Norges Bank


Advice on the countercyclical capital buffer 2015 Q4

Norges Bank's letter of 16 December 2015 to the Ministry of Finance

Norges Bank is responsible for preparing a decision basis and advising the Ministry of Finance on the level of banks' countercyclical capital buffer four times a year. The buffer rate is set at 1 percent. In June 2015, the Ministry of Finance decided to increase the buffer rate to 1.5 percent, effective from 30 June 2016. The decision basis for Norges Bank's advice on the countercyclical capital buffer in 2015 Q4 is presented in the December 2015 Monetary Policy Report (4/15).

The premise for Norges Bank's assessment is that banks should build up and hold a countercyclical capital buffer when financial imbalances are building up or have built up. The buffer rate will be assessed in the light of other requirements applying to banks. The buffer rate can be reduced in the event of an economic downturn and large bank losses with a view to mitigating the procyclical effects of tighter bank lending. The buffer rate should not be reduced automatically even if there are signs that financial imbalances are receding. The countercyclical capital buffer is not an instrument for fine-tuning the economy.

Banks have posted solid earnings, and capital ratios have risen slightly. At the end of Q3, the average Common Equity Tier 1 (CET1) ratio for the largest banks was 13.9 percent. Most banks must continue to build capital to reach their announced capital targets in 2016. Banks' funding costs have edged up recently, but banks still have ample access to wholesale funding. In Norges Bank's lending survey, banks announced that credit standards for enterprises would be tightened. Bank loan losses are still low.

Norges Bank's assessment of financial imbalances is based on the credit-to-GDP ratio and its deviation from a long-term trend. Overall credit to households and enterprises expanded faster than mainland GDP in the years preceding the financial crisis. The credit indicator has continued to rise in the post-crisis years, but at a gentler pace. Household debt continues to rise somewhat faster than disposable income. Debt growth has edged down recently. Growth in corporate bank debt has increased in the past year, particularly for enterprises in commercial real estate and construction. Growth in corporate bond debt is low, and oil-related enterprises with a low credit rating are finding it difficult to access bond markets.

The European Systemic Risk Board (ESRB) recommends the calculation of technical reference rates for the buffer. The long-term trend in the credit indicator can be calculated by applying different methods. Applying the trend calculation method proposed by the Basel Committee, the reference rate was 0 percent in 2015 Q3. Using an alternative trend calculation method, which has been shown to provide a better leading indicator of crises, the reference rate was 1.25 percent in Q3, the same as in Q2. The ESRB stipulates that there should not be a mechanical relationship between the reference rate and the buffer rate, but that the requirement should be based on a broader decision basis.

In addition to the credit indicator, Norges Bank takes account of developments in real estate prices and banks' wholesale funding ratios. Through the past year, national house prices have risen approximately in pace with household disposable income. The commercial property price indicator has risen markedly in recent years. Banks' wholesale funding ratios have been stable.

The persistent rise in household debt ratios and high real estate price inflation in recent years are signs that financial imbalances have built up. Norges Bank's assessment of financial imbalances is little changed since September. Weak growth in the Norwegian economy and signals of somewhat tighter bank credit standards may restrain credit growth ahead. On the other hand, the decline in lending rates over the past year may entail a risk of a renewed pick-up in real estate price inflation and debt growth.

On the basis of an overall assessment, Norges Bank's Executive Board has decided to advise the Ministry of Finance to keep the buffer rate unchanged.

In preparing its advice on the countercyclical capital buffer, Norges Bank has exchanged information and assessments with Finanstilsynet (Financial Supervisory Authority of Norway).



Øystein Olsen

Ida Wolden Bache


Copy: Finanstilsynet

Published 17 December 2015 10:03