Norges Bank urges banks to reduce liquidity risks

The Central Bank of Norway urges banks to reduce liquity risk in its latest report on financial stability. Banks’ loan losses are likely to increase somewhat in the period ahead. Loans to commercial property companies, shipping and borrowers in the Baltic countries still have the highest loss exposure, the report says.

“It is important to draw lessons from Norway’s and other countries’ experience. Improved liquidity and capital regulation will reduce the frequency and severity of future crises. The financial system will benefit from regulation that not only limits risk at individual banks, but that also limits risk across the entire financial system”

Svein Gjedrem

(Report in English)

sveingjedrem.jpg

Some highlights:

* “Banks now require very little equity capital for residential mortgage loans, and housing investment is subsidised via the tax system. This leads to high household debt accumulation and results in periods of financial imbalances. It is important that regulation and supervision not only limit risk at individual banks, but also risk across the whole financial system.”

* “Foreign banks have sizeable activity in the Norwegian financial market. Cooperation between the Nordic countries in banking regulation, supervision and crisis management will foster an environment where rules are practiced evenly and sufficiently tightly across borders.”

* “In many countries, government borrowing requirements have increased noticeably during the downswing. Sizeable government debt accumulation has increased the risk of public debt payment problems. Many countries are also facing the challenge of rapid growth in public spending as a result of an ageing population. To reduce the risk of public finance crises, governments must stabilise and reduce their debt. This may move forward the winding down of crisis-related measures and lead to higher taxes or reduced public spending.”

* “The global downturn is the deepest observed in the post-war period. Even if the situation now seems to have stabilised, there is still a risk that growth will remain low for a long period ahead, and in the worst case turn negative again.”

Here’ the full report from Central Bank of Norway in English.

Some key figures:

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