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Countercyclical buffer increases

Historical archive

Published under: Solberg's Government

Publisher: Ministry of Finance

Today, the Ministry of Finance has decided that the countercyclical capital buffer requirement for banks shall be increased to 2.5 percent from 31 December 2019, in line with the quarterly advice from Norges Bank.

The buffer requirement currently stands at 2 percent, as decided by the Ministry in December 2016. 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 12 December 2018, Norges Bank advised to increase the level to 2.5 percent effective from 31 December 2019. Norges Bank said that household debt ratios are high and rising, and that property prices have risen rapidly for many years and are now at historically high levels. As a result, financial imbalances have built up. Looking ahead, low house price inflation and gradually rising interest rates are expected to curb a further increase in debt growth. The persistent and sharp rise in commercial real estate prices is contributing to higher financial imbalances. Norges Bank also said that banks should become more resilient during an upturn, and pointed out that certain EU regulations will be implemented in 2019, which will reduce the capital required to achieve the same risk-weighted capital ratio level. This means that banks can now withstand an increase in the countercyclical buffer requirement without having to make substantial adjustments. Norges Bank’s assessment is published in its Monetary Policy Report with financial stability assessment 4/18.

In a separate letter of 12 December to the Ministry, Finanstilsynet said that it concurs with Norges Bank’s advice.