The financial turbulence and Norway what lessons can be drawn? Governor Øystein Olsen Eiendomsdagene Norefjell 19 January 1
The run-up to the financial crisis 1. Sharp rise in debt and asset prices low long interest rates 1 Yield on 1-year government bonds. Per cent. 1 Jan. 199 15 Sep. 8 9 8 7 5 3 1 US Germany 199 1995 5 1 9 8 7 5 3 1 35 3 5 15 1 House prices in selected countries. Indices. 1995 Q1 = 1. 1995 Q1 8 Q3 5 Norway UK Sweden Denmark US 1995 1998 1 7 35 3 5 15 1 5 Source: Thomson Reuters
The run-up to the financial crisis. Securitisation with complex and vulnerable structures Agents Rating agencies Borrowers Lenders SPV Type I SPV Type II SPV Type III Certificates Money market funds Savers Ownership and/or credit lines Banks 3
The run-up to the financial crisis 3. Weaknesses in the regulation of financial markets Experiences from the financial crisis: Capital and liquidity requirements too low Too little attention paid to the system as a whole Inadequate crisis resolution regimes If you don t believe in banks, they die
Basel III new regulation is on its way Banks assets and liabilities Lending - Mortgages - Corporate loans Securities - Liquid - Illiquid Equity capital Deposits Market funding - Short-term - Long-term Greater systemic focus Capital Requirement for higher and better quality capital Higher capital requirements during upturns Liquidity Quantitative requirements regarding liquidity buffers and stable funding 5
Phase of the financial crisis Yield spreads against German 1-year government bonds Percentage points. 1 January 7 17 35 3 5 15 January 1 Greece Ireland Portugal Spain Italy 35 3 5 15 Money market premiums 3-month maturity. 5-day moving average. Percentage points. 1 January 7 17 January 1 3 USD (LIBOR) EURIBOR NIBOR 3 1 1 1 1 5 5 Sources: Bloomberg, Thomson Reuters and Norges Bank
Europe, what now? Market uncertainty still high Austerity measures being implemented in a number of countries Banks are deleveraging and credit is less accessible and more expensive Measures from the ECB 3-year loans to the banking sector Key rate reduced to 1. per cent Others EU measures New agreement: stricter budgetary control, European Stability Mechanism (ESM) and loans to IMF 7
Sizeable refinancing needs in 1 Goverment debt maturity. In billions of EUR Italy Spain France 7 7 7 Interest Principal Interest Principal Interest Principal 5 5 5 3 3 3 1 1 1 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg
High cost of financial crises GDP. Four-quarter change. Per cent. Projections for 1 by IMF for emerging economies and by OECD for the US and euro area 1 8 1 8 - Emerging economies - - Euro area - 7 8 9 1 11 1 US Sources: IMF and OECD - -
The Norwegian economy is affected through several channels Exports Weaker growth prospects abroad Projected output gap 1), Norway s trading partners Per cent. 3 Q1 1 Q 3 1-1 - -3 - MPR /11 MPR 3/11-5 3 9 1 1) The output gap measures the percentage deviation between GDP and projected potential GDP for Norway's trading partners Sources: IMF, Thomson Reuters and Norges Bank 3 1-1 - -3 - -5 1
The Norwegian economy is affected through several channels Exports Bank funding 11 1 9 8 7 5 3 1 Norwegian banks funding costs have increased Per cent. 3 January 7 1 January 1 NIBOR (3-month effective) Credit premium banks (5-year bond) Key policy rate 7 8 9 1 11 1 Sources: DNB Markets and Norges Bank 11 11 1 9 8 7 5 3 1
The Norwegian economy is affected through several channels Exports 8 The krone fairly stable despite heightened unrest Import-weighted exchange rate index (I-) 1). October 1 July 1 8 8 8 Bank funding 88 MPR 3/11 Q1: 88 Q: 88. 88 Krone exchange rate 9 9 Average so far in Q1: 89.1 9 9 9 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-1 Apr-1 Jul-1 1) A positive slope denotes a stronger krone exchange rate. Daily (historical) and quarterly figures (projections 11 Q 1 Q from MPR 3/11) Source: Norges Bank 1 9
Norway is affected through several channels Exports 15 Petroleum investment is high Constant 7 prices. In billions of NOK. 199 1. Projections for 11-1 15 Bank funding Krone exchange rate 1 9 3 1 9 3 Oil price Petroleum investment 199 1995 1998 1 7 1 13 Sources: Statistics Norway and Norges Bank 13
Projected key policy rate in MPR 3/11 and MPR /11 Per cent. Fan chart from MPR /11. 8 Q1 1 Q 8 Key policy rate MPR 3/11 Key policy rate MPR /11 8 8 1 1 1 Sources: Statistics Norway and Norges Bank 1
The turbulence in the euro area is affecting Norwegian banks Banks assets and liabilities Lending - Mortgages - Corporate loans Securities Equity capital Deposits Market funding - Short-term - Long-term Channels of contagion: Market risk Norwegian banks direct exposure to heavily indebted euro area countries is limited Liquidity risk Wholesale funding more costly and less accessible Credit risk A long period of weaker growth abroad will affect Norwegian banks loan losses 15
The property sector is important to financial stability Distribution 1) of banks lending Property lending accounts for Per cent. As at 31 Dec. 1 more than 5% of total bank Commercial property % Other loans % lending Substantial losses on commercial property during the banking crisis, but small losses since 38 % Residential property 1) Distribution of banks lending to the retail market, corporate market and foreign enterprises Historically, low direct losses on mortgage loans, but substantial impact through second-round effects Source: Norges Bank 1
1 1 Challenge in the long term - household debt burdens are high and house prices are rising rapidly Household debt burden and interest burden. Percentage of disposable income. Actual and projected. 1988 Q1 1 Q 5 House prices in selected countries. Indices 1995 Q1= 1. 5 Q1-11 Q 35 3 35 3 8 15 5 5 Debt burden (right-hand scale) Interest burden (left-hand scale) 1 5 15 1 5 Norway UK Sweden Denmark US 15 1 5 Sources: Thomson Reuters, Statistics Norway and Norges Bank 17
Measures to promote financial stability Banks should be more robust The banks should have a more robust funding structure The largest Norwegian banks should strengthen their Core Tier 1 capital ratios Work on the new regulatory framework: Implement new minimum capital adequacy requirements Achieve national leeway in financial sector regulation Improve the crisis resolution regime Greater transparency concerning banks funding structures 18
The financial turbulence and Norway what lessons can be drawn? Governor Øystein Olsen Eiendomsdagene Norefjell 19 January 1