Countercyclical capital buffer

The countercyclical capital buffer is one of several elements of the new capital adequacy regulation for banks adopted by the Storting (Norwegian parliament) in June 2013. The Regulation on the Countercyclical Capital Buffer was laid down by Royal Decree on 4 October 2013.

Banks shall build up and hold a countercyclical capital buffer when financial imbalances are building up or have built up over a period. The buffer rate can be reduced in the event of an economic downturn and large bank losses. If the buffer functions as intended, banks will tighten lending to a lesser extent in a downturn. This may mitigate possible procyclical effects of banks' lending practice. When the buffer is increased in good times, it may also dampen rapid credit growth and restrain the build-up of financial imbalances.

The Ministry of Finance shall set the level of the countercyclical capital buffer each quarter. Norges Bank has been tasked with drawing up a decision basis and issuing advice on the buffer level to the Ministry of Finance. In drawing up the decision basis, Norges Bank and Finanstilsynet (Financial Supervisory Authority of Norway) exchange relevant information and assessments. The decision basis is published as part of Norges Bank's Monetary Policy Report with financial stability assessment. Advice on the level of the countercyclical capital buffer and a summary of the decision basis are submitted to the Ministry of Finance in connection with the publication of the Report. The advice is published when the Ministry of Finance has made its decision.

A decision to increase the buffer requirement shall normally enter into force no earlier than 12 months after the decision has been made. A decision to reduce the level of the buffer may enter into force immediately. The buffer requirement shall normally be between 0 and 2.5 percent of banks' risk-weighted assets. The requirement will apply to all banks operating in Norway, and will be applicable to branches of foreign banks further ahead.1

Footnotes

1 For foreign branches in Norway, the requirement will apply with certainty as from 2016 and then only be implemented gradually. It is up to the supervisory authorities in the home countries of these banks to determine whether the requirement should apply before 2016.

Published 4 December 2013 12:00