ESRB recommends reciprocation of Norwegian capital requirements for banks
News story | Date: 14/04/2023 | Ministry of Finance
The European Systemic Risk Board (ESRB) has issued a recommendation to other EEA states to reciprocate Norwegian capital requirements for banks. The recommendation concerns the systemic risk buffer requirement and temporary risk weight floors for real estate exposures.
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, applicable to exposures in Norway only. 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. ESRB recommended in 2021 that relevant authorities reciprocate the measures.
In line with advice from Norges Bank, the Ministry of Finance on 16 December 2022 (news story) decided to maintain the systemic risk buffer requirement at 4.5 percent. Banks not using the Advanced IRB Approach, which initially were to be subject to the 4.5 percent systemic risk buffer requirement from year-end 2022, were given a one-year extended transitional arrangement, so that these banks must meet the 4.5 per cent buffer requirement from year-end 2023. The Ministry of Finance also decided to extend the risk weight floors at the same levels as when they were implemented at year-end 2020.
New recommendation from the ESRB
In December 2022, the Ministry of Finance requested the ESRB to issue a new recommendation on reciprocation of the Norwegian requirements. The Ministry also requested lowering of the so-called materiality threshold for the systemic risk buffer from NOK 32 to 5 billion in risk-weighted assets in the Norwegian market. The ESRB has published changes to its recommendation No. 2015/2, which was adopted on 6 March this year. The ESRB's recommendation states that the authorities of other EEA countries should reciprocate the systemic risk buffer requirement within three months after publication in the Official Journal of the European Union at the latest for banks that are above the threshold value of NOK 5 billion. The recommendation further states that foreign banks not using the Advanced IRB Approach should meet the requirement from year-end 2023, since Norwegian non-IRB banks were given a one-year extended transitional arrangement.
The ESRB recommendation is particularly relevant for Nordic banks with activities in Norway. In 2016, Nordic authorities signed a MoU (news story 16 Desember 2016) on extended cooperation regarding cross-border banking activities, where the authorities acknowledged ESRB recommendations as a minimum standard for reciprocation of other states’ macroprudential measures. The Norwegian systemic risk buffer and temporary floors for average risk weights could increase capital requirements for foreign banks in Norway, which will contribute to financial stability and a level playing field in the Norwegian banking market.