Countercyclical buffer increases

Today, the Ministry of Finance has decided that the countercyclical capital buffer requirement for banks shall be increased to 1.5 percent from 30 June 2022, in line with the quarterly advice from Norges Bank.

The countercyclical capital buffer is currently set at 1 percent, after the Ministry reduced the buffer requirement from 2.5 to 1 percent in March 2020, in line with Norges Bank’s advice.

The purpose of the countercyclical capital buffer requirement is to strengthen banks’ solvency and resilience to absorb loan losses, in order to mitigate the risk that banks will amplify a downturn by reducing their lending. Banks should hold a countercyclical capital buffer when financial imbalances are building up or have been built up.

Each quarter, Norges Bank shall provide advice to the Ministry on the level of the countercyclical capital buffer requirement. In a letter of 16 June 2021, Norges Bank advised the Ministry of Finance to increase the buffer rate to 1.5 percent with effect from 30 June 2022. Norges Bank says that the activity in the Norwegian economy has picked up after the sharp fall in spring 2020. The authorities have begun a gradual reopening of society, and unemployment has fallen. Moreover, Norges Bank says that creditworthy businesses and households appear to have ample access to credit. Both property prices and household debt ratios are at high levels. Property price inflation is expected to continue to moderate ahead. Moreover, Norges Bank says that the uncertainty related to credit losses is still higher than normal. Banks are well equipped to meet an increased countercyclical capital buffer requirement while maintaining credit supply. Norges Bank expects the buffer to return to 2.5 percent in the period ahead. On the basis of its current assessment of economic developments and prospects for bank losses and lending capacity, Norges Bank will advise further increasing the buffer in the course of the year.

Norges Bank’s assessment is published in its Monetary Policy Report with financial stability assessment 2/21. In a separate letter of 16 June 2021 to the Ministry, Finanstilsynet said that it concurs with Norges Bank’s advice.

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