Banks’ buffer capital: How important is risk?

Most banks hold a capital to asset ratio well above the required minimum defined by the present capital adequacy regulation (Basel I). Using bank-level panel data from Norway, important hypotheses concerning the determination of the buffer capital are analysed. Focus is on the importance of: (i) risk, particularly credit risk, (ii) the buffer as an insurance, (iii) the competition effect, (iv) supervisory discipline, and (v) economic growth. A negative or nonsignificant risk effect is found, which suggests that introducing a more risk-sensitive capital regulation (Basel II) is likely to affect Norwegian banks. Support is found for the hypothesis that buffer capital serves as an insurance against failure to meet the capital requirements.Banking; Excess capital; Risk; Panel data

Evaluation of macroeconomic models for financial stability analysis

As financial stability has gained focus in economic policymaking, the demand for analyses of financial stability and the consequences of economic policy has increased. Alternative macroeconomic models are available for policy analyses, and this paper evaluates the usefulness of some models from the perspective of financial stability. Financial stability analyses are complicated by the lack of a clear and consensus definition of ‘financial stability’, and the paper concludes that operational definitions of this term must be expected to vary across alternative models. Furthermore, since assessment of financial stability in general is based on a wide range of risk factors, one can not expect one single model to satisfactorily capture all the risk factors. Rather, a suite of models is needed. This is in particular true for the evaluation of risk factors originating and developing inside and outside the financial system respectively.Financial stability; Banks; Default; Macroeconomic models; Policy

Pursuing financial stability under an inflation-targeting regime

We evaluate two main views on pursuing financial stability within a flexible inflation targeting regime. It appears that potential gains from an activist or precautionary approach to promoting financial stability are highly shock dependent. We find support for the conventional view that concern for financial stability generally warrants a longer target horizon for inflation. The preferred target horizon depends on the financial stability indicator and the shock. An extension of the target horizon favoring financial stability may contribute to relatively higher variation in inflation and output.Monetary policy, financial stability

Evaluation of macroeconomic models for financial stability analysis

As financial stability has gained focus in economic policymaking, the demand for analyses of financial stability and the consequences of economic policy has increased. Alternative macroeconomic models are available for policy analyses, and this paper evaluates the usefulness of some models from the perspective of financial stability. Financial stability analyses are complicated by the lack of a clear and consensus definition of ‘financial stability’, and the paper concludes that operational definitions of this term must be expected to vary across alternative models. Furthermore, since assessment of financial stability in general is based on a wide range of risk factors, one can not expect one single model to satisfactorily capture all the risk factors. Rather, a suite of models is needed. This is in particular true for the evaluation of risk factors originating and developing inside and outside the financial system respectively.Financial stability; Banks; Default; Macroeconomic models; Policy

Norwegian homeowners’ debt-servicing capacity is adequate

Debt-servicing capacity is a function of both available cash flow and the size of obligatory expenses. We use household level information to calculate normal expenses that cover food, other general consumption, electricity and fixed housing expences, as well as interest expenses. We link this to information on household income, debt, financial wealth and housing wealth. Just over 1 percent of home-owning households lacked income to cover normal expenses and interest in 2020. Half of these had the opportunity to cover the liquidity deficit by drawing on financial wealth or increasing their mortgages. We show how higher food and electricity prices, and also higher interest rates, affect the number of households with weak debt-servicing capacity and the share of debt held by this group. The share of households that might experience debt servicing problems will increase with a rapid and marked increase in interest rates. Given the debt-to-income ratio in 2020, it is only when the interest rate rises above 5 percent that the share facing problems rises markedly in groups other than those with the lowest income.publishedVersio

Betalingsevne og boligkjøpekraft blant husholdninger som ikke eier bolig

Husholdninger som ikke eier egen bolig, utgjør om lag en fjerdedel av alle husholdningene. De holder bare 7 prosent av husholdningenes gjeld, men mye av dette er gjeld uten sikkerhet. Vi finner at denne gruppen har lite frie inntekter sammenliknet med boligeiere og dermed begrenset evne til å spare. Vi beregner at om lag 10 prosent av husholdningene som ikke eier bolig har tilstrekkelig med midler til å oppfylle kravenei utlånsforskriften ved boligkjøp.publishedVersio

Norske boligeiere har god gjeldsbetjeningsevne

Gjeldsbetjeningsevne handler om å ha midler til å dekke utgifter til livsopphold og kostnader knyttet til å betjene lån. Vi bruker opplysninger på husholdningsnivå til å beregne et anslag på normale utgifter til livsopphold som dekker mat, annet alminnelig forbruk, strøm og faste utgifter på bolig, så vel som renteutgifter. Vi kobler dette opp mot informasjon om husholdningenes inntekt, gjeld, finansielle formue og boligformue. Litt over 1 prosent av husholdninger med bolig manglet inntekt til å dekke normale utgifter og rentekostnader i 2020. Halvparten av disse hadde mulighet til å dekke likviditetsunderskuddet ved å trekke på finansiell formue eller øke sitt boliglån. Vi viser hvordan økte priser på mat og strøm og høyere rente påvirker antallet husholdninger med svak gjeldsbetjeningsevne og andelen av gjeld som holdes av denne gruppen. Andelen husholdninger som kan få problemer med å betjene gjelden, vil øke ved en rask og markert økning i rentenivået. Gitt forholdet mellom gjeld og inntekt i 2020, er det først når renten kommer over 5 prosent at andelen i problemer stiger markert i andre grupper enn de med lavest inntekt.publishedVersio

The Effect of New Technology in Payment Services on Banks' Intermediation

In many countries, payment services in banking have shifted from paper-based giro and cheque payments to electronic giro and debit card payments. This paper analyses the effect of this change in payment technology within a multiple-output framework using Norwegian bank-level panel data. The dual approach with four variable inputs is applied, and the general model includes random coefficients to capture heterogeneity in production technology across banks. The results show that the move towards electronic payment services has decreased average costs and increased the economies of scale in bank intermediation. An output composition effect can explain that decreasing economies of scale is often found in analyses of banks.publishedVersio

Sustainable Household Debt : Towards an Operational View and Framework

From a broad financial stability perspective, sustainable household debt should be evaluated within a steady-state consumption-path approach. We calculate measures for households’ steady-state consumption based on average consumption to income ratios for a number of household groups and use a ‘counterfactual history approach’ to evaluate their debt sustainability. The results show that households within the first-home buyers and second steppers groups, which hold more than half of total household debt in Norway, are vulnerable to an increase in the loan rate

Banks’ Buffer Capital: How Important Is Risk?

Most banks hold a capital to asset ratio well above the required minimum defined by the present capital adequacy regulation (Basel I). Using bank-level panel data from Norway, important hypotheses concerning the determination of the buffer capital are analysed. Focus is on the importance of: (i) risk, particularly credit risk, (ii) the buffer as an insurance, (iii) the competition effect, (iv) supervisory discipline, and (v) economic growth. A negative or non-significant risk effect is found, which suggests that introducing a more risk-sensitive capital regulation (Basel II) is likely to affect Norwegian banks. Support is found for the hypothesis that buffer capital serves as an insurance against failure to meet the capital requirements.publishedVersio