Developments in the credit market--new types of loans and the volume of fixed-rate loans in Norway.

• Author: Almklov, Gunnar

This article describes developments in various types of loans from financial institutions (1) and the volume of loans with a fixed-rate period, i.e. fixed-rate loans. In recent years, the credit market has evolved rapidly. The number of loan products is increasing and growth in borrowing has been high. Furthermore, borrowers have more choice with regard to loan repayment profiles. For instance, interest-only loans have become more common. At the same time, the number of fixed-rate loans has fallen from the already low level of recent years. In Denmark and Sweden, the number of fixed-rate loans is significantly higher. However, the share of fixed-rate loans has recently been declining in these countries as well.

1 Introduction

In recent years, the credit market in Norway has been marked by high and rising lending growth, strong competition and rapid emergence of new loan products. This article takes a closer look at some characteristics of these developments, with special focus on growth in credit to households and non-financial enterprises (hereafter merely referred to as enterprises). In addition to looking at total growth in credit in these two sectors, their loans will be split up into various subcategories. We will also take a closer look at some new loan products which have been launched in recent years.

The number of fixed-rate loans affects how quickly and how strongly monetary policy changes (interest rate changes) feed through to the credit market and possibly further into the real economy, in other words how efficient the transmission mechanism is. The higher the share of floating-rate loans and the shorter the lock-in period for fixed-rate loans, the faster monetary policy will have an effect. However, fixing the interest rate may cause greater predictability in the public's debt-servicing expenses and may contribute to preventing payment problems for particularly vulnerable groups. Fixed-rate loans may thus have a positive effect on financial stability.

The high credit growth over several years has led to a higher debt burden for households. Corporate debt has also increased markedly over the past year, which implies that interest rate changes may have a larger impact on the public's debt-servicing capacity in the future. The number of fixed-rate loans may be of importance in the assessment of this picture. We will therefore provide an overview of the scope of and developments in fixed-rate loans for households and enterprises. This overview is partly based on Norges Bank's new statistics on loans by fixed-rate period, which go back to the first quarter of 2004.

The fixed-rate loan statistics and the other background information for this article have given us a broader basis for estimating the extent to which the public hedges against interest rate increases through fixed-rate loans. However, we do not have sufficient information to comment on the degree to which the public as a whole is protected against interest rate increases. For example, we are lacking information on the scope of interest rate swaps and other derivatives. This is particularly important when estimating the extent of hedging by enterprises and municipalities.

2 The credit market

2.1 Credit to the public (2)

In the description of credit developments we will be looking at developments in the credit indicators C2 and C3. C2 measures credit from domestic lenders. C3 also includes credit from foreign lenders and is thus a measure of total credit to the public. The credit indicators describe developments in the public's gross debt and are well suited as indicators of developments in the real economy. (3) In addition, the credit indicators provide information about the various sectors' financial position and are thus also important contributors to the analysis of financial stability. An advantageous feature of the credit indicators is that they have good real-time properties, (4) which means that there are few revisions, especially in C2.

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Table l shows that the level of domestic credit to the public has more than doubled since 1995. Chart l shows that growth rose sharply in the 1990s, after having been low for a period, and has remained high since the end of that decade.

Credit from domestic lenders currently represents about 83 per cent of total credit to the public. The statistics do not include detailed information about credit from foreign lenders distributed by borrowing sectors. It is therefore not possible to quantify precisely the size of total borrowing in various sectors. Still, we know that it is primarily enterprises that raise loans from foreign lenders, while households and municipalities only take up loans abroad to a very limited degree. According to Household financial accounts, gross domestic loan debt accounts for more than 90 per cent of total household debt. (5)

2.2 Domestic lenders

Banks (6) are the largest lenders and account for as much as 70 per cent of domestic credit to the public (see Table 1). The banks' share has increased by a good 14 percentage points over the past ten years.

State lending institutions currently include the Norwegian State Housing Bank (Husbanken), the Norwegian State Educational Loan Fund (NSELF) and Innovation Norway. These are specialised lending institutions that provide loans and financing for a limited range of purposes. In the past, such institutions were important public instruments for the allotment of subsidised credit, but their significance in this respect has been reduced in recent years. State lending institutions currently account for 8 per cent of domestic credit to the public. In 1990, by comparison, there were ten state lending institutions which together accounted for 18 per cent of domestic credit.

Mortgage companies extend loans secured on dwellings, commercial buildings and the like. They primarily finance their lending activities through funding or by issuing bonds, notes and short-term paper. Finance companies include various types of lending companies. They specialise in loan products such as factoring, leasing, overdraft facilities and credit card loans, mainly financed by funding.

The group insurance companies includes non-life and life insurance companies, private and municipal pension funds, as well as the contractual early retirement scheme (AFP) and the Pension Scheme Under Collective Wage Agreements (FTP). Insurance companies were previously major credit providers, but their share of domestic credit to the public was only one percent in July 2006. The bulk of these loans are extended to households and municipalities.

2.3 Credit to households and enterprises

Households

Households constitute the largest borrowing sector. Household credit accounts for more than 60 per cent of total domestic credit to the public (see Table 2). This implies that developments in household finances are important for financial undertakings' credit risk (7). Historically, losses on household loans have been moderate compared with corporate loans. Weaker financial developments in the household sector and a deterioration of their financial position may still have a considerable impact on the economy in general. An increase in the interest rate will force households to use a larger share of their disposable income on debt servicing, and may also lead to increased saving. Due to these factors, there will be a reduction in household consumption. Lower demand from the household sector may affect enterprises' earnings and debt-servicing capacity. Subsequently, this may affect output and employment.

Household debt growth has been high in the last five-year period. Since mid-2000, annual growth in household credit has generally been more than 10 per cent (see Chart 2). Household loans may generally be divided into two groups: mortgage loans and other loans. A mortgage loan means that the loan is secured on the borrower's dwelling (or leisure property). Over the past ten years the share of mortgage loans has risen by approximately 10 percentage points to 77 per cent of total credit to households (see Table 3). The strong growth in mortgage loans is partly related to the sharp rise in house prices. The growth is partly a result of an increase in collateral values due to the strong rise in house prices coupled with the introduction of new types of loans designed to facilitate mortgage equity withdrawal (see section on new loan products below).

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"Other loans" include various types of unsecured loans or loans secured on...