## _cr15257 - EXECUTIVE SUMMARY AND RECOMMENDATIONS

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---

### Key findings and systemic concerns
- Credit growth, household debt, property prices and banks’ wholesale funding are important systemic concerns.
- Cyclical systemic risk sources:
  - Credit-to-GDP and household debt: credit-to-GDP ratio and household debt-to-disposable income ratio both stand at around 200 percent.
  - House prices: believed to be overvalued by some 20–60 percent.
  - Low interest rates may be fuelling credit and asset price growth; main macroeconomic vulnerability is falling oil prices.
- Structural systemic risk:
  - Heavy dependence of Norwegian banks on wholesale funding.
- Authorities’ macroprudential focus to date:
  - Emphasis on building bank resilience through higher capital requirements; additional attention needed on liquidity/funding and structural housing measures.
- Institutional roles and coordination:
  - Ultimate responsibility for financial stability: Ministry of Finance; powers and responsibilities allocated to the FSA and the Norges Bank.
  - Norges Bank provides decision basis and advice to the Ministry of Finance for the counter cyclical capital buffer and takes financial stability into account in monetary policy.
  - FSA focuses heavily on systemic risks and has taken several measures.
  - Coordination shortcomings: individual macroprudential measures not closely coordinated among the three authorities; no clear analytical framework specifying overall objectives or instrument interactions.

### Measures implemented (selected)
- Higher capital requirements and early adoption/implementation of EU capital regulations.
- Additional capital buffers:
  - a 3 percentage points systemic risk buffer from July 2014;
  - a 2 percentage points capital surcharge for D-SIBs from July 2016;
  - a 1 percentage point counter cyclical capital buffer from July 2015.
- Pillar 2 capital requirements relating to systemic risk.
- Restrictions on mortgage lending RWAs (bringing internal-ratings based RWA on residential mortgages up to around 20-25 percent).
- Guidelines on banks’ mortgage lending standards (recommended upper limits on LTVs and affordability tests).
- A degree of “leaning against the wind” in the setting of the monetary policy instrument.
- Early establishment of an analytical framework for the counter cyclical capital buffer.

### Macro-financial statistics and vulnerabilities (selected exact figures)
- Interest rates:
  - Official short-term interest rate: remained at 1.5 percent from early 2012, reduced to 1.25 percent in December 2014.
  - Interbank rates: below 2 percent since mid–2012.
  - Yields on covered bonds: declined to just above 2 percent by end–2013; peaked at nearly 4 percent in second half of 2011.
- Credit and credit-to-GDP:
  - Credit-to-GDP ratio: increased from around 110 percent in 1996 to nearly 200 percent by 2013.
  - Credit-to-GDP gap: peaked at around 15 percent above trend in 2008; fallen to around 0–5 percent.
- House prices and housing indicators:
  - House prices (deflated by consumer prices): rose 200 percent from 1985 to 2013.
  - House prices (deflated by hourly wages): rose 40 percent from 1985 to 2013.
  - House prices to disposable income ratio: rose from around 70 percent in early 1990s to around 140 percent in early 2013 (Q4 1998 = 100).
  - IMF estimate: house prices may be overvalued by between 20 and 60 percent.
  - House price inflation: turned negative at end of 2013; moved back up to around 7 percent toward end of 2014.
- Household indebtedness and vulnerability:
  - Household debt: above 200 percent of disposable income at end-2013 (from around 115 percent in 2000).
  - Household debt: 130 percent of total income at end-2013.
  - More than three quarters of households own their own home.
  - 85 percent of lending to households is secured against dwellings, mostly at floating rates.
  - Around 20 percent of lending is interest only.
  - Household interest burden: 6 percent of disposable income at the end of 2013.
- Distributional impacts of a 2 percentage point interest-rate rise:
  - Proportion of households with interest burden 20–30 percent: increases from 5.5 percent to 12 percent.
  - Proportion with interest burden above 30 percent: increases from 2.5 percent to 7 percent.
  - Proportion of households with debt above five times disposable income: around 12 percent (hold 35 percent of household debt).
- Banking sector structure:
  - Financial intermediation bank-dominated: more than 80 percent of total domestic credit provided by banks and covered bond mortgage companies.
  - Banking sector size: around 200 percent of GDP.
  - Market shares: DNB Bank >30 percent lending market share; Nordea Bank Norway 13 percent lending market share.
  - Sectoral lending composition: 62 percent mortgages/retail loans; 13 percent commercial property; 11 percent shipping.
- Capital and solvency:
  - Average CET1 ratio: 12.2 percent at end-2013.
  - Total (Tier 1 and Tier 2) regulatory capital ratio: 14.8 percent at end-2013.
  - CET1 capital: 6.5 percent of total assets (leverage ratio) at end-2013.
- Deposits and wholesale funding:
  - Parent banks deposit-to-loan ratio: almost 100 percent at end-2013 (from 65 percent in 2008).
  - Including mortgage companies: deposit-to-loan ratio fell from 70 percent in 1997 to 58 percent at end-2013.
  - Wholesale funding: increased from 20 percent of total assets in 1995 to above 50 percent by 2008 and remained around that level.
  - Customer deposits: around 40 percent of total funding at end–June 2014 (retail 20 percent; other Norwegian customers 15 percent; foreign customers 5 percent).
  - Covered bonds: around 20 percent of banks’ total funding at end-June 2014.
  - Senior bonds: declined from 14 percent to below 10 percent.
  - Market funding with maturity over one year: 66 percent at end-2013.
  - Short term (up to 3 months) wholesale/interbank funding: fell from 26 percent in 2007 to below 20 percent (of market funding).
  - Equity and subordinated debt capital: 9 percent of bank funding.
  - Large banks’ foreign funding: slightly over 60 percent of market funding from foreign sources at end-June 2014, almost all in foreign currency.
  - DNB accounts for 65 percent of foreign market funding.
  - Total foreign currency borrowing: around 35 percent of total funding at end-June 2014.
  - Approximately one-third of foreign currency funding finances domestic currency assets (~10 percent of banks’ total assets).
- Liquidity coverage and NSFR:
  - Aggregated average LCR (all currencies): 125 percent using revised LCR from January 2013.
  - 52 banks had an LCR of less than 100 percent at end-2013 (3 large, 11 medium, 38 small banks).
  - Average LCR in domestic currency: below 60 percent using Basel 2013 definition; around 70 percent under recent European Commission Regulation.
  - NSFR for 17 largest banks: averaged 93 percent at end-2013; fell below 90 percent at end-June 2014.
- Stress tests and limitations:
  - Norges Bank stress-test: average CET1 falls from 12.9 percent in 2014 to 9.1 percent in 2017 in the central case adverse scenario; would fall below 6 percent if scenario imposed a 12 percent share of problem loans to households.
  - EBA stress test (2014) for DNB Bank: CET1 increased from 11.3 percent at end-2013 to 14.4 percent at end-2016 under baseline; remained 11.3 percent under adverse.
  - Stress tests generally do not include very significant funding stresses or large second-round interconnectedness effects.

