Will strong growth in the banking industry continue?

Will strong growth in the banking industry continue?

Views on the balance of risks

Speech at a banking industry seminar on primary capital certificates

13 September 2007 Deputy Governor Jarle Bergo

Norges Bank

Mainland GDP

Annual growth in volume. Per cent. 1971 – 2007

-2 0 2 4 6

-2 0 2 4 6

1970 1975 1980 1985 1990 1995 2000 2005

Sources: Statistics Norway and Norges Bank Growth in the first half

of 2007, annualised

Inflation

CPI and CPI-ATE. 12-month change. Per cent

CPI-ATE Inflation target CPI

Source: Statistics Norway

-2 0 2 4 6

2002 2003 2004 2005 2006 2007

-2 0 2 4 6

Norges Bank

Terms of trade

Index, 1995 = 100. 1995 – 2006

90 110 130 150 170 190

1995 1997 1999 2001 2003 2005

90 110 130 150 170 190

Traditional goods and services Total

Sources: Statistics Norway and Norges Bank

Growth in lending and total assets for banks and mortgage companies in Norway ¹⁾

Annual growth. Per cent. 2001 – 2007

0 4 8 12 16 20 24

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 0 4 8 12 16 20 24

Lending to households and non-financial enterprises

Total assets

1)All banks and mortgage companies in Norway

2)Growth in 2007 is calculated as the growth from 06 Q2 to 07 Q2

Source: Norges Bank

Norges Bank

0 1 2 3 4

2005 2006 2007 2008 2009 2010 0 1 2 3 4

Baseline scenario in Monetary Policy Report 2/07

Per cent. 05 Q1 – 10 Q4

0 1 2 3 4 5 6 7 8 9

2005 2006 2007 2008 2009 2010 0 1 2 3 4 5 6 7 8 9

-2 -1 0 1 2 3 4

2005 2006 2007 2008 2009 2010 -2 -1 0 1 2 3 4

-1 0 1 2 3 4

2005 2006 2007 2008 2009 2010 -1 0 1 2 3 4

30%

50%

70%

90%

Output gap

CPI-ATE Key policy rate

CPI

Sources: Statistics Norway and Norges Bank

-40 -30 -20 -10 0 10 20

2003 2004 2005 2006 2007

-40 -30 -20 -10 0 10 20

House prices ¹⁾ and housing starts in the US

Seasonally adjusted. 12-month growth in per cent

Jan 2003 – Jul 2007

1)Median price

2) 3-month moving average

Housing starts Existing homes

New homes

Sources: Reuters (EcoWin) and Norges Bank

Norges Bank

Outstanding volume of mortgage loans in the US in 2006

In banks and as mortgage-backed securities (MBS). Billions of USD

0 2000 4000 6000 8000 10000

Mortgage loans

Source: UBS, US Economic Perspectives, 9 March 2007 In banks

MBS - Agency

MBS - Non-agency except subprime MBS - Subprime

Credit spreads for mortgage-backed bonds with rating BBB- backed by subprime and conventional mortgages

Basis points. 3 Jul 2006 – 10 Sep 2007

Source: Lehman Brothers Subprime issued 2nd half of 2006,

BBB-

Mortgage-backed securities, BBB-

0 500 1000 1500 2000 2500

Jul-06 Oct-06 Jan-07 Apr-07 Jul-07

0 500 1000 1500 2000 2500

Norges Bank

International equity indices

Indexed, 1 Jan 2007 = 100. 1 Jan 2007 – 11 Sep 2007

85 90 95 100 105 110 115 120 125 130

Jan-07 Mar-07 May-07 Jul-07 Sep-07

85 90 95 100 105 110 115 120 125 130

Europe Stoxx Norway OSEBX

Source: Reuters (EcoWin) US S&P 500

Japan Topix Emerging markets MSCI

Treasury bills Asset-backed commercial paper

LIBOR

US interest rates with varying degree of risk

90-day rates. 1 Jan 2007 – 11 Sep 2007

3 3.5 4 4.5 5 5.5 6 6.5

Jan-07 Mar-07 May-07 Jul-07 Sep-07

3 3.5 4 4.5 5 5.5 6 6.5

Source: Reuters (EcoWin)

