Banks need more capital
- Banks need more capital to improve access to funding and to be more robust in the future. They ought to take a precautionary approach and build up capital now. The Government Finance Fund has been established to facilitate banks’ ability to strengthen their solidity and this will improve credit provision capacity, says Deputy Governor Jan F. Qvigstad in connection with today’s publication of the report Financial Stability 1/09.
The financial turbulence has led to a demanding situation for banks. Loan losses have increased over the past six months and profitability has declined. Banks’ losses will continue to increase as the economic downturn adversely affects borrowers. Industries with substantial bank debt and weak prospects are likely to incur the largest losses. This applies, for example, to commercial property and shipping. If economic developments prove to be broadly in line with projections, banks are expected to remain in compliance with the official capital adequacy requirements.
- Banks must nonetheless provision for adverse periods when assessing their capital needs. Their financial strength can be bolstered by increasing earnings, cutting costs or by procuring new capital. They can raise capital from existing owners, in the market or by applying to the Government Finance Fund, says Deputy Governor Jan F. Qvigstad.
The financial crisis has revealed a need for more Tier 1 capital of good quality at financial institutions. In time, when the turmoil has come to a definitive end, new rules are likely to subject banks to higher capital requirements.
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