More capital and liquidity will strengthen the resilience of Norwegian banks
"Norwegian banks' profitability has been stable and solid in recent years, but banks nevertheless remain vulnerable. New capital and liquidity requirements will put them in a better position to cope with market turbulence and economic downturns," says Deputy Governor Jon Nicolaisen.
Household debt in Norway is at a historically high level. The vulnerabilities that built up during the lead-up to the financial crisis are still present. This could amplify a future downturn in the Norwegian economy. The analyses in the 2014 Financial Stability Report show that increased capital buffers will improve banks' capacity to withstand a period of large loan losses without a substantial reduction in bank lending.
Liquidity buffers reduce bank vulnerability to market turbulence. A new liquidity coverage standard, the Liquidity Coverage Ratio (LCR), will be phased in across the EU from 2015. The requirement will also be made applicable to Norwegian banks. There is a limited supply of highly liquid securities in NOK. Bank liquidity regulation must therefore be adapted to Norwegian conditions.
"It would not be appropriate for Norges Bank to set up a new central bank facility to enable banks to meet the LCR requirement. Instead, banks can hold more liquidity in foreign currency," says Deputy Governor Nicolaisen.
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