IMF published its staff report and selected issues report in the context of 2017 Article IV consultation with Norway. The assessment highlights that significant policy actions have been taken to address financial stability risks. However, vulnerabilities in the financial system have increased in the context of high and rising property prices and elevated household debt.
The staff report highlights that Norway has been well ahead of schedule in terms of implementing the CRD IV/Basel III requirements. The risk-weighted capital ratios of Norwegian banks have improved markedly since 2008, with all banks comfortably meeting Pillar 1 and Pillar 2 requirements and the upcoming leverage ratio requirements by ample margins. Bank stress tests by both the Financial Sector Assessment Program (FSAP) mission in 2015 and the Norges Bank in 2016 suggest that banks’ buffers render them well-positioned to withstand severe shocks. Important steps have been taken to cope with the build-up of financial imbalances, including recent decisions to raise the countercyclical capital buffer to 2% from December 31, 2017, tighten mortgage regulations (effective from 2017 to mid-2018), and introduce the debt-to-income limit and leverage ratio requirements of 5% (with an exception for DNB—the largest bank―at 6%) from June 30, 2017. The authorities have been vigilant about the key risks and have made important progress with implementing Article IV and FSAP recommendations.
The staff report points out that further efforts are needed to address several key FSAP recommendations that remain outstanding, including limiting banks’ wholesale funding including on the mismatch between the maturity of currency swaps and underlying exposures; enhancing the Financial Supervisory Authority of Norway’s (FSA) de jure operational independence; and strengthening the legal and institutional framework for crisis management, safety nets, and bank resolution. Moreover, Norway has been leading its European peers in the adoption and use of macro-prudential tools. In addition, the FSA has submitted a proposal―currently under consultation—to introduce liquidity coverage ratio requirements in significant currencies. The report also reveals that bank profitability declined slightly, partly due to a rise in loan provisions requested by the FSA, but remains high compared to peers. The nonperforming loan ratio edged up—reflecting losses on oil-related exposures―but stayed low.
The selected issues report examines various factors driving the uptrend in house prices; evaluates the key tax reform measures to identify the remaining gaps in the current tax system relative to the best practice; and discusses ways to support long-term growth in Norway through high-quality labor supply.
Keywords: Europe, Norway, IMF, Basel III, FSAP, CRD IV, Article IV, Banking
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