1. Idar Kreutzer CEO, Finance Norway
Implementation of crr/crd iv
Idar Kreutzer CEO, Finance Norway
Norwegian authorities have already implemented new capital requirements.
This fairly short presentation directs attention towards the implementation plan of stricter requirements in the coming years, the proposal on the policy framework for the countercyclical buffer, and a possible tightening of IRB mortgage risk weights.
All factors have in common regulatory approaches that can entail distortional effects on conditions of competition.
Oslo,
11/20/2018

2. Capital requirements in Norway for credit institutions and parent companies of banking groups
Capital ratio requirements in the new regulatory framework. Per cent, 1 July 2013 – 1 July 2016
Maximum counter-
cyclical buffer VI VI VI VI V V V
SIFI buffer IV IV IV IV IV
Systemic risk buffer
III
III
III
III
III
Conservation buffer
In Norway, new capital requirements already apply, from July 1st this year to be precise, and various requirements are imposed prior to EU-implementation. The legislation includes four new buffer requirements, a new minimum requirement on common equity tier 1 capital, and continuation of the 8 per cent minimum requirement. From July 1st 2013, the conservation buffer requirement is 2.5 per cent, and the systemic risk buffer requirement is 2 per cent. Moreover, the systemic risk buffer requirement is raised from 2 to 3 per cent from July 1st next year. From 1st of July 2015, a 1 per cent buffer requirement for systemically important institutions is imposed, and this requirement increases to 2 per cent by 1st of July However, it has not yet been clarified which institutions who will qualify for the SIFI requirement. If the countercyclical buffer requirement is set to 2.5 per cent in 2016, the overall capital requirement for systemically important banks will be 18 percent in less than three years. That would imply a substantial tightening – and with knowledge of some of the positions of the Ministry of Finance, the Central Bank and the FSA – this isn’t an unlikely policy tightening. II II II II
Additional Tier 1 + Tier 2 II I I I I I
Minimum requirements, CET 1
Source: Ministry of Finance and Norges Bank

3. Countercyclical buffer (CCB)
The Ministry will determine the CCB, based on advice from the Central bank
The buffer shall reflect financial imbalances that are building up or have been built up
Four key indicators, and different methods to calculate gaps
No benchmark buffer rate
Credit/GDP-gaps
Total credit mainland Norway as a percentage of mainland GDP. Deviation from trend. Percentage points Q4 – 2013 Q1
10 year rolling average, Central bank alternative
CCB = 2.5 if gap > 10
Central bank, main alternative
The Ministry of Finance issued in June a consultation on a regulation concerning the CCB. The Ministry will decide on the buffer rate, based on advice from the Central bank. The Ministry does not want the advice to be published prior to the decision is made, something which even the Central bank has criticized.
Concerning the purpose of the CCB, we believe that Norwegian authorities are not in line with the intention of CRD IV. According to the Ministry, the rate should be increased when financial imbalances are building up or have been built up over a period, and the Central bank has formulated a similar objective. So in other words, if credit growth becomes normal or even weak, the CCB-rate shall not necessarily be reduced, and we fear it will become an almost permanent requirement.
The Central bank will base its advice on four key indicators: i) the ratio of total credit to mainland GDP, ii) the ratio of house prices to household disposable income, iii) real commercial property prices, and iv) the wholesale funding ratio of banks.
The central bank has also used different methods to calculate indicators’ deviation from a long-term trend, the so-called gaps. As illustrated here, gaps for the same indicator varies substantially, which makes it difficult to infer a policy advice. The central bank has published all gaps in the chart.
Moreover, Norwegian authorities have so far not been willing to estimate a benchmark buffer rate, as CRD IV requires. Combined with large differences between various gaps for the same key indicator, this framework doesn’t point to a predictable and transparent policy practice.
CCB = 0 if gap < 2
BCBS methodology
Source: Norges Bank
11/20/2018

