Tag Archives: Financial Supervisory Authority of Norway

Financial Authorities See No Point In Stress Testing Norwegian Banks

The Financial Supervisory Authority of Norway can’t see any need for Norwegian banks to participate in EU‘s stress tests. Neither does Committee of  European Banking Supervisors (CEBS) who is conducting the test on behalf of the EU administration.

“We don’t see any national need for Norwegian banks to participate in this test.”

Bjørn Skogstad Aamo

Bjørn Skogstad Aamo

While seven Nordic banks are among the 91 tested, there is no Norwegian on the list. Director of the Financial  Supervisory Authority of Norway, Bjørn Skogstad Aamo, thinks that’s okay, and don’t see any need for stress testing Norwegian banks.

“We don’t see any national need for Norwegian banks to participate in this test. The CEBS came to the same conclusion, and that is not surprising,” Mr. Skogstad Aamo says to the Norwegian website DN.no.

The Financial Authority of Norway, however, have been in contact with the European Committee of European Banking Supervisors (CEBS) with an inquiry about Norwegian banks was to be include in the stress tests.

CEBS dis not find this necessary, according to the Norwegian director.

The Smoke And The Mirrors

There are mainly two reasons why the Norwegian banks was excluded from the EU stress test, says Mr. Skogstad Aamo.

“One reason was that the effects of the crisis in Europe will be modest for Norwegian banks,” he says.

CEO Rune Bjerke, DnB NOR ASA

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“Only DnB NOR has operations in other countries, and it is limited. If DnB NOR had significantly larger market shares or businesses in other countries, the EU would have seen a need for Norway to be included,”says Mr. Skogstad Aamo.

Financial supervisory director emphasizes that they’ve been in contact with DnB NOR and that Norway’s largest bank in no way would object to go through the European stress test.

“The second reason was that Norwegian banks have an extremely low exposure to the so-called PIIGS-countries. Only one percent of the balance of the Norwegian banks are loans or securities to these countries, while other countries’ banks have up to 10 and 20 times as much exposure,” the supervisory director says.

According to the Financial Supervisory Authority of Norway, the EU believes that Norwegian banks are stable even if the PIIGS-countries default on its debt.

“It wouldn’t had any consequences for Norwegian banks,” Mr. Skogstad Aamo says.

What?!

One might wonder if the Norwegian supervisory director is speaking against better knowledge, or if he really doesn’t have clue to what’s going on in his own back yard.

Unfortunately, earlier statement from the Norwegian Financial Authority suggest the last alternative is closest to the truth.

In May 2007 I made a phone call to the Norwegian Financial Authority. after I had conversations with several international experts, like Paul Wilmott and Espen Gaarder Haug, who both expressed deep concerns about the situation that was beginning to unfold in the credit derivative market.

Speaking with the director of market supervision, Mr. Eirik Bunæs, I was told that the Financial Authority could not see any immediate danger in either the international or the national financial markets.

“But we’re keeping our eyes on things,” Mr. Bunæs said.

Prime Minister Jens Stoltenberg, Norway

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After Lehman Brother went bankrupt about a year later, Norway’s Financial Authority sided with the Central Bank of Norway and the Finance Ministry in a joint statement, saying the Norwegian banks was rock solid and that the crisis would not have any fundamental effect on the Norwegian economy.

Two weeks later the Norwegian government was forced to come up with a NOK 350 billion bailout package to the Norwegian banks – mainly to save DnB NOR, (who used the occasion to make the biggest illegal insider trade in Norwegian financial history).

In this context, it’s only fair to mention that both the CEO of DnB NOR, Rune Bjerke and the director of the Financial Supervisory Authority of Norway, Bjørn Skogstad Aamo, is members of the same political party as the Norwegian prime minister, Jens Stoltenberg.

The Little Nice Bank of Norway

Okay, back to the point in case: The only bank in Norway that could have been subject to the EU stress test is DnB NOR, as the director rightfully points out.

But according to Mr. Skogstad Aamo, the banks operations outside Norway is “limited.”

The fact is that DnB NOR make about 20% of its income abroad, and is one of the largest players in the international offshore market.

