The CRR and CRD IV enter into force in Norway at year-end while the increase in systemic risk buffer is postponed till end of 2020

The Norwegian Ministry of Finance announced on Thursday 5 December that the CRR and CRD IV will (finally) enter into force in Norway on 31 December 2019. Further, on 11 December the Ministry published a proposal for adjustments to the capital requirements which will enter into force at year-end 2020. The Ministry is satisfied with the overall capital levels in Norwegian banks. The aim of the new measures is to ensure that Norwegian banks maintain their capital levels and that non-Norwegian banks are subject to the same requirements when operating in Norway.

The Norwegian Ministry of Finance announced on 5 December 2019 that the incorporation of the EUCapital Requirements Regulation (CRR) and the fourth Capital Requirements Directive (CRD IV) in the EEA agreement will take effect from year-end, and that the Ministry will adopt the necessary legislation  so that the package will apply to Norwegian banks from 31 December 2019. With the implementation of CRR, the so-called Basel I floor will be removed, and the SME discount, resulting in lower risk weights for loans to small and medium-sized businesses, will be introduced. As a consequence, most Norwegian banks will obtain higher capital adequacy ratios (all else being equal), where the capital ratios for banks that use internal models (IRB) will increase the most.

The Norwegian authorities have been concerned that changes in risk weights resulting from the implementation of CRR / CRD IV may lead to a reduction in the capitalisation of Norwegian banks. Therefore, on December 11, the Ministry of Finance published a new proposal to adjust the capital requirements for Norwegian banks following the implementation of CRR / CRD IV. The proposal is based on the consultation paper published by the Ministry on June 25, 2019, but the rules will not take effect until the end of 2020, a year later than originally proposed.

New systemic risk buffer from year-end 2020

Despite criticism from banks that are not using internal models, and that will have no benefit from the removal of the Basel 1-floor, the Ministry maintains its proposal of an increase in the systemic risk buffer. According to the proposal, a systemic risk buffer of 4.5 per cent shall apply, but only to exposures in Norway, contrary to the current systemic risk buffer requirement of 3 per cent that applies to all exposures. In addition, buffer requirements in force in other countries that address systemic risk in general (i.e. not institution specific risk), should also apply to Norwegian banks' exposures in the respective countries. For smaller banks in Norway (that do not use advanced IRB), there will be a transitional period until 31 December 2022, where the current systemic risk buffer requirement of 3 percent for all exposures will apply. The new systemic risk buffer will be notified to the relevant EU and EEA authorities in accordance with the procedures set forth in CRD IV, and the Ministry will request the European Systemic Risk Board ( ESRB) to issue a recommendation that the authorities in other EU- and EEA states recognise the requirement and apply it to non-Norwegian banks' exposures in Norway.  It remains to be seen whether other EU- and EEA-states will apply the measure reciprocally, as it would increase the capital requirements for some institutions significantly when operating in Norway.

New floors for real estate risk weights

Further, to ensure that IRB banks maintain a minimum level of risk weights for exposures to residential and commercial real estate in Norway, temporary floors for average risk weighting of such loans of 20 per cent and 35 per cent, respectively, will be introduced. The floors will apply for a period of two years from the end of 2020. For Norwegian banks, this requirement will have little practical impact, since they already have average risk weights above these levels. The measure will be notified to relevant EU and EEA authorities, and the Ministry will request the ESRB to issue a recommendation that authorities of other EU- and EEA countries recognise the Norwegian requirement and apply it to non-Norwegian banks' exposures in Norway. According to the Ministry, especially the 35 per cent floor for commercial real estate will result in higher risk weights for most non-Norwegian banks, if recognised by their respective home countries.

Changes to the buffer for systemically important institutions

Finally, the Ministry proposes amendments to the buffer requirement for other systemically important banks, which, going forward, will be differentiated based on the degree of systemic importance. Banks that meet the current objective criteria for systemic importance (institutions with total assets of more than 10 per cent of mainland Norway's GDP or more than 5 per cent of total lending to the public in Norway) will receive a buffer requirement for other systemically important institutions of 1 per cent. Banks that meet twice the current objective criteria will receive a buffer requirement for other systemically important institutions of 2 percent. The Ministry of Finance may still decide that institutions, other than those who meet the objective criteria, should be considered systemically important, based on the institution's scope of operations, the complexity of the institution, the role of the institution in the financial infrastructure and the degree to which the institution is interconnected with the rest of the financial system. So far, the Ministry has only considered Kommunalbanken and DNB as systemically important, based on the objective criteria.

The Ministry of Finance has published a memo describing the justification for the systemic risk buffer which can be found here (in Norwegian and English).

It is expected that the relevant EU- and EEA authorities will give their opinion the proposed measures within two months.