outlook have led to a fall in global financial markets. Activity in the Norwegian economy is high, and unemployment is at a historically low level. At the same time, there are signs that some areas of the economy are cooling down, in the housing market for example, where prices have fallen in autumn.
“Over the past year, the risk of a downturn in the Norwegian economy has increased, and the financial stability outlook has weakened”, says Deputy Governor Pål Longva.
House prices have risen faster than household income, and household debt is high, which makes households vulnerable to loss of income, higher interest rates or a fall in house prices. If many households reduce consumption sharply, firms’ earnings are impaired and banks may face higher losses on corporate exposures. This constitutes a risk to the financial system.
“Many households are highly indebted. Higher interest rates and living costs imply tighter finances for many, but the Bank’s analyses show that the vast majority of households are able to service their debt”, says Deputy Governor Longva.
It is essential for financial stability that banks and other financial system participants are able to perform their tasks effectively even in the event of severe downturns and economic crises. The stress test in Financial Stability Report 2022 shows that banks will weather a sharp contraction without having to tighten lending and thereby amplify a downturn.
“The financial system is assessed to be well equipped to address the risks we are facing. At the same time, it is especially important for the financial system to maintain a high level of resilience”, says Deputy Governor Longva.
Tightened capital and liquidity requirements over many years have better equipped banks to deal with crises. Norges Bank has previously decided to raise the countercyclical capital buffer to 2.5 percent from 31 March 2023. The Bank has also advised the Ministry of Finance to maintain the systemic risk buffer (SyRB) at 4.5 percent. The vulnerabilities that the SyRB is intended to address are, in the Bank’s view, broadly at the same level as when the SyRB was last evaluated in 2020. In the aggregate, the regulatory requirements help to ensure that Norwegian banks hold sufficient capital.
Cyber attacks on critical functions may be a threat to financial stability. The financial infrastructure is secure and efficient, but the threat landscape has become more aggressive and more difficult to gauge. This requires an intensive effort to identify risks, regulation and extensive cooperation between various authorities and financial system participants.
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