Norway's banks should brace for increased loan losses, says regulator

OSLO (Reuters) - Norwegian banks could face higher loan losses in the period ahead due to rising interest rates and a weaker economic outlook, the country's Financial Supervisory Authority (FSA) said in a report on Thursday.

The FSA warned of heightened risk of financial instability, citing high household indebtedness and elevated property prices as key vulnerabilities in the Norwegian financial system.

"Finanstilsynet expects Norwegian banks' capital planning to factor in losses that may arise in a stagflation scenario featuring a sharp rise in interest rates, higher unemployment and a property market crash," FSA Director General Morten Baltzersen said in a statement.

After a long period of substantial increase in the prices of both resident and commercial properties, there is now a heightened risk of a sharp fall on these markets which pose an increased credit risk for the banks, the regulator said.

"Commercial property companies also have large volumes of debt falling due over the next few years, which entails a considerable refinancing risk," Baltzersen said.

While Norwegian banks meet regulatory capital requirements and have had high profits in the past two years, the regulator's updated stress test show that banks may suffer substantial losses and be required to draw on their capital, the FSA added.

(Reporting by Victoria Klesty, editing by Terje Solsvik)