The Effects of Oil Price Shocks on Bank Profitability and Financial Stability in Norway

Abstract

This thesis examines how oil price shocks affect bank profitability. We use this examination to assess the implications for financial stability in Norway. Our analysis employs a sample of commercial banks from 2012 to 2021. To control for persistence in profitability, we use dynamic panel data with a system generalized method of moments (GMM) estimator. This thesis differentiates between the direct and indirect effects of oil price shocks, where we explore the latter through non-linear relationships. The main findings are that oil price shocks have both a positive and negative impact on Norwegian banks through different channels. Credit exposure to the oil sector yields a positive, albeit small direct effect on profitability. Banks with a high level of non-interest income are also positively affected. Furthermore, we find a non-linear relationship between oil price shocks and inflation on bank profitability. Our results imply that the impact of the oil price shock is negative for high inflation levels. We present evidence that the negative effect is due to higher loan loss provisions. However, the overall assessment is that oil price shocks do not threaten financial stability. Even so, this thesis points out risk factors that should be considered.