4. IRB mortgage risk weights
The Ministry of Finance has argued that elevated house prices and a high household debt burden pose a systemic risk not reflected in current IRB mortgage risk weights
On March 22, 2013, the Ministry issued a consultation on proposals for four new alternative sets of rules that each can replace the Basel I floor:
IRB mortgage risk weight floor as in the standardized approach, i.e. 35 per cent
The EAD-weighted LGD-floor increased to 20 per cent
Multiplying current IRB mortgage risk weights with 2
IRB mortgage risk weight floor set to 25 per cent
The Ministry of Finance, and also the FSA and the Central bank, have frequently stated that mortgage risk weights of IRB banks should be increased. Their argument is that a high house price level and household debt pose a larger risk to financial stability than what is reflected by current average mortgage risk weights, which vary from 10 to 13 per cent when disregarding the Basel I floor. In March this year, the Ministry of Finance issued a consultation, where four alternative rules for IRB mortgage risk weights were proposed, and each proposal was seen as an alternative to the current Basel I floor. The first alternative would raise RWA levels, while the last three alternatives would effectively hold risk weighted assets at the level implied by the current Basel I floor, which is an important consideration for the Ministry. The Ministry has not yet concluded, but we expect a decision this fall. Of the four alternatives, Finance Norway believes the LGD adjustment is the least unfortunate alternative. The reason is that this alternative would to some extent preserve risk sensitive capital requirements, it is the only proposal that is consistent with the regulation (CRR) and probably the only alternative that will comprise all mortgage lenders in Norway.
11/20/2018

5. How many measures should address systemic risk?
Countercyclical buffer ≤ 2,5 pct.
Systemic risk
SIFI buffer 2 pct.
Systemic risk
Too-big-too-fail
Systemic risk buffer 3 pct.
Systemic risk
Conservation buffer 2,5 pct.
Minimum requirements 8 pct.
But Finance Norway’s advice on the LGD adjustment is not our first-best option. What we would prefer, is that capital buffer requirements is directed against potential systemic risk, while rules for calculating risk weighted assets (RWA) should be entirely consistent with international standards.
The Norwegian Government will use buffer requirements directed against systemic risk. But they are also of the opinion that risk weights should address systemic risk, of which we disagree. While increased capital buffers will raise measured solidity, stricter, national RWA rules imply the exact opposite and blurs banks’ solidity.
If a level playing field should materialize in the European Economic Area, then it is imperative that RWA differences should reflect different risk profiles, and not varying risk weight rules and diverse supervisory practices.
Of particular interest for Norwegian banks, is the implementation of the Basel I floor. The floor has been imposed as a RWA backstop in Norway and in some other countries. But several countries have instead implemented the more lenient version where the floor is a restriction on the capital ratio [it can not be lower than 6.4 per cent measured according to Basel I].
From January 1st next year, the Basel I floor requirement will be part of the regulation (CRR), where the floor refers to own funds. So what would be interesting to discuss with you, is whether national governments have any opportunity to interpret a requirement that is part of a regulation [CRR, article 500].
Risk weighted assets
Systemic risk
11/20/2018

6. Some of Finance Norway’s concerns
Neither a EU/EEA nor Nordic level playing field, due to:
Early implementation of capital requirements in Norway that will not comprise all institutions operating in the Norwegian market
Material RWA differences due to special national rules and different interpretations of EU legislation
Norwegian macroprudential policy conduct and framework inconsistent with international guidelines and practice
Will a high Norwegian countercyclical buffer rate reflect elevated systemic risk or policymaker’s wish for banks to be excessively robust?
So far, the approach of Norwegian authorities has given cause for concern.
The early implementation will probably not comprise all credit institutions that provide loans in the Norwegian market.
There also a possibility that rules for IRB mortgage risk weights will be particularly strict, and that the Basel I floor will be maintained as a RWA backstop.
Furthermore, regarding the countercyclical buffer, we fear that its purpose and decision basis will not be in line with Basel recommendations and EU rules.
It may become difficult, especially for foreign investors, to assess whether a high buffer rate reflect that Norwegian authorities want an extraordinary robust banking sector, or whether the strict requirement mirrors a financial imbalance.
If a political desire for excessive solidity is perceived by investors as increased risk, it may have an unfortunate and significant impact on funding costs, which would imply unnecessary costs for the wider Norwegian economy.
11/20/2018