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Public consultation on amendments to banks’ capital requirements

When the European capital requirements framework becomes part of the EEA Agreement later this year, many Norwegian banks’ actual requirements will be reduced. Today, the Ministry of Finance has issued a public consultation on draft amendments to maintain banks’ actual requirements at a level that is commensurate with prevailing risk factors in the Norwegian economy.

In order to promote financial stability and fair competition, the requirements should also apply to foreign banks’ activities in Norway. The draft implies an increase in the systemic risk buffer requirement from 3 to 4.5 percent, and the introduction of temporary risk weight floors for residential and commercial real estate exposures. The deadline for comments to the consultation is 30 September 2019.

Background

On 29 March 2019, the EU capital requirements framework (CRR/CRD IV) was incorporated into the EEA Agreement, and it will enter into force when all three EEA/EFTA states have lifted their constitutional reservations, which may happen in the second half of 2019. Certain elements of the Norwegian framework will then be harmonised with the European rules. This includes the introduction of the so-called SME discount factor, which will lower banks’ capital requirements for lending to small and medium-sized enterprises. Moreover, the Basel I floor will be abolished. The floor has prevented unjustifiably low capital requirements for banks using the internal ratings based approach (IRB banks).

Public consultation

The incorporation of the CRR/CRD IV framework means that the capital adequacy ratios for Norwegian and foreign banks will be more comparable. At the same time, the introduction of the SME discount factor and the abolishment of the Basel I floor imply that the capital requirements for many Norwegian banks will be reduced in real terms, without there having been any reduction in banks’ risk exposures. In order to maintain banks’ actual capital requirements at a level that is commensurate with prevailing risk factors in the Norwegian economy, the Ministry has drafted an amendment to increase the systemic risk buffer requirement from 3 to 4.5 percent, effective from 31 December 2019 for IRB banks. Other banks may phase in the increased buffer requirement until 31 December 2021.

An increased system risk buffer requirement is meant to capture structural vulnerabilities and other systemic risks in the Norwegian economy, and should therefore in principle only apply to banks’ exposures in Norway. In the same way as the bank-specific counter-cyclical buffer requirement, a bank-specific system risk buffer requirement should be calculated based on buffer rates applicable to exposures in different countries. The Ministry plans to ask the European Systemic Risk Board (ESRB) to issue a recommendation to other EEA states to recognise the Norwegian systemic risk buffer rate, so that it may also apply to foreign banks’ exposures in Norway, as provided for in Article 134 of the Capital Requirements Directive (CRD IV).

In order to ensure that Norwegian residential and commercial real estate exposures are not assigned unjustifiably low risk weights by IRB banks, the Ministry considers the introduction of temporary floors for average risk weights for such exposures at 20 and 35 percent, respectively. The average risk weights in most Norwegian banks are around or above these levels today. Such floors may promote a more prudent treatment of real estate exposures in the small number of banks that operate with lower average risk weights. If the risk weight floors are introduced, they will be applicable for a period of two years, and may be extended in line with the provisions in Article 458 of the Capital Requirements Regulation (CRR). The Ministry plans to ask the ESRB to issue a recommendation to other EEA states to recognise the risk weight floors.

The consultation paper (in Norwegian only)

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