### Macroprudential policy design, tools, and application
- Primary focus: banking-sector capital and resilience (SRB, D-SIB surcharge, counter cyclical capital buffer, Pillar 2).
- SRB (Systemic Risk Buffer):
  - SRB of 3 percentage points imposed as part of 2013 amendments.
  - Initial rate: additional 2 percentage points from July 1, 2013, increasing to 3 percentage points from July 1, 2014.
  - SRB applies to all Norwegian banks, including subsidiaries of foreign banks, and to local and foreign lending.
  - Public communication of rationale was unclear.
- D-SIB designation and buffer:
  - Current D-SIBs: DNB Bank, Nordea Bank Norway and Kommunalbanken AS.
  - Regulation: designate SIFIs annually; decision normally enters into force no earlier than 12 months after decision.
  - Additional capital buffer for SIFIs: 1 percent above minimum CET1 from July 1, 2015, rising to 2 percent from July 1, 2016 (in addition to SRB).
- Counter cyclical capital buffer:
  - Announced: banks shall hold a counter cyclical capital buffer of 1 percent from June 30, 2015.
  - Level set quarterly by Ministry of Finance based on Norges Bank advice.
  - Norges Bank decision basis uses three criteria and four indicators: total credit to mainland GDP; house prices to household disposable income; real commercial property prices; wholesale funding ratio.
- Constraints on IRB model parameters:
  - LGD floor for IRB retail exposures secured by residential real estate: minimum EAD-weighted average LGD increased from 10 percent to 20 percent from January 1, 2014.
  - Expected effect: increase average risk weight on residential mortgages from 10–15 percent to around 20 percent; combined measures expected to result in minimum 20-25 percent risk weighting.
  - Basel I floor: RWAs of IRB banks not lower than 80 percent of Basel I RWAs.

### Policy recommendations (explicit)
- Recommendation 1: Objectives and Analytical Framework
  - Produce a more comprehensive and coordinated framework for macroprudential policy including:
    - Clear specification of macroprudential policy objectives;
    - Intended objectives of instruments individually and collectively;
    - Expected benefits and costs of instruments;
    - Possible interactions with microprudential tools and monetary policy;
    - Post-implementation reviews of effectiveness and associated costs;
    - Consider setting medium to long term broad ranges for key financial stability ratios for communication.
  - Consider placing more emphasis on containing risks at source using a range of macroprudential and other policy measures.
- Recommendation 2: Addressing Specific Vulnerabilities (housing and household debt)
  - Take additional measures to contain systemic risks from house prices and household indebtedness, including:
    - Stricter LTV and amortization guidelines (reduce recommended upper limits, tougher approach to exceptions, limit proportion of mortgages exceeding recommended levels, consider rules rather than guidelines);
    - Add loan-to-income or debt service ratio limits to supplement affordability (interest rate stress test) guideline;
    - When raising/lowering lending standards on a time-varying basis, specify primary indicators used for calibration (similar to counter cyclical capital buffer approach).
  - Fiscal and structural measures to reduce long-term demand/supply imbalances:
    - Reduce/remove tax deductibility of mortgage interest payments;
    - Reduce/remove favorable treatment of real estate within the wealth tax and introduce higher imputed rental income from property;
    - Consider transaction taxes as counter cyclical instrument;
    - Improve planning processes, release more land, consider impact of minimum space and energy efficiency requirements.
- Recommendation 3: Limits on banks’ wholesale funding and related actions
  - Consider additional limits (overall or bank-specific) on:
    - Proportion of short-term wholesale funding, particularly from abroad;
    - Mismatch between maturity of currency swaps (and other hedging techniques) and maturity of underlying exposures.
  - Run more severe stress tests with emphasis on adverse funding and liquidity scenarios.
  - Implement proposals to increase transparency about asset encumbrance; continue close monitoring of covered bond issuance and consider limits when appropriate.
  - Consider price-related constraints linking covered bond issuance to risk-sensitive deposit insurance premia or capital requirements.
- Recommendation 3 (regional and reciprocity aspects)
  - Continue progress on establishing and implementing reciprocity agreements; reciprocity for the SRB awaits EEA adoption of EU capital requirements legislation.
  - Review continued use of the Basel 1 RWA floor in light of international standards (leverage ratio, IRB amendments); monitor market for cross-country regulatory distortion.
- Recommendation 4: Institutional structure and governance
  - Standardize and increase transparency of procedures for advice to Ministry of Finance; extend quarterly advice approach to D-SIB buffer, SRB (every two years), and IRB risk weights; publish advice in full when given.
  - Adopt a more transparent “comply or explain” approach by decision-makers receiving published advice, including fuller rationale for decisions.
  - Provide an annual broader overview of collective purpose, impact and effectiveness of macroprudential instruments.
  - Enhance independence of the FSA.
  - Consider greater delegation of macroprudential decision-making to Norges Bank or FSA based on clear mandates, objectives and accountability.
  - Alternatively, consider a formal Committee (core membership: Ministry of Finance, Norges Bank, FSA, possibly external members) to make recommendations and possibly employ some instruments directly; weigh risks of disrupting a functioning institutional structure and potential for “group think”.

