In its bi-annual Financial Stability Report, Norges Bank assesses vulnerabilities and risks in the financial system. In the Report for the second half of 2023, particular weight is given to analyses of households and firms.  

“Interest rates have risen further both abroad and in Norway, and there is still a heightened risk of financial system vulnerabilities amplifying an economic downturn. In the face of high inflation and higher interest rates, some households and firms may experience problems servicing their loans, but cost increases are manageable for most borrowers. Norwegian banks are solid and well equipped to absorb higher losses”, says Deputy Governor Pål Longva, adding:  

“The financial system in Norway is resilient, and the overall financial stability outlook has not materially changed since the previous Report in May”.  

Over the past two years, the cost of living for Norwegian households has risen owing to higher inflation and higher interest rates. Households with high debt-to-income ratios are particularly affected by higher interest rates. Norges Bank’s analyses show that the vast majority of households can service debt in the face of higher costs, but many will likely have to tighten consumption. Household financial wealth has risen over many years, which has provided households with a solid foundation to meet higher living costs.  

Most firms are expected to be able to manage higher interest expenses, but debt-servicing capacity varies across sectors. Commercial real estate (CRE) firms are highly indebted, but higher rental income means that most CRE firms will likely be able to cope with higher interest expenses. Over the past year, commercial property prices have fallen and are expected to fall somewhat further ahead. In CRE, lower equity ratios and profitability will make rolling over maturing loans more demanding. If both rental income and property prices should fall markedly, many CRE firms will have problems servicing debt, and bank losses may be substantial. 

Norwegian banks are profitable and satisfy capital and liquidity requirements by a solid margin. Banks’ profitability is the first line of defence against losses. In the event of a sharp economic downturn, banks may need to draw on the capital they have built up to cover credit losses. Banks can absorb substantial credit losses while still maintaining lending. The countercyclical capital buffer rate of 2.5 percent contributes to this resilience. 

The countercyclical capital buffer is intended to strengthen banks’ solvency and mitigate the risk that banks amplify an economic downturn. According to the capital framework, the countercyclical capital buffer is intended, in principle, to range between 0 percent and 2.5 percent. Norges Bank will normally set the buffer rate in the upper part of this range. Norges Bank sets the countercyclical capital buffer rate each quarter. 

Pressures in the Norwegian economy are easing. The labour market is still tight, but the number of new job advertisements has decreased, and the number of employed appears to have been lower than expected. 

Many households are highly indebted and property prices rose over many years. These vulnerabilities could amplify a downturn in the Norwegian economy (see Financial Stability Report 2023-H2).  

For many years, debt rose faster than household income, but over the past two years, debt growth has been slower than income growth. Owing to high debt levels, households need to spend a larger share of their income on interest payments when interest rates rise. 

Household financial wealth has risen faster than income over the past 10 years, and the rise was particularly pronounced in 2020. The accumulated savings have helped reduce household sector vulnerabilities. Last year, many households drew on savings on the back of high inflation and higher interest rates.  

The vast majority of households can service debt in the face of higher costs, but many will likely have to tighten consumption. If consumption is tightened to a substantial degree, corporate earnings and debt-servicing capacity may fall. This may lead to bank losses on corporate exposures and amplify an economic downturn through tighter credit standards. Losses will most likely be limited because banks' exposures to the most consumption-oriented industries are relatively low, but problems in these industries may result in spillovers. 

House prices rose at the beginning of 2023, after falling the previous autumn. Since spring, house prices have edged down again in response to higher lending rates, and the stock of unsold homes has increased. House price developments are more uncertain than normal. Large and abrupt falls in house prices may trigger higher losses on banks’ exposures. The risk of a large decline in house prices is dampened by low construction activity and low unemployment.  

Banks’ high commercial real estate (CRE) exposures are a key financial system vulnerability. For a long period, low interest rates fuelled a rapid rise in commercial property prices. Over the past year, prices have decreased, and future price developments are more uncertain than normal. Somewhat lower commercial property prices are expected ahead. 

CRE firms are facing reduced profitability as a result of higher interest expenses, and lower commercial property prices are lowering their equity ratios. If both rental income and property prices should fall markedly, many firms will have problems servicing debt. Since high employment is helping sustain demand for office space, rental income is still expected to rise, which means that most CRE firms will be able to cope with higher interest expenses. Lower equity ratios and profitability will make rolling over maturing loans more demanding. This may force fire sales of properties, which can amplify a fall in property prices.  

Creditworthy households and firms have ample access to credit. As a whole, banks in Norges Bank’s lending survey for the third quarter of 2023 reported unchanged credit standards for households and firms. Banks reported some further tightening of standards for CRE firms. For the fourth quarter, banks expect unchanged credit standards. Risk premiums in the Norwegian corporate bond market have shown little change since August. Risk premiums for CRE firms are still higher than normal.  

Norwegian banks satisfy capital and liquidity requirements by a solid margin. Norwegian banks are highly profitable, and interest margins have risen since the tightening cycle began in 2021, at the same time as losses have been low. Interest margins are expected to decline and losses to edge up, but profitability is likely to continue to be solid. If rental income developments in the CRE sector prove markedly weaker than expected and selling prices fall sharply, bank losses may be substantial.  

The capital requirements reflect the vulnerabilities in the Norwegian financial system and the countercyclical capital buffer requirement of 2.5 percent helps ensure that banks are well positioned to absorb higher losses. The vulnerabilities are little changed over the past six months, but there is still an elevated risk of them amplifying an economic downturn. If there is a sharp economic downturn, credit losses may prove to be so large that banks will operate at a loss and have to draw on the capital they have built up. Stress and sensitivity tests, including in Financial Stability Report 2022, show that banks can absorb substantial credit losses, while still maintaining lending, and  thus not amplify an economic downturn. 

The Committee unanimously decided to keep the countercyclical capital buffer rate at 2.5 percent. 

Ida Wolden Bache 
Pål Longva 
Øystein Børsum 
Ingvild Almås 
Jeanette Fjære-Lindkjenn 

1 November 2023