Dear Commissioner,

I hope you are well, and thanks for our productive meeting in November last year. Following further up on our discussions, I want to add some perspectives on banking regulation.

We all want Europe to succeed going forward, and a well-functioning banking sector is essential for the economy. I have noticed that there are different views on how banking regulation may contribute to a competitive economy, and I welcome the recent consultation from the Commission on the matter. The Norwegian Ministry of Finance has submitted a reply to the consultation, and by this letter, I want to highlight some important aspects from a Norwegian perspective.

To summarize, the key messages in this letter are:

  • Simplification is welcome. A less complex rulebook and streamlined supervisory practices can enhance competitiveness and efficiency.
  • Resilience must be preserved. A strong, well-capitalised banking sector is a source of competitiveness, not a constraint.
  • Improvements in the macroprudential framework should be considered. Simplification of the capital stack and mandatory reciprocity may improve the framework. Flexibility to handle local risks should be maintained, and notification procedures should be simplified.
  • More convergence in supervisory practices is needed. Simplification of the regulation should be accompanied by harmonised supervisory tools to be used by local supervisors, best suited to consider risks in the individual banks.
  • Competition in regulatory standards should be avoided.
    Europe should focus on areas affecting the level playing field within the internal market and strive for the reestablishment of global cooperation.
  • A diverse banking sector is beneficial.
    A diverse banking sector is beneficial for meeting the needs of different customers and supporting the economy under different conditions.

Simplification is welcome

I strongly believe there are areas for improvements in the banking regulation, cf. also the letter from the Nordic supervisory authorities in July 2024. Reduced complexity is of particular importance for smaller economies.

Resilience must be preserved

Some stakeholders suggest there is a balance between ensuring financial stability on the one hand, and an innovative and efficient financial banking sector on the other, based on an assumption that financial stability and competitiveness are conflicting objectives. As the memories of the financial crisis fades, this argument seems to get increasing support, even if empirical evidence shows otherwise. In my view, there is no conflict. Our approach to financial regulation, including macroprudential policies, has been shaped by the lessons learned from the Norwegian banking crisis in the early 1990s and, later, from the global financial crisis.

Banks in Norway are currently solid, highly innovative, efficient and generating strong profits. I firmly believe that resilience is a source of competitive strength, both for the individual banks and for the European economy. Well capitalised banks are performing well and will be better placed to maintain its position and support the economy in a downturn. Resilience in the system reduces the risk of a banking crisis with long-term consequences for the economy. We are living in times of uncertainty. We must avoid weakening resilience in a time when it is needed the most.

Importantly, strengthening resilience does not preclude simplification. I believe a more efficient regulatory and supervisory system can be achieved by reducing unnecessary complexity and reinforcing the internal market.

Improvements in the macroprudential framework should be considered

The Nordic region is characterised by a highly integrated cross-border banking system dominated by regional banking groups, strong financial interconnectedness and small and open economies exposed to external shocks. Macroprudential tools plays a central role in safeguarding the financial stability. As an active user of the tools, we find the framework unnecessary complex. Simplification should aim to improve the transparency and usability of macroprudential instruments. Simplification may be achieved by merging the different buffers (for example into two buffers, one releasable and one non-releasable buffer), simplifying notification procedures and standardising the framework for building and using the buffers.

Flexibility to tackle country-specific risks

Despite increasing financial integration, macro-financial risks differ markedly across countries, including housing market dynamics, credit growth patterns and exposure to external shocks. It is important that standardisation of the macroprudential framework does not limit the ability of national authorities to apply macroprudential measures tailored to country-specific risks. Sufficient flexibility is essential to prevent procyclical developments and mitigate systemic risks early. Simplification efforts must therefore strengthen—rather than weaken—the operational effectiveness of macroprudential supervision. The objective should be a framework that is simpler, more predictable, and better coordinated across borders, while maintaining adequate flexibility to tackle country-specific risks.

Reciprocity of macroprudential instruments should be mandatory

In a cross-border banking system, mandatory reciprocity is important to ensure that macroprudential measures apply equally to local subsidiaries, branches of foreign institutions, and cross-border lending activities within the internal market. Enhanced and more automatic reciprocity would reduce regulatory arbitrage, simplify implementation, improve policy transmission, and strengthen financial stability across jurisdictions.

More convergence in supervisory practices is needed

As pointed out by EBA in previous reports on convergence, there are differences in supervisory practises in the EEA. We have recently seen that pillar 2-requirements for certain banks have been reduced significantly after moving from one country to another, even if there has been no reduction in risks after the change of location. This difference in supervisory practices may have implications for the level-playing-field and for financial stability. Harmonising supervisory practices further is in my view essential, taking into account that both the size of the banking system as well as the supervisory resources vary between countries. Harmonising practises should not reduce the importance of supervisory judgement in relation to bank-specific risks.

Competition in regulatory standards should be avoided

Global cooperation is under pressure, and from a banking regulation perspective there is a risk of “race to the bottom” with an aim to attract business and increase economic growth. As previously mentioned, this may give results in the very short run with significant costs and negative effects in the long run. This is a strategy which is particularly dangerous in the current situation with elevated risks. Instead of participating in the global race on banking regulation, Europe should focus on areas affecting the level playing field within the internal market and strive for the reestablishment of global cooperation.

A diverse banking sector is beneficial

The Nordic region is characterised by significant cross-border business, with banks operating in several countries via branches. At the same time the Norwegian banking sector is diverse, consisting of small and large banks, local, national and cross-border banks. This diversity is beneficial for meeting the needs of different customers and supporting the economy under different conditions. In light of this, we should carefully consider the ambitions for consolidation and market integration.

Conclusion

I strongly support banking regulation that is simpler and better coordinated across borders, while maintaining sufficient flexibility to address country-specific systemic risks. At the same time, I am also convinced that well capitalised banks are in the best interest of Europe, and we should avoid regulatory changes that weaken resilience in the system. Norwegian authorities stand ready to share experiences and contribute to the development of concrete proposals to achieve the ambition of a better regulatory system supporting the European economy.

Yours sincerely,
Jens Stoltenberg