Looking at the international organization chart, DnB NOR don’t seem very “limited” to me:

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In addition, DnB NOR is among the largest bank holding companies operating in the Baltic region, side by side with the Swedish banks; SEB,  Handelsbanken and Swedbank who all are being tested by the CEBS.

So, what makes DnB NOR that much safer?

The Extremely Low Exposure

According to the director of  The Financial Supervisory Authority of Norway, Norwegian banks have an extremely low exposure to the so-called PIGS-countries, compared with other European countries’ banks.

That may be right.

But Norwegian life insurance companies have a significant exposure, with 4% of their total assets (NOK 12 billion) invested in Portugal, Italy, Ireland, Greece and Spain.

Norway’s biggest life insurer is Vital Forsikring – owned by DnB NOR.

My guess is; with about 80% of the market share among Norwegian private citizens, and a state ownership of 34%, DnB NOR can’t be allowed to fail anything.

If the bank fails, most of Norway’s financial system is at risk of breaking down – a systemic risk = that means “too-big-to-fail”…

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Two Tests – Two Results

Director Skogstad Aamo stress that Norwegian banks are being stress tested on regular basis by the Central Bank of Norway.

And the test are probably tougher than what the banks in Europe are exposed to at the moment, Mr. Skogstad Aamo believes.

“In the stress test conducted in May, Norges Bank assumed a very negative economic progress for the Norwegian economy, where GDP was set seven percentage points lower than the main estimates. The test showed that even then, they would all  manage the capital requirements,” the Finance Authority Director says.

(In comparison; some news reports claims that the worst case scenario in the EU’s test is a 3% lower than estimated GDP).

But here’s the really interesting part:

Governor Svein Gjedrem, Central Bank of Norway

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The Norwegian Central Bank also did a stress test in December last year, but with a completely different – and probably far more realistic – worst case scenario.

In the December test was the worst case scenario a total freeze in the credit markets, and a withdrawal of deposits of 5%.

120 out of a total of 149 Norwegian banks would not be able to survive more than one month, the test showed.

This also goes to show how important the matter of method will be when EU reveals parts of the test, Friday afternoon.

By the way; the Norwegian Financial Authority Director also hopes that the financial markets soon will regain confidence, according to DN.no.

Related by the Econotwist:

Norway: Most Banks Fail In Stresstest

Norway’s GDP Fall For First Time In 20 Years

DnB NOR: “Comprehensive System Failure”

DnB NOR Except Penalties of NOK 26 million

Nordic Central Banks Agree On Baltic Bank Bailout

European Banks Hunting For EUR 1,65 Trillion

All Nordic Banks Will Pass Stress Test, Nordea Says

The EU Stress Test: Working The Media

European Bank Stress Tests Are Loosing Credibility

DnB NOR Net Profit Reduced By 33%

How To Make A Rat Look Like A Puppy

DnB NOR’s Latest Fuck-Up

Norway: Storebrand Subsidiary Sued Over Insurance Contracts

Morgan Stanley To Buy Bad Baltic Loans?

The Nordic Superbank Dream

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Norwegian Labor Costs At Record High

Measured by relative labor costs, Norwegian labor has never been as costly as it is now. One reason is the strong currency. The Norwegian krone has been characterized as  “The New Swiss Franc” by international media. Sounds good, but it have become a major problem for the country’s export industry, and is about to block the Central Bank of Norway‘s plans to rise the key interest rate further.

“The Norwegian export industry may lose market shares ahead. There are no prospects of another rise in export prices as sharp as in the 2000’s.”

Svein Gjedrem

Photo: Nancy Bundt/Norges Bank

According to governor of the Norwegian Central Bank, Svein Gjedrem, the plans for rising the key interest rate is changed, and the central bank have changed focus from economic growth to inflation. Various measures of the underlying inflation has been close to 2,5% in recent months, and that worries Mr.Gjedrem.

Because it might force the Central Bank of Norway to raise the key interest rate further, and thereby pull the rug under the fragile economic recovery.

“Lower wage growth, reduced capacity utilization and low global inflation have counterbalanced the effects of higher energy prices and the depreciation of the krone in autumn 2008,” central bank governor Svein Gjedrem explained to fellow bankers in a speech just before the Easter holidays.

Inflation forecast: Green dot line show prognosis from October last year, blue line show the underlying inflation as measured quarterly.

