Branches of foreign banks and credit supply
- Lars-Tore Turtveit
- Economic Commentaries
Branches of foreign banks have experienced more volatile lending growth than Norwegian banks in the past ten years. Although foreign branches are not subject to independent capital requirements, the banking group must comply with capital requirements in its home country. Volatility in lending growth may to some extent reflect the flexible allocation of capital within banking groups. In a crisis isolated to Norway, foreign branches can make a positive contribution to maintaining overall credit supply in Norway, while their impact can be negative in an international crisis. Norwegian banks are subject to high capital requirements in the interest of financial stability. Norwegian banks are required to be robust and capable of absorbing large loan losses while maintaining lending capacity during downturns. Foreign branches with lower capital requirements in their home countries have, in isolation, a regulatory competitive advantage but also weaker loss-absorbing capacity. Over time, this could lead to high lending growth and higher market share, but also to higher volatility in foreign branch lending. Foreign branches have increased their market share in the corporate market in the past ten years. The conversion of Nordea Bank Norge into a branch will considerably increase the market share of foreign branches.
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