Norges Bank

Prices for hedging against credit risk. Prices for 5-year credit default swaps (CDS) for banks

Basis points. 1 Jul 2005 – 10 Sep 2007

0 10 20 30 40 50 60 70

Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 0 10 20 30 40 50 60 70

Sources: Bloomberg, Reuters and Thomson Datastream DnB NOR

JP Morgan Chase

European banks (iTraxx index)

Citigroup

Interest rate spreads

Spread between 3-month interbank rate and treasury bill rate Basis points. 1 Feb 2007 - 10 Sep 2007

0 50 100 150 200 250

Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 0 50 100 150 200 250

Source: Reuters (EcoWin) US

Norway

UK Euro zone

Japan

Norges Bank

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

01 Jul-07 15 Jul-07 29 Jul-07 12 Aug-07 26 Aug-07 09 Sep-07 0.0

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

The Norwegian money market

Interest rate spread between T/N, 3-month NIBOR and sight deposit rate.

Percentage points. 1 Jul 2007 – 10 Sep 2007

T/N

3-month NIBOR

Source: Reuters (EcoWin)

12-month growth in credit to households

Per cent. Jan 1998 – Jul 2007

0 2 4 6 8 10 12 14 16

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 0 2 4 6 8 10 12 14 16

Mortgage loans¹⁾

Domestic credit to households

Source: Statistics Norway

1) Break in the series in December 2005

Norges Bank

Real house prices

Indices, 1985 = 100. 1985 – 2006

0 50 100 150 200 250

1985 1988 1991 1994 1997 2000 2003 2006 0 50 100 150 200 250

Deflated by house rent

Deflated by building costs

Deflated by disposable income¹⁾

Deflated by CPI

1)Disposable income less estimated reinvested dividend payments for the period 2000 - 2005

Sources: Association of Norwegian Real Estate Agents, ECON, Finn.no, Association of Real Estate Agency Firms, Statistics Norway and Norges Bank

Sources: Association of Real Estate Agents, ECON, Finn.no and Association of Real Estate Agency Firms

Rise in house prices

12-month rise and annualised 3-month rise.

Per cent. Jan 1998 – Aug 2007

-20 -10 0 10 20 30 40

1998 2000 2002 2004 2006

-20 -10 0 10 20 30 40

Annualised rise in 3-month centred moving average

12-month rise

Norges Bank

Credit lines secured on dwellings

Share of total mortgage loans in banks and covered bonds companies

Per cent. Dec 2005 – Jul 2007

0 4 8 12 16 20

Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 0 4 8 12 16 20

1)All banks and covered bonds companies in Norway Foreign-owned banks

Norwegian-owned banks and covered bonds companies All banks and covered bonds companies

Source: Norges Bank

Household debt burden

Per cent. 1987 Q1 – 2007 Q2

100 120 140 160 180 200

1987 1991 1995 1999 2003 2007

100 120 140 160 180 200

Sources: Statistics Norway and Norges Bank

Norges Bank

Household liabilities and assets

Billions of NOK. 2006 Q4

0 1000 2000 3000 4000 5000 6000

Liabilities Assets

0 1000 2000 3000 4000 5000 6000

Mortgages Other loans

Housing wealth¹⁾ Notes, coins and

bank deposits Insurance reserves Securities Other claims

1)Projection

Sources: Association of Norwegian Real Estate Agents, ECON, Finn.no, Association of Real Estate Agency Firms, Statistics Norway and Norges Bank

Rental and selling prices for office premises in Oslo

Constant 2007-prices in NOK per square meter. Jun 1986 – Jun 2007

0 500 1000 1500 2000 2500

Jun-86 Jun-89 Jun-92 Jun-95 Jun-98 Jun-01 Jun-04 Jun-07 0 5000 10000 15000 20000 25000 30000 35000

1)Offices of good standard in centre of Oslo

2)Central office premises in the Oslo area Rental prices¹⁾

(left hand scale)

Selling prices²⁾ (right hand scale)

Sources: Dagens Næringsliv and OPAK