Risk Outlook – December 2021

Activity in the Norwegian and international economies has quickly rebounded after the sharp downturn triggered by the Covid-19 pandemic. The economic upturn reduces the risk of financial instability in the short term, but there is considerable uncertainty about the future path of the pandemic. At the same time, households’ debt burden and property prices are higher than before the pandemic.

“High household debt and high property prices have long been, and still are, the key vulnerabilities in the Norwegian financial system,” says Director General Morten Baltzersen.
Inflation has risen considerably in a number of countries over the past six months. It is uncertain whether this proves to be temporary.

“If the elevated level of inflation prevails or rises further, there may be a need for significant monetary tightening in a number of countries. If so, this will also affect the Norwegian economy and the Norwegian financial system, which is vulnerable to a sharp rise in interest rates,” says Baltzersen.

Finanstilsynet expects banks’ capital planning to factor in the considerable uncertainty that prevails about future economic developments.

“It is vital that the banks are well capitalised to be able to absorb loan losses and provide loans to creditworthy customers during an economic downturn,” says Baltzersen.

Climate change and the transition to a low-emission society will entail a significant restructuring of the Norwegian economy and cause a decline in earnings in industries and firms that are negatively affected by the changes. Finanstilsynet has analysed two possible pathways for the Norwegian economy. In the first scenario, the transition to a low-emission society starts immediately and takes place with no major costs to the real economy. In the alternative scenario, the restructuring starts later and is characterised by a sudden and disorderly transition both in Norway and internationally. This heightens the risk of misinvestment and a fall in the value of existing production equipment. Finanstilsynet's calculations indicate that in such a scenario, banks will suffer significant losses on corporate loans. Estimated losses are nevertheless considered to be manageable for Norwegian banks.