### Governance, data, coordination, and analytical gaps
- Governance and decision-making:
  - Ministry of Finance sets counter cyclical capital buffer quarterly based on Norges Bank advice; advice and summary submitted with Norges Bank’s quarterly Monetary Policy Report; advice exempt from disclosure until Ministry decision.
  - No formal “comply or explain” requirement; advice-to-decision gaps typically no more than ten days.
- Data and stress-testing gaps:
  - Authorities have broad access to macro and micro data, but gaps exist: bank losses reported mainly at aggregate level; limited intra-group exposures data; limited commercial property data outside Oslo; need better data for funding stress tests.
  - Stress tests: limited inclusion of significant funding stresses and interconnectedness; assumption examples: money market rate (NIBOR) 1.5 percentage points above key policy rate; average credit spread for covered/senior bonds 1 percentage point on top of NIBOR.
- Effectiveness measurement:
  - No clear long-term macroprudential objectives or measures of effectiveness; authorities should develop clearer analytical framework and metrics to assess instruments’ impacts.
- Coordination and institutional arrangements:
  - Tripartite meetings (Ministry, Norges Bank, FSA) exist but do not provide comprehensive coordinated macroprudential decision-making; Ministry of Finance centrally coordinates and is accountable to Parliament.
  - Norges Bank and FSA required to exchange information for counter cyclical buffer decisions; both publish analysis and engage external research.
  - Norges Bank resources: approximately 35 staff on financial stability; FSA: 28 staff on financial stability; Ministry Financial Markets Department staff: approximately 25, with about 10 on business cycle and monetary policy—distribution roughly fifty-fifty economists and legal professionals.

*Source: _cr15257 - EXECUTIVE SUMMARY AND RECOMMENDATIONS (PDF).*

### EXECUTIVE SUMMARY AND RECOMMENDATIONS ____________________________________________ 4

### _cr15257 - EXECUTIVE SUMMARY AND RECOMMENDATIONS ____________________________________________ 4

### Executive summary — key findings
- Credit growth, household debt, property prices and banks’ wholesale funding are important systemic concerns.
- Key cyclical systemic risk sources:
  - Strength of mortgage lending: the credit-to-GDP ratio and the household debt-to-disposable income ratio both stand at around 200 percent.
  - Strong rise in, and overvaluation of, house prices: house prices are believed to be overvalued by some 20–60 percent.
  - Low interest rates may be fuelling credit and asset price growth; the main macroeconomic vulnerability is falling oil prices.
- Structural systemic risk arises primarily from the heavy dependence of Norwegian banks on wholesale funding.
- Authorities have deployed a wide range of macroprudential measures since 2008, including higher capital requirements and lending standards guidance.
- Macroprudential measures have focused primarily on building bank resilience through higher capital requirements; two other areas need further attention:
  - Additional measures to supplement the forthcoming implementation of the LCR and the NSFR, given heavy reliance on wholesale, short-term, foreign and foreign-currency funding.
  - Greater focus on structural measures to contain housing market risks at source.
- Institutional roles:
  - Ultimate responsibility for financial stability resides with the Ministry of Finance, with powers and responsibilities allocated to the FSA and the Norges Bank.
  - Norges Bank provides decision basis and advice to the Ministry of Finance for the counter cyclical capital buffer and takes financial stability into account in monetary policy setting.
  - The FSA focuses heavily on systemic risks and has taken several measures to address them.
- Coordination and procedural shortcomings:
  - Individual macroprudential measures do not appear to have been coordinated very closely among the three authorities.
  - No clear analytical framework specifying overall objectives of macroprudential policy or how instruments contribute individually and collectively.
  - Arrangements for advice by Norges Bank and FSA differ across instruments.

### Executive summary — measures implemented (as described)
- Higher capital requirements and early adoption/implementation of EU capital regulations.
- Additional capital buffers:
  - a 3 percentage points systemic risk buffer from July 2014,
  - a 2 percentage points capital surcharge for D-SIBs from July 2016,
  - a 1 percentage point counter cyclical capital buffer from July 2015.
- Pillar 2 capital requirements relating to systemic risk.
- Restrictions on mortgage lending RWAs (bringing the internal-ratings based RWA on residential mortgages up to around 20-25 percent).
- Guidelines on banks’ mortgage lending standards (recommended upper limits on LTVs and affordability tests).
- A degree of “leaning against the wind” in the setting of the monetary policy instrument.
- Early establishment of an analytical framework for the counter cyclical capital buffer.

