Norway’s Financial Supervisory Authority: The crisis could be deep and long-lasting

Developments in the Norwegian and international economy are uncertain and will largely depend on the infection situation, the Financial Supervisory Authority of Norway (Finanstilsynet) stated.

In the “Risk Outlook December 2020” report, the Authority emphasizes that there is still great uncertainty about the course of the corona epidemic and its economic effects. 

Director-General Morten Baltzersen points out that the vaccine will eventually make it possible to discontinue interventional infection control measures.

“It may still take a long time before economic activity is back at the same level as before the pandemic outbreak. 

“Some industries may also face lasting changes in demand. Banks and insurance companies must therefore take into account that the crisis can be deep and long-lasting,” Baltzersen said.

High debt ratio concerns

The Authority expresses concern about the high debt ratio in Norwegian households, which constitutes a significant vulnerability in the Norwegian economy, the report noted.

“High debt contributes to many households being vulnerable to loss of income, increased interest rates, and falling house prices,” Morten Baltzersen said.

Shouldn’t be overstated

The Norwegian Association of Real Estate agrees with the Authority’s assessment that high house prices and a high debt burden constitute a systemic risk. 

But they believe this concern should not be overstated.

“In the assessment of vulnerability, it must be taken into account that the interest burden on households is historically low and that there is a very low probability that interest rates will increase significantly in the years to come. 

“At the same time, Norwegian banks’ lending practices are transparent and well regulated through the current mortgage regulations,” Carl O. Geving, CEO of the Norwegian Real Estate Association, said.

Fewer consumer loans

The long-standing growth in consumer loans has now turned into a downturn. 

The Authority believes that both the financial downturn and the introduction of a debt register have led to new consumer loans falling sharply this year. 

The Authority also pointed out that more customers with low solvency are now rejected, after lenders have gained better insight into the applicants’ finances.

Holding back profits

The report points out that the banks’ capital adequacy is high and increasing. 

But this is primarily due to regulations that do not increase the banks’ solvency. 

Previous crises have shown that it can take time before loan losses are booked in the accounts. 

The advice to the banks is that they must take into account that loan losses may increase considerably in the future.

“The great uncertainty indicates that the banks preserve their equity by holding back profits so that they are in a good position to provide loans to creditworthy customers even in a situation with large loan losses,” Baltzersen said.

© NTB Scanpix / #Norway Today