As the figure shows; the Norwegian inflation wasn’t supposed to reach 2,5% before summer 2012, but according to Mr. Gjedrem it’s almost there already now.

The Central Bank of Norway’s main goal is to keep the inflation as close to 2,5% as possible.

Over the last 10 years the central bank has managed to do so pretty well, using the key interest rate as its main tool.

But Mr.Gjedrem warns of the danger related to using interest rates to stimulate economic growth. The consequence can easily be inflation that’s out of control.

At the moment The Central Bank of Norway is kept from raising the key interest rate according to the plan presented in October 2009.

“The effect on private consumption of the substantial interest rate cuts in 2008 and 2009 has probably not been exhausted and high consumption growth is expected to continue in 2010. House prices have risen. The new guidelines for prudent residential mortgage lending issued by Finanstilsynet (the Financial Supervisory Authority of Norway) may curb household debt accumulation. Over time, household borrowing may nevertheless increase considerably and saving may fall. The aim of guarding against the risk of future imbalances, which may disturb activity and inflation somewhat further ahead, suggests that the interest rate should be gradually brought closer to a more normal level.”

“On the other hand, a marked interest rate increase in Norway and a wider interest rate differential between Norway and other countries may entail a risk of a considerably stronger-than-projected krone, resulting in inflation that is too low.”

“This will make it difficult to bring inflation up to target within a reasonable time horizon. A strong krone may also lead to lower activity in exposed industries and thereby lower capacity utilization in the Norwegian economy. This suggests that the interest rate should not be raised too rapidly.”

“Overall, the outlook and the balance of risks suggest that the key rate should be gradually increased ahead, although somewhat later than we envisaged in October 2009,” the Norwegian central bank chief says.

Here is The Central Bank of Norway’s new estimates for the key interest rates in the U.S and the Euro Zone:

Dotted lines - old estimates. Whole lines - new estimates.

As for Norway, the central bank’s estimates have a large room for variables. But this time the spread seem even larger than usual.

Towards 2014 Norway may have a key interest rate of 1,5% – or 8%.

This should be an interesting bet….

Insecurity Illustrated

It’s the combination of a low interest rate and strong currency that worries Mr.Gjedrem the most.

The side effects are beginning to show.

For example; the wage growth is much larger that the price growth.

Blue line; wage growth. Red line; price growth.

“Measured by relative labor costs, Norwegian labor has never been as costly as it is now. As a result, the Norwegian export industry may lose market shares ahead. There are no prospects of another rise in export prices as sharp as in the 2000’s, when Norway’s terms of trade improved considerably.”

What seem to puzzle the experts most, is the big drop in Norwegian household’s spending in spite of record high income growth due to low interest rates.

Blue sticks - income growth. Red line - household's spending.

“Growth in private consumption increased through 2009 and growth is expected to continue. In spite of a lower interest rate level, the household saving ratio increased to a record-high level in 2009. This probably reflected high household debt levels with a need for some households to consolidate, and a large degree of uncertainty owing to prospects of higher unemployment and a fall in the value of housing wealth. At the same time, household real disposable income increased. Almost half the increase is attributable to a lower interest rate level.”

“Debt burdens are still high, but the stabilization of employment at a relatively low level has contributed to reducing uncertainty. The interest rate level remains low. In addition, house prices have increased. The saving ratio is therefore expected to fall, and growth in private consumption is projected at 5 per cent in 2010.”

“On 24 March, the Executive Board decided that the key policy rate should be in the interval 1½-2½ per cent in the period to the publication of the next Report on 23 June 2010 unless the Norwegian economy is exposed to new major shocks. The interest rate was kept unchanged at this meeting. This is based on the assessment that inflation and capacity utilization may for a period be slightly lower than previously projected and that the interest rate should be increased somewhat later than expected in autumn 2009.”


Here’s the full transcript of governor Svein Gjedrem’s speech (in English).

And here’s a copy of all the charts.

Related by the Econotwist:

Norway Put Interest Rates On Hold

Norway’s GDP Growth Slows Down

Norwegian Oil Explorer Files For Bankruptcy

Consumer Confusion Index At Record High

Norway’s GDP Fall For First Time In 20 Years

Central Bank Of Norway Call For A New “Global Order”

Evaluation Of Norwegian Monetary Policy



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