Vulnerabilities have increased, but banks are better prepared to absorb losses
"Norwegian banks' capital buffers have increased, and liquidity has improved over the past year. At the same time, some aspects of the Norwegian economy are a source of vulnerability for banks", says Deputy Governor Jon Nicolaisen in connection with the publication of the 2015 Financial Stability Report.
The fall in oil prices has weakened the growth outlook and has heightened uncertainty regarding further developments in the Norwegian economy. High household debt and a sharp contraction in elevated real estate prices could amplify a downturn. Banks' short-term foreign currency funding makes them vulnerable to financial market turbulence. At the same time, well-capitalised and liquid banks put the Norwegian economy in a better position to weather a downturn and financial turbulence.
The capital requirements banks are facing take into account banks' risk of losses by applying risk weights calculated on the basis of historical loan losses. The financial crisis showed that risk weights can become too low during an upturn, which is why a backstop mechanism is needed. Currently, the transitional rule sets a floor for risk weights.
"A sufficiently high leverage ratio requirement could replace the current transitional rule. The requirement should be sufficiently high to sustain banks' resilience to losses", says Deputy Governor Nicolaisen.
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