Advice on the countercyclical capital buffer 2019 Q4
Norges Bank's letter of 18 December 2019 to the Ministry of Finance
Norges Bank’s Executive Board has decided to advise the Ministry of Finance to keep the countercyclical capital buffer rate at 2.5 percent from the end of 2019.
Norges Bank is responsible for preparing a decision basis and advising the Ministry of Finance on the level of the countercyclical capital buffer for banks four times a year. Under the Financial Institutions Act, the countercyclical capital buffer shall as a rule be set between 0 and 2.5 percent of banks’ risk-weighted assets, but may be set higher in exceptional circumstances. The buffer is currently set at 2.0 percent, and the Ministry of Finance decided to raise the buffer rate to 2.5 percent in December 2018, effective from 31 December 2019. The decision basis for Norges Bank’s advice in 2019 Q4 is presented in the December 2019 Monetary Policy Report. Norges Bank published a revised framework for the elements that should be included in the decision basis for Norges Bank’s advice on 16 December 2019 (see Norges Bank Papers 4/2019).
Banks should build up and hold a countercyclical capital buffer when financial imbalances are building up or have built up. Large financial imbalances entail a risk of an abrupt decline in demand from households and enterprises and large bank losses. The current countercyclical capital buffer of 2.0 percent and the decision to increase the buffer to 2.5 percent reflect the build-up of financial imbalances over a long period.
The objective of the buffer is to increase banks’ resilience in a downturn and should not be changed frequently in an attempt to manage credit growth or asset prices. The buffer should not necessarily be reduced even if there are signs that financial imbalances are receding. In the event of a severe downturn and clearly reduced access to credit, the buffer rate should be lowered to counteract tighter bank lending.
In its assessment of financial imbalances, Norges Bank attaches weight to developments in credit and property prices, pricing of risk and lending conditions. Norges Bank also assesses households' and enterprises' access to credit, banks’ capacity to absorb losses and the effect of a change in the buffer requirement on banks and the economy.
Household debt-to-income ratios are high. Household debt continues to rise faster than income, but the difference has narrowed over the past year, owing to growth in disposable income and lower growth in household debt. Growth in corporate credit from domestic sources remains elevated and has outpaced growth in the economy since 2017 Q2. Enterprises' bank debt and revenues have grown at approximately the same pace in recent years.
Property prices are high after rising rapidly for many years. House price inflation has been moderate over the past two years and the housing market remains buoyant. House prices relative to household disposable income continue to decline. The rise in estimated selling prices for prime office space in Oslo has slowed over the past year.
In Norges Bank’s assessment, financial imbalances are no longer building up and there are now some signs that they are receding. Household debt growth has gradually slowed and is now close to growth in disposable income. Moderate house price inflation in recent years has reduced housing market vulnerabilities. The slower pace of debt growth and house price inflation may reflect bank credit standards requirements and interest rate increases over the past year. The rapid rise in commercial property prices has slowed.
Banks have good profitability, low losses and ample access to wholesale funding. Developments in credit growth and credit standards suggest that enterprises and households have ample access to credit.
Banks satisfy the capital requirements and are well positioned to meet the announced capital requirements. The stress test in Financial Stability Report 2019 shows that banks have the capital to absorb large loan losses and that the increase in the countercyclical capital buffer from 2.0 percent to 2.5 percent will make it easier for the banking sector to maintain credit supply in the event of a downturn.
Norges Bank’s Executive Board has decided to advise the Ministry of Finance to keep the countercyclical capital buffer rate at 2.5 percent from the end of 2019. The decision was unanimous.
In preparing its advice on the countercyclical buffer, Norges Bank has exchanged information and assessments with Finanstilsynet (Financial Supervisory Authority of Norway).
Øystein Olsen Torbjørn Hægeland