The international situation is marked by geopolitical unrest. The war in the Middle East has led to high volatility in energy and financial markets and is creating greater uncertainty about the economic outlook. This is increasing the risk of market stress and a downturn that could also affect Norway. However, Norges Bank’s Monetary Policy and Financial Stability Committee considers the Norwegian financial system to be robust.

“The Norwegian financial system is resilient. At the same time, uncertainty about future economic developments is greater than normal. Geopolitical unrest and increased unpredictability may result in sharp market movements and spill over to the Norwegian economy, but Norwegian banks are well equipped to withstand both market stress and higher losses”, says Deputy Governor Pål Longva.

In a more turbulent world, the risk of targeted cyberattacks and other operational disruptions increases. Artificial intelligence may make it easier to exploit vulnerabilities.

The financial system is becoming more interconnected and complex

Non-bank financial institutions (NBFIs) may contribute to increased competition and new forms of financing but may also be a source of new vulnerabilities. Risk may be transferred to market participants that have less capacity to bear such risk and are less transparent.

In many countries, the volume of private credit and securitisation has grown. In Norway, banks continue to be the dominant providers of credit, and it is the Committee’s assessment that the current role of NBFIs in credit provision does not constitute a financial stability risk.

Norwegian banks are well equipped to withstand stress

Norwegian banks satisfy capital and liquidity requirements by an ample margin and have adequate access to both deposits and wholesale funding. Analyses in this Report show that banks have sufficient liquidity reserves to cope with an extended period of severe stress in funding markets.

The analyses also show that a scenario with an abrupt increase in carbon prices and new climate policy requirements can result in substantial bank losses. Banks as a whole can absorb large losses, and a reduction of capital buffer requirements in such a scenario would provide banks with more leeway to continue to provide credit, also in a deep economic downturn.

“Banks’ profitability is the first line of defence against losses. Norwegian banks have efficient operations and low losses, which bolsters resilience in the face of uncertainty”, says Pål Longva.

The capital buffers should be maintained

The Committee has decided to keep the countercyclical capital buffer unchanged at 2.5 percent and has advised the Ministry of Finance to maintain the systemic risk buffer at the current level of 4.5 percent.

At the same time, the Committee emphasises that international regulatory work is characterised by discussions on the simplification of capital requirements and reporting.

“There are good reasons to explore opportunities to simplify a complex regulatory framework, but it is important that this is not at the expense of financial system resilience”, says Deputy Governor Pål Longva.