Summary: The Norwegian banking sector is generally well prepared to cope well with possible external shocks, but imbalances have built up in recent years and could pose challenges. Strong real mainland GDP growth, and high oil production and exports since the 2008 crisis have supported high credit quality and healthy bank profitability, despite a decline in interest margins.2 Profit retention and equity issuance have accounted for the build-up of additional capital in the system. Banks’ capitalizations were also propped up by risk-weight reductions for banks adopting the Basel II internal ratings-based (IRB) approach, even though the authorities have curbed excessive reductions via regulatory measures. The economic outlook under the baseline is expected to continue to support limited credit risks and strong profitability. However, the build-up of imbalances that began before the 2008 crisis—including the rise in household and corporate leverage—poses challenges. Banks’ dependence on wholesale funding also remains high, even though banks have increased maturities—including of foreign borrowing—following funding pressures during the 2008 crisis.

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