Financial corporations, balance sheet, August 2008

As a consequence of the financial turmoil banks access to liquidity has become more difficult. The turmoil has lead to increased risk premium and money market rate, which lead to more expensive funding. Many Norwegian banks have increased the deposit rate, hoping that they will become less dependent on funding in the money market.

Lowest deposit/loan ratio since November 2006

The figures for August 2008 indicate that increased deposit rates do not have the desired effect, so far. The deposits from non-financial corporations increase, and even though loans to non-financial corporations increase too, the deposit/loan ratio (loans financed by deposits) increase some. For households, the deposits decrease and with still increasing loans to this sector, the deposit/loan ratio slightly decreases. The total deposit/loan ratio decreased from July to August 2008, and is now 61.9 per cent. Disregarding March 2008, when the deposit/loan ratio was 61.4 per cent, this is the lowest deposit/loan ratio since November 2006. The deposit/loan ratio is, however, still quite high in Norwegian banks.

Increased dependency on funding in the money market

Banks finance their operations from different sources. Customer deposits are usually regarded as the safest, least expensive and most stable of these sources, but with decreasing deposit/loan ratio the banks’ dependency on other funding sources increase. These other sources include, among others, bond loans, short term security loans, inter-bank loans and loans in the central bank.

Bond debt on the second highest level ever

Bond loans are the most important long-term funding source next to customer deposits. Norwegian banks’ total bond debt amounted to NOK 521 billion at end-August 2008, the second highest ever recorded. The highest level was in June 2008, when Norwegian banks’ total bond debt amounted to NOK 523 billion. From July to August 2008, the total bond debt increased by 0.4 per cent, following a decrease of nearly 1 per cent the previous month. The domestic bond debt increased by 2.3 per cent from July to August 2008, while the foreign bond debt decreased by 1 per cent in the same period. At end-August 2008, Norwegian banks’ domestic and foreign bond debt amounted to NOK 240 and 281 billion respectively.

An alternative to long-term funding is short-term funding in the money market. This includes inter-bank loans, short term security loans and loans from the central bank. Borrowing in the money market is usually regarded as less propitious than borrowing in the market for long-term funding. One reason for this is that the banks’ loans to customers normally have longer maturity than loans in the money market. To reduce risk exposure it may be an advantage to have a more equal maturity on lending and funding.

Unprecedented inter-bank loans

Norwegian banks’ total inter-bank loans have increasedevery month since March 2008. At end-August 2008 Norwegian banks’ total inter-bank loans amounted to NOK 717 billion, which is the highest ever recorded. Inter-bank loans are Norwegian banks’ second largest funding source following customer deposits. The largest part of the inter-bank loans are foreign. Norwegian banks’ foreign inter-bank debt amounted to a total of NOK 654 billion at end-August 2008. This constitutes 90 per cent of Norwegian banks’ total inter-bank debt. Inter-bank debt is the only foreign funding source which increased from July to August 2008, by 1 per cent. The domestic inter-bank debt increased by a total of 6 per cent in the same period, but still constitutes only NOK 63 billon of Norwegian banks’ total inter-bank debt. It is however important to point out that the dominance of foreign inter-bank loans is largely due to loans from the parent company to foreign-owned banks operating in Norway.

Short-term security debt on the lowest level since November last year

Norwegian banks’ total short-term security debt has, contrary to bond debt and inter-bank debt, fallen quite sharply. At end-August 2008 Norwegian banks’ total short-term security debt amounted to NOK 113 billion, a decrease of nearly 6 per cent from July 2008. The decrease from July to August 2008 succeeds a three month period of monthly decreases between 7 and 10 per cent. Norwegian banks’ total short-term security debt is at the lowest level since November last year. There has been a decrease both in the domestic and the foreign short-term security debt. The domestic short-term security debt fell by nearly 3 per cent from July to August 2008, succeeding a sharp increase of nearly 9 per cent in the previous month. The foreign short-term security debt fell by a total of 7.6 per cent from July to August 2008. This succeeds three months with even sharper falls in the foreign short-term security debt. From April to May 2008 it fell by 7 per cent, the preceding month it fell by 10.7 per cent and from June to July 2008 the debt fell by a total of 18.8 per cent. At end-August 2008 the foreign short-term security debt amounted to NOK 68 billion, the lowest level since October 2007. The domestic short-term security debt amounted to NOK 45 billion at end-August 2008.

Loans from the Norwegian central bank amounted to NOK 42 billion at end-August 2008, down from NOK 50 billion last month.

Decrease in foreign funding for the first time since February

Total funding from foreign sources have decreased from July to August 2008. This is the first monthly decrease since February 2008. Funding from domestic sources, on the other hand, increased by 2 per cent from July to August 2008, a riseequivalent to the previous month. The increase in July and August succeeded two months with decease in domestic funding.

Even though foreign funding sources still constitute a considerable part of Norwegian banks’ funding, the figures for August 2008 indicate that Norwegian banks are trying to reduce their dependency on foreign funding. These figures, however, do not reflect the effect of the escalation of the financial turmoil in the last few weeks.