How high should risk weights be on Norwegian residential mortgages?
- Henrik Andersen
- Staff Memo
The authorities and market participants have questioned whether banks in Norway hold sufficient equity capital for their residential mortgages. Banks calculate how much equity capital they must hold by weighting their assets by the applicable risk weights. The largest banks use internal models to estimate risk weights for their assets (the internal ratings-based approach, or IRB*). Following the introduction of new capital standards in 2007, residential mortgage risk weights have fallen by up to 80 percent for the IRB banks in Norway. At end-2012, the average residential mortgage risk weight of IRB banks in Norway was 11.2 percent, less than a third of the minimum requirement applicable to the smaller banks that use the standardised approach. This analysis uses historical default and loss data, stress tests and other points of reference to calculate what the average risk weight should be for Norwegian residential mortgages. The calculations show that the risk weights of IRB banks in Norway should be raised from current levels. The calculations, which apply data back to the banking crisis in the early 1990s, indicate that banks' risk weights for residential mortgages should be around 20 to 30 percent.
* DNB, Nordea Bank Norge, SpareBank 1 SR-Bank, Sparebanken Vest, SpareBank 1 SMN, SpareBank 1 Nord-Norge, SpareBanken Hedmark and Bank 1 Oslo Akershus.
Staff Memos present reports and documentation written by staff members and affiliates of Norges Bank, the central bank of Norway. Views and conclusions expressed in Staff Memos should not be taken to represent the views of Norges Bank.
ISSN 1504-2596 (online)