Norges Bank is responsible for preparing a decision basis and advising the Ministry of Finance on the level of the countercyclical capital buffer four times a year. On 19 December 2014, the Ministry of Finance decided to keep the buffer rate unchanged at 1 percent effective from 30 June 2015, in line with Norges Bank's advice. The decision basis for Norges Bank's advice on the countercyclical capital buffer in 2015 Q1 is presented in the March 2015 Monetary Policy Report.

The premise for Norges Bank's assessment is that banks should build up and hold a countercyclical capital buffer when financial imbalances are building up or have built up. The buffer rate will be assessed in the light of other requirements applying to banks. The buffer rate can be reduced in the event of an economic downturn and large bank losses with a view to mitigating the procyclical effects of tighter bank lending. The buffer rate should not be reduced automatically even if there are signs that financial imbalances are receding. The countercyclical capital buffer is not an instrument for fine-tuning the economy.

Banks posted solid earnings in 2014 and continued to build capital. The average Common Equity Tier 1 (CET1) ratio for the largest banks was 12.4 percent at the end of the year. This is higher than the capital requirements applicable from 1 July 2015. The capital requirement for systemically important banks will increase further from summer 2016.

Norges Bank's assessment of financial imbalances is based on the credit-to-GDP ratio and its deviation from a long-term trend. Overall credit to enterprises and households is at a high level relative to mainland GDP. Credit growth has decreased somewhat since the financial crisis and the credit indicator has remained fairly stable. Although growth in household debt slowed gradually through 2014, household debt is still growing slightly faster than household income. Growth in corporate debt edged up towards the end of 2014, but is still fairly low.

The European Systemic Risk Board (ESRB) recommends the calculation of technical reference rates for the buffer. The long-term trend in the credit indicator can be calculated by applying different methods. Applying the trend calculation method proposed by the Basel Committee, the reference rate was 0 percent in 2014 Q4. Using an alternative trend calculation method, which has been shown to provide a better leading indicator of crises, the reference rate was ¾ percent. The ESRB emphasises that there should not be a mechanical relationship between the reference rate and the buffer rate, but that the requirement should be based on a broader decision basis.

In addition to the credit indicator, Norges Bank takes account of developments in property prices and the share of bank funding obtained in financial markets. Over the past year, house prices have risen more rapidly than household income. The commercial property price indicator has risen markedly. Banks' share of market funding has been stable at a high level in recent years.

The rise in house and commercial property prices may be a sign that financial imbalances are building up further. This may indicate that the countercyclical capital buffer rate should be raised. On the other hand, growth in corporate debt is fairly low, and higher capital requirements for systemically important banks are already scheduled to apply from summer 2016.

The decision basis as a whole suggests that the buffer rate should be kept unchanged at 1 percent now. If house prices continue to increase rapidly and credit growth rises, it will be appropriate to advise the Ministry to raise the level of the countercyclical capital buffer effective from summer 2016.

In preparing its advice, Norges Bank has exchanged information and assessments with Finanstilsynet (Financial Supervisory Authority of Norway). Norges Bank notes that Finanstilsynet has proposed measures that may contribute to curbing household credit growth.

Sincerely,

Øystein Olsen

Ida Wolden Bache