Towards the end of 2014 sentiment in the Norwegian economy turned following the dramatic fall in the oil price from around USD 110 to USD 50 per barrel.
The marked fall was attributable to a number of factors, including weak growth prospects in the European and Chinese economies and an increased oil supply due to US shale oil production, which allayed fears that sanctions between Russia and the West could restrict access to oil.
Concerns that the low oil price would have knock-on effects for the Norwegian economy and thus curb future growth influenced Norges Banks decision to set the key policy rate at a record-low 1.25 per cent in December. In doing so, the Central Bank stressed the importance of combating the risk of a pronounced slowdown in the Norwegian economy, even though lower interest rates could result in house prices and household debt continuing to outstrip growth in household income.
Despite the more modest development of key sentiment indicators, the above has not yet had a major impact on actual economic performance. Activities have remained buoyant and vacancies low. On the other hand, the general situation is currently more unstable than for some time, which will be of importance for the banks should developments in the oil market fuel lower activities and higher vacancies. One fear is that the above, combined with continued strong pressure in the housing market, could reduce household demand.
Over the last year significant attention has been paid to competition in the banking market. Initially the banks established measures to boost earnings as part of initiatives to reinforce equity in order to satisfy new capital requirements. The above was achieved by increasing revenues and cutting costs, while losses have also remained at extremely low levels. Here it was emphasised that competition in the banking market was not functioning particularly well, and that the authorities has initiated analyses and measures with a view to boosting competition. The Norwegian Competition Authority is currently carrying out an analysis of the competitive environment in the housing market and will subsequently look more closely at small and medium sized enterprises. As the banks have made progress with their initiatives to satisfy the new capital requirements, so margin pressure and competition has been further ramped up.
In overall terms the banks continued to post improved results in 2014. This was mainly due to higher net interest income (which in turn was largely attributable to reduced expenses for market financing). Low cost increases and continuing low losses also contributed to the improved performance. In addition, some banks made significant gains on the sale of Nets Holding in 2014.
Financial stability is being aided by solid banks and the Guarantee funds equity, which amounted to NOK 28.6 billion at the end of 2014. This equates to 2.66 per cent of the guaranteed deposits. All funds are invested in highly secure and liquid government bonds with governments with a high international rating.
The Guarantee Fund has initiated wide-ranging measures to develop more efficient payment solutions in order to be able to repay guaranteed deposits within a deadline of one week in practice five working days if a bank is placed in administration. Here, one particular focus area has been establishing a payment solution via portals with adequate security and safety levels. These initiatives are continuing in 2015.
The Banking Law Commission has initiated extensive measures to implement the EUs Bank Recovery and Resolution and Deposit Guarantee Directives in Norwegian law. A number of key topics need to be clarified in this context, including: in the first instance, whether to continue the established systems and structures for crisis contingency planning and payment solutions for guaranteed deposits that have been built up in the Guarantee Fund and by the authorities; and subsequently, whether the already paid-in funds can be utilised to build up the new fund structure.