Indicators of financial imbalances
Norges Bank's assessment of financial imbalances is based on a broad range of indicators. Particular weight is given to developments in four key indicators. Norges Bank has also developed a ribbon heatmap for assessing systemic risk in the Norwegian financial system. The heatmap complements the four key indicators in the assessment of financial imbalances. Norges Bank also uses other indicators, such as estimated crisis probabilities and reference rates for the countercyclical capital buffer and a composite indicator of systemic stress.
Norges Bank's advice on the countercyclical capital buffer is based on four indicators of a build-up of financial imbalances (see Criteria for an appropriate countercyclical capital buffer):
- Credit-to-GDP ratio for mainland Norway
- Ratio of house prices to disposable income
- Estimated real commercial property prices
- Banks' wholesale funding ratio
The four indicators provide signals of vulnerabilities and have historically risen ahead of periods of financial instability. The key indicators are compared with historical trends. The gap between the key indicators and the estimated trends can serve as a measure of financial imbalances. There will not be a mechanical relationship between the indicators, the gaps and Norges Bank's advice on the countercyclical capital buffer. The advice will also build on the Bank's professional judgement.
Credit1 mainland Norway as a share of mainland GDP. From 1983 Q1 onwards
Credit gap. Credit mainland Norway as a share of mainland GDP. Deviation from estimated trends.1 Percentage points. From 1983 Q1 onwards
Ratio of house prices to disposable income.1. Index. 1998 Q4=100. From 1983 Q1 onwards
House price gap. House prices relative to disposable income. Deviation from estimated trends.1 Percent. From 1983 Q1 onwards
Real commercial property prices.1 Index. 1998 = 100. From 1983 Q1 onwards
Commercial property price gap. Real commercial property prices. Deviation from estimated trends. 1 Percent. From 1983 Q1 onwards
Banks'1 wholesale funding ratio. Percent. From 1983 Q1 onwards
Wholesale funding gap. Banks' wholesale funding ratio. Deviation from estimated trends.1 Percentage points. From 1980 Q1 onwards
Norges Bank has developed a ribbon heatmap as a tool for assessing systemic risk in the Norwegian financial system. The heatmap tracks developments in a broad range of indicators for three main areas: risk appetite and asset valuations, non-financial sector vulnerabilities (household and corporate) and financial sector vulnerabilities. Developments in each individual indicator are mapped into a common colour coding scheme, where green (red) reflects low (high) levels of vulnerability. The heatmap thus provides a visual summary of current vulnerabilities in the Norwegian financial system compared with historical episodes. Composite indicators are constructed by averaging individual indicators. Many of the indicators were high prior to the banking crisis in the early 1990s and before the financial crisis in 2008. For a detailed discussion of the heatmap and the individual indicators, see A Heatmap for Monitoring Systemic Risk in Norway.
Composite indicators in the heatmap. From 1980 Q1 onwards
Reference rates for the countercyclical capital buffer, estimated crisis probabilities and a composite indicator of systemic stress
The Basel Committee on Banking Supervision has proposed a simple rule for calculating a reference rate for the countercyclical capital buffer (a buffer guide) based on the credit-to-GDP ratio (see Guidance for national authorities operating the countercyclical capital buffer). The reference rate is calculated using both a one-sided HP filter and a one-sided HP-filter augmented with a simple projection.
Norges Bank has developed early warning models for financial crises based on credit and property price developments. The models are described in the September 2014 Monetary Policy Report (page 40) and in Bubbles and crises: The role of house prices and credit. Estimated crises probabilities are based on a large number of combinations of explanatory variables and trend estimation models.
The European Systemic Risk Board (ESRB) emphasises that the decision basis for the countercyclical capital buffer should include an indicator of general systemic stress in the financial system.. Norges Bank has developed a composite indicator of systemic stress (CISS) for Norway. CISS is described in Monetary Policy Report 1/19 and "En forbedret sammensatt systemisk stressindikator (CISS) for Norge" [An improved composite indicator of systemic stress (CISS) for Norway] (Forthcoming in English).
Reference rates for the countercyclical capital buffer under alternative trend estimates. Percent. From 1983 Q1 onwards
Estimated crisis probabilities based on various model specifications. From 1983 Q1 onwards