### Executive summary — policy recommendations (explicit)
- Increase efforts to produce a more comprehensive and coordinated framework for macroprudential policy in Norway. The framework should include:
  - a clear specification of the overall objectives of macroprudential policy;
  - the intended objectives of macroprudential instruments, both individually and collectively;
  - the expected benefits and costs of using these instruments;
  - post-implementation reviews of the effectiveness of these instruments;
  - possibly setting medium to long term broad ranges for key financial stability ratios as a communication tool.
- Take additional measures to contain systemic risks from the growth of house prices and household indebtedness. Possible measures include:
  - stricter LTV and amortization guidelines;
  - adding loan-to-income or debt service ratio limits to supplement the affordability (interest rate stress test) guideline;
  - considering structural measures such as a reduction in the tax incentives for home ownership and a relaxation of planning and building requirements to stimulate the supply of new housing units.
  - Note: recommendation is not necessarily to use all instruments; structural measures could reduce need for stricter macroprudential measures.
- Take additional measures to limit banks’ wholesale funding. Suggested actions include:
  - consider whether, in addition to the implementation of the LCR and the NSFR, limits (either overall, or more bank-specific) should be placed on the proportion of short-term wholesale funding, in particular from abroad;
  - consider limits on the mismatch between the maturity of currency swaps (and other hedging techniques) and the maturity of the underlying exposures;
  - run more severe stress tests, with greater emphasis on adverse funding and liquidity scenarios;
  - implement proposals to increase transparency about asset encumbrance, continue close monitoring of banks’ issuance of covered bonds, and consider the point at which such issuance should be limited, while recognizing the benefits of covered bonds as a source of long-term funding.
- Continue progress on establishing and implementing reciprocity agreements; reciprocity arrangements for the systemic risk buffer await EEA agreement on the adoption of the EU capital requirements legislation.
- Improve the existing institutional structure. Suggested steps:
  - more standardized and transparent procedures for giving advice to the Ministry of Finance;
  - a more transparent “comply or explain” approach by decision-makers;
  - an annual broader overview of the collective purpose, impact and effectiveness of the use of macroprudential instruments;
  - greater delegation of decision-making powers over macroprudential instruments in due course to the Norges Bank or the FSA, based on clear mandates, objectives, and accountability.
- Alternatively, some macroprudential policy functions could be exercised through a formal committee whose powers would (at least) be to make recommendations to core members and possibly to employ some instruments directly.

---

### Risks to financial stability — Cyclical (selected facts and statistics)
- Interest rates:
  - Official short-term interest rate remained at 1.5 percent from early 2012, before being reduced to 1.25 percent in December 2014.
  - Interbank rates have fallen to below 2 percent since mid–2012.
  - Yields on covered bonds declined to just above 2 percent by end–2013, having peaked at nearly 4 percent in the second half of 2011.
- Credit dynamics:
  - From the mid–1990s until 2008, total credit to households and mainland enterprises grew markedly faster than economic activity.
  - Bank lending to households has continued to grow steadily at around 6–7 percent a year since 2008, and has more than doubled between 2004 and 2012.
  - Bank lending to corporate borrowers has been weak since 2008.
  - Some modest growth in capital markets: debt issues by large corporates have doubled since 2011, albeit from a low base.
- Credit-to-GDP and gaps:
  - Credit-to-GDP ratio increased from around 110 percent in 1996 to nearly 200 percent by 2013.
  - Credit-to-GDP gap peaked at around 15 percent above trend in 2008, and has fallen steadily since then to around 0–5 percent (depending on the measure used).
  - Caution: an upward trend in the credit-to-GDP ratio may not be sustainable or desirable; measures based on deviations from trend may underestimate financial imbalances.
- House prices and housing market:
  - House prices deflated by consumer prices rose 200 percent from 1985 to 2013.
  - House prices deflated by hourly wages rose 40 percent from 1985 to 2013.
  - The ratio of house prices to disposable income rose from around 70 percent in the early 1990s to around 140 percent in early 2013 (Q4 1998 = 100), before declining during 2013.
  - Deviation of this ratio from estimated trends fell from around 10–15 percent during 2000–2007 to close to zero by end–2013.
  - IMF estimates suggest house prices in Norway may be overvalued by between 20 and 60 percent.
  - House price inflation turned negative at end of 2013, but moved back up to around 7 percent toward end of 2014, above the rate of growth of household disposable income.
  - The decline in house prices in the second half of 2013 may have been partly due to higher lending margins from early 2012, tougher FSA guidelines on mortgage lending released at end of 2011, and higher actual and prospective capital ratios.
  - In the second half of 2014 there are signs of re-emergence of growth in house prices, household indebtedness and bank credit at above the rate of nominal income growth.
- Housing demand and tax incentives:
  - Mortgage interest payments are tax deductible at a tax rate of 27 percent (reduced recently from 28 percent).
  - Imputed rent from home ownership is tax exempt.
  - A homeowner can rent out part of a property tax free.
  - Housing is subject to a lower wealth tax than other assets (at approximately 20–25 percent of market value).
  - There is no capital gains tax if a house has been owned for more than a year (this also applies to second and third properties).
  - Saving for house purchase is encouraged by tax deductions on a savings scheme for house purchase by persons under 34 years of age.
  - The December 2014 report of a Commission on corporate taxation included recommendations to increase the wealth tax on housing, to increase the tax on rental income, and to remove the home savings scheme for young persons.
- Supply constraints:
  - House completions are running behind the growing number of households.
  - Strict planning restrictions are imposed on new house building.
  - Some municipalities have proposed speeding up planning processes and reducing costs and risks to developers.

