The global economy is marked by uncertainty about future trade policies, and growth prospects abroad appear weaker. There is a higher risk of market turbulence and downturn that could weaken financial stability.

"The uncertainty surrounding global economic developments ahead is higher than normal. If trade restrictions and heightened uncertainty lead to a downturn abroad, the effects can spill over to the Norwegian economy and increase banks’ credit losses. However, Norges Bank’s Monetary Policy and Financial Stability Committee considers the financial system to be robust," says Deputy Governor Pål Longva.

The Committee sets the level of the countercyclical capital buffer each quarter. In its meeting on 7 May, the Committee decided to keep the rate unchanged at 2.5 percent.

"Banks in Norway are solid and have liquidity and capital buffers that enable them to withstand considerable losses and financial market turbulence without having to tighten lending. In the face of uncertainty, maintaining this resilience is important," says Deputy Governor Longva.

The solvency stress test in this Report shows how the large Norwegian banks as a whole can absorb large credit losses, while still maintaining lending if the buffer requirement is reduced. However, lending capacity varies somewhat across banks.

The liquidity stress test assumes a not very likely yet conceivable scenario and shows how banks as a whole hold sufficient liquidity reserves to weather an extended period of pronounced stress without new wholesale funding.

There are significant cross-holdings between banking groups, and turbulence in the covered bond market may reduce banks’ liquidity reserves and weaken their ability to obtain new funding.

The harmonisation and simplification of regulations is now higher up on the international agenda, and in a number of countries there is increased pressure to ease banks’ capital requirements.

"There are good reasons to explore opportunities to simplify complex and comprehensive regulations, but this should not be achieved at the cost of financial system resilience,” Deputy Governor Longva concludes.