Press release | Date: 17/12/2020| No: 99/2020
Today, the Ministry of Finance has decided to follow Norges Bank’s advice not to change the countercyclical capital buffer requirement of 1 percent for banks.
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 16 December 2020, Norges Bank recommended keeping the level unchanged. Norges Bank says that the Norwegian economy is in the midst of a deep downturn. Economic activity has picked up since March, but higher infection rates and stricter containment measures are holding back the recovery. On the other hand, there is positive news about vaccines, and there are prospects that vaccination can begin in early 2021. This may result in a faster recovery than previously projected. Nevertheless, it will probably take time for economic activity to return to pre-pandemic levels. Overall, households and businesses appear to have ample access to credit. Norges Bank says that the outlook for losses is highly uncertain. Loan losses will in Norges Bank’s view likely be lower in 2021 than in 2020, but will still be markedly higher than the average for the past 20 years. Norwegian banks are well equipped to absorb higher losses while maintaining credit supply. On the basis of its current assessment of economic developments and prospects for bank losses and lending capacity, Norges Bank says it will advise increasing the buffer in the course of 2021. Norges Bank expects the buffer to return to 2.5 percent in the period ahead.
Norges Bank’s assessment is published in its Monetary Policy Report with financial stability assessment 4/20. In a separate letter of 16 December 2020 to the Ministry, Finanstilsynet said that it concurs with Norges Bank’s advice.