Countercyclical buffer unchanged Q1 2021

Today, the Ministry of Finance has decided to follow Norges Bank’s advice not to change the countercyclical capital buffer requirement of 1 percent for banks.

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 17 March 2021, Norges Bank recommended keeping the level unchanged. Norges Bank says that the Covid-19 pandemic has led to a sharp downturn in the Norwegian economy. Extensive government support measures are dampening the downturn and mitigating the risk of a more prolonged impact on output and employment. There is substantial uncertainty surrounding the economic recovery ahead. Since December, higher infection rates and stricter containment measures have weighed on economic activity, but there are prospects for a somewhat faster upturn through 2021 than assumed earlier. Overall, households and businesses appear to have ample access to credit. Both property prices and household debt ratios are at high levels. Since May 2020, house price inflation has risen markedly and household credit growth has edged up. Moreover, Norges Bank says that there is still uncertainty related to credit losses ahead for banks, but the banks are well equipped to absorb higher losses 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 increasing the buffer stepwise in the course of 2021.

Norges Bank’s assessment is published in its Monetary Policy Report with financial stability assessment 1/21. In a separate letter of 17 March 2021 to the Ministry, Finanstilsynet said that it concurs with Norges Bank’s advice.