Reduction of the countercyclical buffer

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Today, the Ministry of Finance has decided to follow Norges Bank’s advice to reduce the countercyclical capital buffer requirement from 2.5 to 1 percent with immediate effect. Norges Bank says that there is a risk of a pronounced economic downturn as a result of the coronavirus outbreak. The buffer requirement is reduced to prevent tighter lending standards from amplifying a downturn.

Norges Bank is tasked with providing advice to the Ministry on the level of the countercyclical capital buffer requirement. In a letter of 12 March 2020, Norges Bank recommends reducing the buffer requirement from 2.5 to 1 percent with immediate effect.

Norges Bank says that the outbreak of coronavirus and the measures to limit contagion will have a significant negative impact on growth in the Norwegian economy. The bank also says that there is substantial uncertainty about the duration and the consequences of the outbreak and a risk of a pronounced economic downturn. Norwegian banks are profitable and solid, and they have sufficient capital to absorb losses in the event of a severe downturn. Norges Bank says however that a tightening of lending standards may amplify the downturn in the economy. Norges Bank also says that when banks’ general meetings decide on dividend payments, they should in the period ahead take account of the extraordinary situation now facing our country.

Norges Bank does not expect to advise the Ministry to increase the buffer rate again until 2021 Q1 at the earliest. Normally, implementation of an increase in the countercyclical capital buffer will not be effective until 2022 Q1 at the earliest.

In a separate letter of 12 March 2020, Finanstilsynet recommends keeping the countercyclical buffer unchanged in 2020 Q1.