*Source: _cr15257 - EXECUTIVE SUMMARY AND RECOMMENDATIONS (PDF).*

### 7.      Household debt has increased sharply since the early 2000s, leaving households

### 7.      Household debt has increased sharply since the early 2000s, leaving households vulnerable to the impact of a marked increase in interest rates

### Household indebtedness and interest‑rate vulnerability
- Household debt stood at above 200 percent of disposable income at end-2013 (from around 115 percent in 2000).
- Household debt was 130 percent of total income at end-2013.
- More than three quarters of households own their own home.
- 85 percent of lending to households is secured against dwellings, mostly at floating rates.
- Around 20 percent of lending is interest only.
- Households do not appear to make significant use of the refinancing of positive equity in residential properties to increase household consumption.
- Household debt service (including interest) to income ratios has remained low because of low interest rates.
- The household interest burden stood at 6 percent of disposable income at the end of 2013, with a wide dispersion across households.
- Anecdotal evidence suggests fewer signs of speculative activity in the housing market than before 2008.
- Households are vulnerable to higher interest rates and a fall in house prices.

### Distributional vulnerability to a 2 percentage point interest‑rate rise
- Research by the FSA and Statistics Norway: an increase in interest rates by 2 percentage points would:
  - Increase the proportion of households with an interest burden of between 20 and 30 percent from 5.5 percent to 12 percent.
  - Increase the proportion with an interest burden of above 30 percent from 2.5 percent to 7 percent.
- Norges Bank (2014 Financial Stability Report): the proportion of households with debt above five times disposable income has more than doubled since the late 1990s to around 12 percent of households.
  - These households hold 35 percent of household debt, up from 15 percent in the late 1990s.
- There has been a decline over the same period in other categories of vulnerable households—those with low debt service capacity and those with inadequate collateral.
- Less than 3 percent of households fall into all three vulnerability categories simultaneously.

### Housing and commercial real estate developments
- Real commercial property prices (observed rents for high-standard Oslo office premises, deflated by the mainland GDP deflator, 1998 = 100):
  - Rose from around 75 in 2005 to above 160 in late 2012.
  - Eased back during 2013 and picked up again in the first half of 2014.
- Real commercial property prices stand at around 10–15 percent above trend using an HP filter.
- Commercial real estate prices have increased more rapidly and been more volatile than house prices since the mid-2000s.

### Banking sector structure and concentration risks
- Financial intermediation in Norway is bank-dominated: more than 80 percent of total domestic credit to Norwegian households and corporates is provided by banks and their covered bond mortgage companies.
- Banking sector size: around 200 percent of GDP.
- Major market shares:
  - DNB Bank has a lending market share of more than 30 percent.
  - The Norwegian subsidiary of Nordea has a lending market share of 13 percent.
  - Branches of foreign banks (principally Handelsbanken and Danske Bank) follow closely.
- Some regional banks, though small in aggregate, are systemically important locally due to lack of substitutability for local borrowers.

### Sectoral lending concentration
- Bank lending composition:
  - 62 percent of bank lending goes to the financing of mortgages and other retail loans.
  - 13 percent to commercial property.
  - 11 percent to shipping.
- Concentrated loan books expose banks to common external shocks and reduce robustness.

### Banks’ solvency, capital ratios and regulatory requirements
- Average CET1 ratio for Norwegian banks stood at 12.2 percent at the end of 2013.
- Total (Tier 1 and Tier 2) regulatory capital ratio at end-2013 was 14.8 percent.
- CET1 ratio increased from around 8 percent in 2008 to the 2013 level, aided by lower risk weights under Basel II and capital increases.
- At the end of 2013, Norwegian banks’ CET1 capital stood at 6.5 percent of total assets (leverage ratio).
  - This is above the minimum leverage ratio of 3 percent (using a total Tier 1 measure of capital) currently proposed in Basel III.
- Legislative transposition of CRR and CRD4: passed by the Norwegian Parliament in June 2013, entry into force July 2013.
  - By July 2016 Norwegian banks will be subject to:
    - Full implementation of the minimum CET1 requirement of 7 percent (including the capital conservation buffer).
    - A 3 percent systemic risk buffer.
    - A 2 percent capital surcharge on designated D-SIBs.
    - A 1 percent counter cyclical capital buffer.
  - The FSA makes active use of Pillar 2 capital requirements.

### Leverage, deposits, and wholesale funding
- Deposit-to-loan ratios:
  - At parent banks the deposit-to-loan ratio rose to almost 100 percent at end-2013 (from 65 percent in 2008), reflecting transfers of mortgages to residential mortgage companies.
  - Including mortgage companies, the deposit-to-loan ratio fell from 70 percent in 1997 to 58 percent at the end of 2013.
- Wholesale funding reliance:
  - Banks’ (excluding foreign branches/subsidiaries) wholesale funding increased from 20 percent of total assets in 1995 to above 50 percent by 2008, and remained around that level.
  - Customer deposits were around 40 percent of total funding at end–June 2014:
    - Retail deposits around 20 percent of total funding.
    - Other Norwegian customers around 15 percent.
    - Foreign customers 5 percent.
- Market funding composition (end-June 2014):
  - Covered bonds represented around 20 percent of banks’ total funding at the end of June 2014.
  - The proportion of senior bonds declined from 14 percent to below 10 percent.
  - The proportion of market funding with maturity of over one year increased to 66 percent at the end of 2013.
  - Short term (up to 3 months) wholesale/interbank funding fell since 2007 from 26 percent to below 20 percent (of market funding).
  - 9 percent of bank funding is from equity and subordinated debt capital.
- Large banks’ foreign funding:
  - Slightly over 60 percent of market funding (including interbank funding) was from foreign sources at end-June 2014, almost all in foreign currency.
  - Of this foreign funding, more than 50 percent has maturity above one year.
  - DNB accounts for 65 percent of this foreign market funding.
  - Total foreign currency borrowing was around 35 percent of total funding at end-June 2014, compared with 25 percent of total bank assets in foreign currency.
  - Approximately one-third of the foreign currency funding is funding domestic currency assets, equivalent to around 10 percent of banks’ total assets.

