News story | Date: 16/12/2022 | Ministry of Finance
Today, the Ministry of Finance has decided to maintain the systemic risk buffer at 4.5 percent. For banks not using the Advanced IRB Approach, the phasing-in period is prolonged by one year. Thus, the systemic risk buffer of 4.5 percent shall apply from 31 December 2023 for these banks. The Ministry has also decided to extend the current risk weight floors that apply to residential and commercial real estate exposures for IRB banks.
The measures contribute to maintaining a well-capitalised Norwegian banking sector. This is important in a time of substantial uncertainty about the economic outlook and increased risk of financial instability.
The systemic risk buffer
After an assessment of the structural vulnerabilities in the Norwegian financial system, the Ministry of Finance decided in December 2019 to increase the systemic risk buffer requirement from 3.0 to 4.5 percent from year-end 2020. Norges Bank is tasked with giving the Ministry advice every two years on the systemic risk buffer requirement, and advised the Ministry of Finance on 7 November 2022 to maintain the buffer at 4.5 percent. Norges Bank particularly emphasized the high level of debt in many households, the banks’ substantial exposure to commercial real estate and the fact that banks own a large part of each other’s bonds.
In 2019, it was decided that the increased systemic risk buffer requirement would apply for banks not using the Advanced IRB Approach from year-end 2022, since these banks had not received as large reductions in their real capital requirements as the IRB banks, and more time was needed to ensure consistency between Pillar 1 and Pillar 2 requirements. Pillar 2 assessments are carried out every two or three years for non-IRB banks. Since the end of 2019, Finanstilsynet has set revised Pillar 2 requirements for many of the non-IRB banks, even if the work was affected by the pandemic. However, the work is somewhat delayed, and a significant number of non-IRB banks will not have received a new decision until 2023. The Ministry of Finance has therefore decided to extend the transitional arrangement for these banks by one year, so that they must meet the systemic risk buffer requirement of 4.5 per cent from the end of 2023. They are currently subject to a systemic risk buffer requirement of 3.0 per cent for all exposures.
Commercial and residential real estate exposures
In December 2019, the Ministry of Finance also adopted temporary floors for average risk weights for residential and commercial real estate exposures of 20 and 35 per cent, respectively, for IRB banks, for two years from December 2020. The Norwegian Financial Supervisory Authority (Finanstilsynet) has assessed the need to extend or amend the floors from year-end 2022. Finanstilsynet recommends increasing the floors for residential and commercial property loans to 25 and 45 per cent, respectively. The proposal was on a public consultation until 29 November 2022. Norges Bank recommended in a letter 26 October 2022 to maintain the floors at the current levels.
The Ministry of Finance has decided to extend the floors at the current levels. The Ministry agrees with Finanstilsynet and Norges Bank that the financial stability outlook has weakened over the past year. The Ministry nevertheless considers the floors sufficient for IRB banks operating in the Norwegian market.
Finanstilsynet has also assessed risk weights for residential and commercial real estate in non-IRB banks, and concluded that no changes should be made. Finanstilsynet's assessments will be subject to a public consultation.
As with the systemic risk buffer requirement, the Ministry is today notifying the ESRB of the decision regarding the risk weight floors. In addition, the EFTA Surveillance Authority (ESA) is notified.