Private debt and housing prices are main financial challenges in Norway

The higher levels of private debt and rising house prices are the main challenges to financial stability in Norway, Norges Bank says in its annual financial stability report. 

The central bank adds that commercial property prices have also increased from already high prices over the last year. “Nearly half of banks’ exposures to Norwegian corporates are to commercial real estate. Losses on commercial property loans have been low in normal times, but high during crises, both in Norway and other countries,” says the report.

Norges Bank thinks vulnerabilities in the financial system have increased somewhat since November 2017, as a result of higher commercial property prices. “At the same time, banks have become more resilient, and measures implemented by the authorities have limited borrowing by vulnerable households. On balance, the financial stability outlook is therefore broadly unchanged,” adds the report.

According to the annual banking stress tests, banks need to reduce countercyclical capital buffers and a portion of the other buffers in order to maintain lending during a pronounced crisis. “In such a situation, a reduction in buffer requirements may reduce the procyclical effects of tighter bank lending,” says Norges Bank.