### Swap and FX rollover vulnerability
- Large Norwegian banks rely heavily on foreign currency swaps to convert longer maturity foreign currency borrowing that funds Norwegian kroner lending.
- Currency swaps are mostly shorter maturity than the foreign currency borrowing (other than for covered bonds where maturities are matched), increasing rollover risk.
- Largest banks hold substantial liquid assets in foreign currencies; short-term foreign currency funding by DNB is mostly matched by liquid assets held in same currency.

### Vulnerabilities relating to covered bonds (Box 1)
- Encumbered assets from covered bonds can generate vulnerabilities:
  - Unsecured (and uninsured) deposits may become more expensive and less stable due to a more restricted asset base in liquidation.
  - Depositors may be subject to bail-in after shareholders and junior debt holders are exhausted.
  - Increased collateral use exacerbates pro-cyclicality from haircuts, margin requirements, and collateral eligibility.
  - Adverse shocks to the covered bond market could reduce liquidity and constrain a key source of longer-term funding.
- Interconnectedness via covered bonds:
  - Norwegian banks hold 30–40 percent of covered bonds issued by other Norwegian banks in domestic currency.
  - Domestic and foreign covered bonds accounted for nearly 30 percent of banks' total high quality liquid assets at end–June 2014.
  - High concentration of covered bonds in liquidity buffers may make haircuts inadequate in stress.
- Authorities’ response and supervisory stance:
  - Authorities considered measures to constrain reliance on covered bonds but concluded a general limitation on issuance would not be optimal.
  - The FSA suggested asset encumbrance should be part of regular supervisory review, considering bank size, ownership, financing and portfolio structures, and macro developments.
  - Norges Bank and the FSA favor increased transparency about asset encumbrance.
  - International developments on TLAC and MREL are relevant: long-term unsecured debt that can be bailed-in after equity and subordinated debt reduces some concerns about covered bond issuance disadvantaging senior unsecured creditors.

### Liquidity coverage and NSFR readiness
- Norwegian banks’ aggregated average LCR (across all currencies) was 125 percent using the revised LCR from January 2013.
- 52 banks had an LCR of less than 100 percent at the end of 2013:
  - 3 large banks, 11 medium sized, and 38 small banks.
- Some banks’ apparent LCR strength may mask vulnerabilities (example: DNB Bank funded large deposits in foreign central banks with more than 30 day maturity debt instruments).

*International Monetary Fund*

### 26.      The low stock of high quality liquid assets denominated in domestic currency makes it

### 26.      The low stock of high quality liquid assets denominated in domestic currency makes it

### Liquidity Coverage Ratio (LCR) and domestic currency shortages
- The average LCR in domestic currency across Norwegian banks is below 60 percent using the Basel 2013 definition.
- The average LCR in domestic currency is around 70 percent under a recent European Commission Regulation, which allows a more generous treatment of holdings of other banks’ covered bonds (which comprised 28 percent of the high quality liquid assets of Norwegian banks at end-June 2014).
- The European Commission’s Delegated Regulation of October 2014 allows covered bonds with an issue size of at least €500 million to count as level 1 high quality liquid assets, subject to asset coverage and rating requirements, a 7 percent haircut, and a requirement that other level 1 assets comprise at least 30 percent of total high quality liquid assets.
- According to the same Delegated Regulation there is no LCR requirement by currency; however this may be imposed by the competent authorities.

### Authorities’ actions and proposals on LCR implementation
- The FSA is to present a proposal to the Ministry of Finance by May 2015 on how the LCR is to be implemented in Norway.
  - The proposal will include a timetable for the implementation of possible currency requirements and consider particular liquidity rules for systemically important institutions.
- Norges Bank proposals (October 2014 Financial Stability Report):
  - Set the LCR requirement in Norway at 60 percent in domestic currency, on the basis that there are insufficient highly liquid assets in domestic currency and that banks could only meet a higher domestic currency LCR by holding even more covered bonds issued by other banks.
  - Reluctant to provide a routine central bank facility (for fees) to create the equivalent of high quality liquid assets.
  - Propose that the total “all currency” LCR requirement (including domestic currency) and the requirement for each significant foreign currency should be set at 100 percent, as in Basel III and the CRR.
  - Propose that banks should publish more information on their liquidity positions.

### Net Stable Funding Ratio (NSFR) and funding structure
- The 17 largest banks averaged (on a weighted basis) an NSFR of 93 percent at the end of 2013, but this had fallen back to below 90 percent at end-June 2014.
  - Indicates a significant gap between the longer-term lending undertaken by these banks and their stable (longer-term and retail) funding.

### Structural vulnerabilities and limitations of LCR/NSFR
- LCR and NSFR may not be sufficient to address fully structural vulnerabilities in banks’ funding positions:
  - Even if short-term (less than 30 days) wholesale funding is matched by high quality liquid assets, a higher proportion of short-term wholesale funding makes it increasingly difficult for the bank to adjust if short-term wholesale funding is withdrawn.
  - Norges Bank concern: LCR and NSFR may encourage banks to raise deposits at maturities only marginally above cut-off points—just above 30 days for the LCR and just above a year for the NSFR.
  - NSFR does not distinguish between domestic and foreign sources of wholesale funding; funding from abroad may be the most vulnerable to shocks and for a sustained period.
  - Maturity mismatch between currency swaps and underlying positions leaves banks exposed to a refinancing risk on their hedging activities.

