Foreign Bank Branches Dominate Norwegian Banking System

Oslo, Norway - The Norwegian banking system has undergone significant changes in recent years, with foreign bank branches playing a dominant role.

Domestic Banks vs Foreign Bank Branches

According to data from the Financial Supervisory Authority (FSA), 97 domestic banks are savings banks, while the remaining institutions are commercial banks. Foreign bank branches account for a staggering 35 percent of the country’s assets, making them systemically important. The trend has led to three of the four largest banks in Norway being owned by foreign entities.

Banks’ Financial Position Improves

Norwegian banks have reported steady profitability over the years, with capital adequacy ratios more than doubling since 2008.

• Capital adequacy ratio: 16.1 percent at the end of March 2019
• Pre-tax profits: 1.26 percent of average total assets in 2018
• Return on equity: 11.5 percent during the same period

The banks’ financial position has improved significantly due to several years of strong profits and profit retention.

High Exposures to Real Estate Sector

Norwegian banks have significant exposures to the real estate sector, with retail lending making up 60 percent of total lending.

• Residential mortgages: 91 percent of retail lending
• Commercial real estate (CRE) lending: a significant portion of loans to domestic corporate customers
• Foreign bank branches have a higher market share in corporate lending and lower share in retail lending

Risks and Vulnerabilities

High real estate valuations and rising household leverage increase banks’ risks and vulnerabilities in the event of a housing price correction or economic reversal.

• Residential real estate price index: risen by 70 percent over the past decade
• CRE prices: risen by about 60 percent
• Household debt-to-disposable income ratio: 231 percent at the end of 2018 (up three percentage points from the previous year)

Market Funding and Liquidity Buffers

While Norwegian banks rely significantly on market funding, their long-term funding and liquidity buffers have increased since 2008.

• Market funding: 48 percent of total funding at the end of March 2019
• Customer deposits: 40 percent of total funding at the end of March 2019
• Covered bonds: an increasingly important source of funding (accounting for about half of market funding at the end of March 2019)

Institutional Setting

Norwegian rules governing financial institutions are largely derived from EU legislation, with most banking regulations being issued by the Ministry of Finance (MoF).

• Financial Supervisory Authority (FSA): responsible for supervising banks and other financial institutions in Norway
• MoF: exercises licensing powers and serves as the court of appeal for complaints against the FSA
• FSA also plays a key role in resolving financial crises, although decisions of significance for financial stability are taken by the MoF.