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In this analysis, we look at the macrueconomic factors which function as driving forces behind developments in banks' problem loans. Problem loans include non-performing loans and other particularly doubtful loans. Since the beginning of the 1990s, problem loans as a share of total loans have declined sharply and are now at a historically low level. However, the volume of problem loans is highly sensitive to cyclical developments and will usually increase during economic downturns. We have analysed banks' problem loans in the household and the enterprise sector respectively, using two empirical models. The analysis reveals that the declining share of problem loans in recent years is primarily attributable to developments in real interest rates and unemployment. We also project banks' problem loans based on two macroeconomic scenarios: A baseline scenario and a stress scenario which illustrates a deteriorating macroeconomic situation.
1 Introduction
One of Norges Bank's key tasks is to monitor the financial system. The banks play a central pail in the financial system as providers of credit and payment services. Norges Bank therefore closely monitors developments in the banking sector. Attention is particularly focused on developments which in the short or long term may weaken stability in the banking sector and prevent banks from discharging their responsibilities in a satisfactory manner. The experience of Norway and other countries shows that developments in problem loans along with losses on bank lending have a considerable impact on banks* ability to channel credit.2
Problem loans consist of both non-performing loans and non delinquent loans which the banks consider to be particularly doubtful.3 Banks have to estimate their expected losses on problem loans if a borrower goes bankrupt or is, for other reasons, unable to service his debt. To a large extent, recorded losses consist of changes in these loss estimates4. There will thus be a close connection between banks' problem loans and recorded losses. However, recorded losses are also affected by unexpected losses and reversals of previously recorded losses, and the lag between developments in problem loans and recorded losses may vary.
In this article, we look at the relationship between macroeconomie factors and banks' problem loans. Banks' problem loans serve as an important indicator of financial imbalances in the household and enterprise sectors. A...