### Stress testing practices and findings
- The FSA and the Norges Bank both report macro stress tests in their financial stability reports.
  - These stress tests use a range of models and often merge results from multiple models, including a macro financial model, separate models for household and corporate sector losses, and a bank balance sheet model.
  - There has so far been no formal connection between these stress tests and the advice given by the Norges Bank on the counter cyclical capital buffer.
- Stress test outcomes:
  - Norges Bank and FSA stress tests focus primarily on shocks to the real economy, with greatest impact on NPLs and losses in bank lending to the corporate sector.
  - Households are seen as having strong margins, relatively high affordability measures, and likely to prioritize mortgage servicing; lenders have full recourse to the borrower; historically low default rates and low loss given default rates on residential mortgage lending.
  - Stress tests do not generate significant losses on residential mortgage lending.
  - In the latest published Norges Bank stress test:
    - The share of problem loans to households increases to only 4 percent by the end of the stress period (compared with 12 percent during the Norway banking crisis).
    - The average CET1 capital ratio across the sample of banks falls from 12.9 percent in 2014 to 9.1 percent in 2017 in the central case adverse scenario.
    - The 2017 figure would reduce to below 6 percent if the scenario imposed a 12 percent share of problem loans to households.
- EBA stress test (2014) for DNB Bank:
  - DNB Bank’s CET1 ratio increased from 11.3 percent at end-2013 to 14.4 percent at end-2016 under the baseline scenario.
  - DNB Bank’s CET1 ratio remained unchanged at 11.3 percent at end-2016 under the adverse stress scenario.
  - Norwegian authorities recognize the Norwegian economy could face more severe macroeconomic stress than posited in the EBA’s 2014 stress test (e.g., steep, lasting fall in the oil price or stronger fall in property prices).
- Limitations in stress tests:
  - Norges Bank and FSA stress tests do not include very significant funding stresses, either as an initial shock or as a second-round effect.
  - Latest Norges Bank stress tests assume the money market rate (NIBOR) is 1.5 percentage points above the key policy rate.
  - The average credit spread for covered bonds and senior bonds is 1 percentage point (on top of NIBOR); but tests assume banks will continue to have access to wholesale funding and be able to pass higher costs on to lending rates.
  - Stress tests do not include significant stresses relating to interconnectedness and spillovers, despite high levels of domestic and crossborder financial and economic interlinkages.

### Other financial system vulnerabilities
- Central clearing counterparties (CCPs):
  - The largest CCP in Norway, Oslo Clearing, has only a small number of direct participants as clearing members, which may increase its systemic risk.
  - Oslo Clearing is in the process of becoming a part of SIX x-clear.
  - Norwegian banks typically have their largest positions in LCH Clearnet (interest rate derivatives).
- Life insurers:
  - Norwegian life insurers have issued a significant number of policies with guaranteed interest rates, mostly set when interest rates were higher.
  - Low interest rates and increased life expectancy (longevity) pose financial challenges for Norwegian life insurers with significant portfolios of guaranteed insurance liabilities, and in particular paid-up policies.
  - To meet Solvency 2 regime capital requirements (to be implemented from January 1, 2016), many Norwegian life insurers have been compelled to reduce risk and/or raise capital levels.

### Use of macroprudential tools: overview
- Norway has activated—or announced the future activation of—a larger number of macroprudential tools than most other countries.
  - Experience from the 1990s banking crisis led to strengthened macroprudential surveillance and focus on systemic risk.
  - Since 2008, the authorities have deployed a range of measures and Norway adopted Basel III capital adequacy requirements ahead of the EU time schedule for CRR and CRD4.
  - Norway was among the first countries to establish an analytical framework for the counter cyclical capital buffer.
- Macroprudential tools concentrated on banks’ capital requirements:
  - Early implementation of stricter capital (buffer) requirements.
  - Introduction of higher permanent capital requirements (systemic risk buffer and capital surcharge on systemically important banks).
  - Cyclical developments addressed through the counter cyclical capital buffer and Pillar 2 capital requirements.
- Rationale and limitations:
  - Higher capital buffers increase solvency resilience and help absorb potential losses; may dampen financial cycles by constraining debt build-up and enabling continued lending in stressed conditions.
  - Capital buffers do not tackle financial stability vulnerabilities at source.

### Implementation of CRR/CRD4 elements
- Norway moved early to implement the CRR and CRD4 in national law and regulations, including macroprudential provisions.
  - Norway is a member of the EEA, and CRR/CRD4 adoption into the EEA Agreement was expected in 2015.
  - Amendments to the Act on Financing Activity and Financial Institutions (Financial Institutions Act) were effective from July 1, 2013.
  - In August 2014, the Ministry of Finance adopted amendments to national regulations to implement other elements of the CRR/CRD IV framework; these amendments entered into force on September 30, 2014.

