ESRB published a recommendation upon notification from the Norwegian Ministry of Finance regarding the Norwegian intention to set a systemic risk buffer rate in accordance with Article 133 of the Capital Requirements Directive IV (CRD IV). The measure involves the application of a 4.5% systemic risk buffer to the domestic exposures of all credit institutions authorized in Norway, including the subsidiaries of institutions with parents established in other European Economic Area countries. The measure is scheduled to enter into force by December 31, 2020; however, a transitional rule will apply to the banks that do not follow the advanced internal ratings-based approach. As per the ESRB recommendation, the proposed systemic buffer is considered justified, suitable, proportionate, effective, and efficient for the risk being targeted.
The ESRB recommendation focuses on assessing the systemic structural risks, the justification of the systemic risk buffer level, the effectiveness and proportionality of the measure, the likely impact on the domestic market and the European Economic Area, and the justification against use of alternative measures provided for in CRD IV or the Capital Requirements Regulation (CRR). According to the Norwegian Ministry of Finance, the main purpose of the systemic risk buffer requirement of 4.5% for domestic exposures is to maintain Norwegian credit institutions’ resilience to loan losses and other disruptions that may arise as a result of structural vulnerabilities and other long-term systemic risks in the Norwegian economy. ESRB considers the measure to be effective and proportionate. The measure intends to maintain the loss-absorption capacity and the resilience of Norwegian institutions to long-term non-cyclical risks and, therefore, contributes to safeguarding financial stability in Norway as well as in the European Economic Area. ESRB considers the effects of the planned measure on the Norwegian domestic market and its credit institutions to be limited.
ESRB considers that the application of the measure also to subsidiaries of institutions established in other European Economic Area countries is necessary to provide a level playing field in the domestic market and to avoid leakages and regulatory arbitrage. For banks that do not use the advanced internal ratings-based approach, the measure will apply from December 31, 2022. This transitional period, which is applicable to banks that are not significantly affected by the removal of the Basel I floor, should ensure that the changes in the systemic risk buffer requirement enter into effect after a reassessment of the Pillar 2 requirements, so that the impact on domestic banks and their lending capacity remains limited. Based on the information provided, ESRB concludes that the measure would not entail disproportionate adverse effects on the European Economic Area or other financial systems.
The planned reciprocation of the systemic risk buffer intends to reduce the potential for leakages to foreign institutions. The Ministry of Finance intends to request the reciprocation of the systemic risk buffer for all European Economic Area institutions with exposures to Norway to reduce the potential for leakages to foreign institutions, which would otherwise be considered to be significant. ESRB shall be dealing separately with the implications of the reciprocation request in a recommendation. According to the Norwegian Ministry of Finance, the increase of the systemic risk buffer is not expected to be large for some Nordic banking groups if the systemic risk buffer is reciprocated. However, as Nordic countries have taken macro-prudential measures to address the impact of the COVID-19 pandemic, the increase in the capital requirement may be higher in case of reciprocation. Nonetheless, the measure should not have a disproportionate negative effect on the European Economic Area and the reciprocation could be seen as levelling the playing field.
Keywords: Europe, Norway, Banking, CRD IV, CRR, COVID-19, Macro-Prudential Policy, Systemic Risk Buffer, Systemic Risk, Proportionality, IRB Approach, Basel, Regulatory Capital, ESRB
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