Advice on the countercyclical capital buffer 2021 Q2
Norges Bank’s Monetary Policy and Financial Stability Committee has decided to advise the Ministry of Finance to raise the buffer rate to 1.5 percent effective from 30 June 2022.
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. The countercyclical capital buffer shall as a rule be set at between 0 and 2.5 percent of banks’ risk-weighted assets, but may be set higher in exceptional circumstances. The countercyclical capital buffer rate was reduced from 2.5 percent to 1.0 percent in March 2020. This was related to the outbreak of Covid-19 (Covid) and the measures to contain it, which led to a sharp fall in activity in the Norwegian economy. A lower buffer rate reduced the risk of tighter lending standards, which could have amplified the downturn that resulted from the Covid pandemic.
The objective of the countercyclical capital buffer is to increase banks’ resilience in an economic downturn. Banks should build 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 businesses and large bank losses. In the event of an economic downturn that causes or potentially causes higher credit losses and clearly reduced access to credit, the buffer should be lowered to increase banks’ lending capacity. Norges Bank’s framework for advice on the countercyclical capital buffer is described in Norges Bank Papers 4/2019. The decision basis for Norges Bank’s advice in 2021 Q2 is presented in the June 2020 Monetary Policy Report.
Activity in the Norwegian economy has picked up after the sharp fall in spring 2020, but higher Covid infection rates and stricter measures to contain it held back the recovery at the beginning of 2021. Since the March 2021 Monetary Policy Report, infection rates have declined and the pace of vaccination has accelerated. The authorities have begun a gradual reopening of society, and unemployment has fallen. Further easing of Covid-related restrictions will help a return to normal economic conditions.
Creditworthy businesses and households appear to have ample access to credit. Banks have the capital and liquidity to maintain credit supply. In Norges Bank’s lending survey, banks reported unchanged credit standards in 2021 Q1 and do not expect changes ahead. Issuance volumes in the corporate bond market have been high in the past six months, and risk premiums are close to levels observed before the turbulence intensified in March 2020.
Prior to the reduction in March 2020, the countercyclical capital buffer requirement was set at 2.5% against the background of a build-up of financial imbalances over a long period. Prior to the outbreak of the pandemic, the Bank’s assessment was that imbalances were no longer building up, and there were some signs that they were receding. Property price inflation had been moderate for several years, and debt ratios had levelled off. During the Covid pandemic, house prices have increased markedly, and household credit growth has picked up. In 2021 Q1, house prices relative to household disposable income were higher than the peak in 2017. Commercial property prices fell sharply in the first half of 2020, but the decline was more than reversed in the latter half of the year. Property price inflation has recently moderated and is expected to continue to moderate ahead. In Norges Bank’s assessment, financial imbalances have increased somewhat over the past year. Both debt and property prices are at high levels. The consideration of financial imbalances suggests a higher buffer requirement.
Norwegian banks are profitable. Banks’ credit losses increased markedly in 2020 Q1, but declined through the year. For 2020 as a whole, losses amounted to 0.6 percent of total lending. Losses have declined to 0.1 percent in 2021 Q1, which is lower than projected. Uncertainty related to credit losses is still higher than normal. Credit losses in 2021 and 2022 are expected to be lower than in 2020, but higher than the average for the past 20 years. The Ministry of Finance has recommended that Norwegian banks limit dividend payouts until end-September 2021 and all large Norwegian banks have proposed dividend payouts in line with the recommendation. Banks’ capital ratios increased further in Q1 and are well above the capital requirements. Norwegian banks are well equipped to meet an increased countercyclical capital buffer requirement while maintaining credit supply.
Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to advise the Ministry of Finance to increase the buffer rate to 1.5 percent with effect from 30 June 2022. In the Committee’s current assessment of economic developments and the outlook for bank losses and lending capacity, the Committee will advise further increasing the buffer rate in the course of 2021. The Committee expects the buffer to return to 2.5 percent in the period ahead.
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 Torbjørn Hægeland
Governor Executive Director
Copy: Finanstilsynet (Financial Supervisory Authority of Norway)