Norway banking sector robust but pandemic, rates pose risks, central bank says

OSLO (Reuters) – Norwegian banks are well-equipped if faced with a new downturn and the economic recovery has improved the outlook for financial stability, but risks remain, the central bank said in an annual report on Tuesday.

“The stress test in this report shows that the largest Norwegian banks can weather a sharp downturn without having to tighten lending substantially,” Deputy Governor Ida Wolden Bache said in a statement.

Pandemic-related uncertainty has receded but there is a risk of shocks that could weaken Norway’s financial stability such as a resurgence of the COVID-19 outbreak or a sudden rise in interest rates and risk premiums, the central bank said.

“Against the background of the recovery over the past year, Norges Bank now assesses the overall financial stability outlook as little changed since before the pandemic hit,” the bank said in its report.

It added high household debt is seen as the main weakness in the system, but also said that the Nordic country’s banks have ample access to funding and capacity to absorb losses, which had turned out lower than feared in 2020.

“Losses are expected to remain low, but the outlook is still somewhat more uncertain than usual,” the bank said.

(Reporting by Victoria Klesty, editing by Terje Solsvik)