Press release | Date: 09/09/2020| No: 63/2020
The COVID-19 outbreak has led to the largest setback in both the Norwegian and the global economy in decades, and the economic outlook is uncertain. Many businesses have now restarted their operations, but there is still a risk that the economic development will turn out to be weaker than expected, for example in the case of new large virus outbreaks. Well-capitalized banks is a prerequisite for banks to be able to cover large losses while providing credit to businesses and households. It is therefore important that they retain profits at this time.
“Despite seeing signs of improvement in the Norwegian and the global economy these last months, risks are still present. I therefore expect banks to refrain from making dividend payments and share buy-backs until the uncertainty has further subsided,” says Minister of Finance Jan Tore Sanner.
In March, the Ministry of Finance expressed a clear expectation that Norwegian credit institutions and insurers refrain from distributing profits in any form until the uncertainty regarding the economic outlook has subsided. In July, the Ministry sent a communication to the European Systemic Risk Board (ESRB) describing the actions undertaken by Norwegian authorities in response to a recommendation to request financial institutions to refrain from making voluntary pay-outs in light of the economic uncertainty.
The ESRB recommendation is aimed towards all financial institutions irrespective of their financial position. However, the ESRB does point out that the nature of financial institutions and their ability to contribute to the mitigation of systemic risk to financial stability should be taken into account when implementing the recommendation. The Ministry of Finance notes that especially the larger Norwegian banks are of great significance for the stability of the financial system, and that authorities’ expectations on pay-outs should be regarded in the context of reduced capital requirements. In March, the Ministry reduced the countercyclical capital buffer requirement for banks.
Insurers are also impacted by the economic uncertainty, inter alia by the low interest rate environment. However, there is less reason to believe insurance companies face as high risks as banks. Moreover, insurers’ capital requirements have not been reduced. Insurance companies should therefore to a larger degree be able to base their distribution policy on thorough analyses of their own solvency position.
“We have until now fared fairly well through the crisis, and Norwegian banks are amongst the most resilient in Europe. Retaining capital in banks going forward will contribute to both banks and the Norwegian economy being well-positioned to handle the challenges that may lie ahead,” says the Minister of Finance.