September 17, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Norway. Directors noted the high levels of capital and liquidity in the banking sector but cautioned against financial stability risks, including from a combination of high household debt and fast rising house prices. In this context, Directors welcomed the recent extension of the macro-prudential measures but underscored the need to tighten policies further.

The staff report highlights that, while banks are healthy, vulnerabilities related to high household debt, commercial real estate, and reliance on external wholesale funding remain and need to be closely monitored. Balance sheets of banks are strong, loan losses are low, and banks comfortably meet higher capital requirements in effect from 2018: their average common equity tier 1 capital ratio is high (16.8% of risk-weighted assets at the end of 2017). In addition, strong Pillar 2 requirements are levied, especially on banks with concentrated exposures in commercial real estate and consumer lending. Banks’ average leverage ratio stood at 8% at the end of 2017, with all institutions exceeding the 5% requirement. Liquid reserves exceed the liquidity coverage ratio and prospective net stable funding ratio requirements by ample margins. The forthcoming headquarters move of Nordea from Sweden to Finland this October is not expected to affect Nordea’s Norwegian operations. Annex VIII contains a table that summarizes the response of authorities to past IMF recommendations and Annex IX summarizes the status of the recommendations of FSAP, which was conducted in 2015.

The staff report shows that commercial real estate exposures amount to 15% of total bank assets, with branches of foreign banks more exposed. Despite the 2017 correction, staff analysis shows that house prices are still overvalued, particularly in the Oslo region. In June, the Ministry of Finance extended, until the end of 2019, the mortgage regulations that were due to expire in mid-2018. The mortgage regulations of 2017 have reduced high-risk borrowing and their extension this June was essential. Actions on unsecured consumer lending—where default risks may be most immediate in a downturn—include tighter capital and consumer protection requirements and introduction of risk-based contributions to the deposit insurance and bank resolution funds (starting 2019). The authorities have responded to the risks related to commercial real estate with intensified oversight and Pillar 2 capital add-ons for banks with concentrated exposures. New rules requiring provisioning for prospective loan losses are being phased in, in line with the international standards. Legislation corresponding to the Bank Recovery and Resolution Directive (BRRD) in EU has been adopted and will become effective in January 2019. Finally, the licensing process to establish credit registries is underway and there has also been continued progress on implementing FSAP recommendations.

The selected issues report discusses the rapidly growing house prices in Norway in the recent years. In recent years, house prices have been increasing rapidly in Oslo and growing at a moderate pace in other regions. House prices in Oslo have been growing at a fast rate since 2013, with a real appreciation of over 20% in 2016 alone. While real prices in the capital declined by 11% between March and December 2017, they picked up strongly again in the first half of 2018 and, as of May 2018, they were again above their average 2016 level. The Oslo correction happened not long after new mortgage regulations entered into force in January 2017. The new measures included a debt-to-income (DTI) limit of five, tightened conditions for applying an amortization requirement, and a lower limit for the maximum percentage of new mortgage lending in Oslo to deviate from one or more of regulatory requirements. There is evidence that the regulations, especially the DTI limit, have been more binding in Oslo than in the rest of the country. The house price overvaluation has been estimated to be about 5% to 10% in the non-oil, non-Oslo Norway in 2017.


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Keywords: Europe, EU, Norway, Banking, Article IV, FSAP, Pillar 2, Regulatory Capital, Liquidity Risk, IMF