Households are vulnerable to economic setbacks – E24

Norwegian households have a lot of debt and are therefore still vulnerable to a setback in a time of high interest rates and great uncertainty, warns Norges Bank.

– There is still an elevated risk of negative events that could weaken financial stability, concludes Norges Bank in this year’s first report on Financial stability.

The rise in interest rates has dampened activity in the Norwegian economy, but employment is at a high level. Norwegian households have so far handled prolonged high price growth and increased interest rates well. But the uncertainty persists, warns the central bank in the report presented on Wednesday morning.

The outlook for financial stability has not changed significantly since the previous report in November. Lower credit spreads and increased share values ​​reflect that market participants do not expect economic growth at home and abroad to be hit by a sharp setback.

But the central bank points out that going forward there is great uncertainty about developments in the economy and the markets and points primarily to persistent geopolitical unrest.

Households exposed

– Both abroad and here at home, the economy has fared better in the face of high price growth and higher interest rates than many feared. Most households and businesses have so far had the finances to handle the increased expenses, and employment is high, says Deputy Central Bank Governor Pål Longva.

If up to 2 percent of Norwegian households experience payment problems, as Norges Bank outlines in its previous report on financial stability, this corresponds to around 35,000 households, according to calculations Norges Bank made for NTB.

After an interest rate run that lacks parallel in our time – with 14 interest rate increases in around two and a half years – the key interest rate is now set at 4.5 per cent. This implies an average mortgage interest rate of 5.7 per cent.

– Many households have used saved funds. Taken in isolation, this indicates that households are more exposed if, for example, unemployment should increase significantly or interest rates rise further. Should the tightening of consumption then become very large, the companies’ earnings and debt servicing capacity may fall.

Robust banks

In the report, however, it is emphasized that the Norwegian financial system is solid and is well equipped to not only deal with increased losses on lending – they can continue to lend money during a period of increased losses.

– High earnings, efficient operations and solid buffers mean that the banks have good resilience. Our stress test shows that the banks can continue to lend even if losses were to increase significantly due to an economic setback, writes Norges Bank.

The requirements for a countercyclical capital buffer of 2.5 per cent and for a systemic risk buffer of 4.5 per cent should be maintained, the bank believes.

There is also no significant risk of financial instability due to customers making large withdrawals in a short time, for example with the intention of securing their values. Turbulent times and a high degree of digitization have made the financial system more susceptible to events that can affect trust in banks, such as cyber attacks. This can lead to bank deposits being withdrawn so quickly that it gives the banks liquidity problems.

– We have carried out a stress test where trust is put to the test as a result of a cyber attack. The test shows that Norwegian banks can tolerate customers making large withdrawals after such an incident, writes the bank.