### Systemic risk buffer (SRB)
- An SRB of 3 percentage points was imposed as part of the 2013 amendments to the Financial Institutions Act.
  - Legislation determined an initial rate of an additional 2 percentage points on the CET1 risk-weighted minimum capital ratio from July 1, 2013, increasing to 3 percentage points from July 1, 2014.
  - The FSA and the Norges Bank were not involved in the setting of this buffer and did not provide advice to the Ministry of Finance.
  - Under Article 133 of CRD4 the competent or designated authority should review the SRB at least every two years.
- Scope and intent:
  - The SRB applies to all Norwegian banks, including subsidiaries of foreign banks, and to both local and foreign lending.
  - Under reciprocity provisions of Article 134 of CRD4, EU member states may recognize the SRB rate set by Norway and apply that buffer rate to domestically authorized institutions with respect to their exposures to borrowers and other counterparties in Norway, although reciprocity is unlikely before EEA adoption.
  - The SRB should address primarily structural risks: prevent and mitigate long-term noncyclical systemic risks not already covered by minimum capital requirements where there is risk of disruption with serious negative consequences.
  - Norwegian authorities intend the SRB to reduce the risk that imbalances in asset prices and indebtedness could be amplified by contagion from common exposures and growing claims between financial institutions.
  - The SRB add-on is appropriate given the high degree of interconnectedness and vulnerability of the economy and financial system to volatile commodity prices.

- Communication issues:
  - Public communication of the rationale for setting the SRB at 3 percentage points was unclear.
  - Initial SRB of 2 percentage points on top of the 7 percent minimum CET1 capital ratio was justified by the Ministry of Finance as equivalent to the EBA’s 9 percent CET1 capital target ratio for the largest banks in the EEA area; the EBA recommendation (December 2011) was for exceptional and temporary buffers, not intended as a permanent buffer requirement.
  - The additional 1 percentage point SRB, taking the minimum CET1 capital ratio up to 10 percent, was justified by the authorities as being appropriate in light of particular circumstances in Norway.

### D-SIB buffer and designation of SIFIs
- Designation process:
  - The Ministry of Finance designates SIFIs and is empowered to determine criteria and impose special requirements.
  - In May 2014, the Ministry adopted a regulation to designate systemically important financial institutions every year, based on certain criteria and advice from the FSA; the decision should normally enter into force no earlier than 12 months after the decision.
  - The FSA proposed a list of SIFIs in November 2013 comprising eight banks (DNB Bank, Nordea Bank Norway, and six smaller regional banks with >10 percent market share of corporate lending in their regions); Norges Bank advised against inclusion of regional banks. The Ministry decided not to include a regional criterion, emphasizing national systemic importance.
- Current D-SIBs:
  - Three banks are designated as D-SIBs in Norway: DNB Bank, Nordea Bank Norway and Kommunalbanken AS.
  - Regulation sets a general approach: an institution shall be designated as systemically important if it has total assets corresponding to at least 10 percent of GDP, or a share of the Norwegian lending market of at least 5 percent. Other factors include size and scope, complexity, role in infrastructure, and interconnectedness.
  - Kommunalbanken was included as a D-SIB because it met both quantitative criteria and raises most of its funding in international capital markets.
- Additional requirements for D-SIBs:
  - These three banks will be subject to an additional capital buffer requirement.
    - Under the Financial Institutions Act, SIFIs are required to hold a separate capital buffer requirement of an additional 1 percent above the minimum CET1 capital ratio from July 1, 2015, rising to 2 percent from July 1, 2016. This is in addition to the SRB.
  - The FSA proposed D-SIBs be subject to requirements on liquidity coverage, stable funding and recovery plans earlier than other institutions; the Ministry of Finance decided to wait until international standards are finalized.
  - The FSA also proposed requiring D-SIB management boards to implement a more formal annual self-assessment related to competence and experience.

### Counter cyclical capital buffer
- A counter cyclical capital buffer will be applied on the CET1 capital ratio from July 2015.
  - The Ministry of Finance announced in December 2013 that banks shall hold a counter cyclical capital buffer (in the form of CET1 capital) of 1 percent from June 30, 2015.
  - Recent Swedish and Danish legislation implies this buffer will apply to Swedish and Danish banks’ exposures in Norway, although reciprocity arrangements covering all EEA banks will be subject to incorporation of the CRR and CRD4 into the EEA Agreement.

*International Monetary Fund — Norway staff report excerpts*

### 50.      The purpose of the counter cyclical capital buffer is to strengthen the financial

### The purpose of the counter cyclical capital buffer is to strengthen the financial

### Countercyclical capital buffer: objectives, application, and effects
- Purpose: to strengthen the financial soundness of banks by making banks more resilient to loan losses and protecting against future potential losses stemming from system-wide risks associated with excess aggregate credit growth.
- Use in downturns: the buffer may be reduced to mitigate the risk that banks will amplify a downturn by reducing their lending.
- Potential side-effects noted by authorities:
  - Applying the buffer could dampen credit growth.
  - Higher capital requirements may have contributed to banks increasing their lending margins (although more recently they have been narrowing again).
  - Corporate borrowers may turn to bond financing.

### Governance and decision-making
- Legal basis: Powers for the Ministry of Finance to set a counter cyclical capital buffer introduced under amendments to the Financial Institutions Act adopted by the Norwegian Parliament in June 2013.
- Process:
  - The level is set by the Ministry of Finance each quarter, based on a decision basis and advice from the Norges Bank.
  - Norges Bank exchanges relevant information and assessments with the FSA when drawing up advice.
  - Advice and a summary of background are submitted to the Ministry together with Norges Bank’s quarterly Monetary Policy Report.
  - The advice is exempt from public disclosure until the Ministry announces its decision; thereafter it is published.
  - Typical timing: gap between Norges Bank advice and Ministry decision has been no more than ten days.
  - The Ministry will typically explain its decision, but there is no formal “comply or explain” mechanism in the legal framework.

### Decision basis for Norges Bank advice (Box 2)
- Three criteria used by Norges Bank:
  - (i) banks should become more resilient during an upturn;
  - (ii) the size of the buffer rate should be viewed in the light of other requirements applying to banks;
  - (iii) stress in the financial system should be alleviated.
- Four indicators of financial imbalances:
  - (a) the ratio of total credit (including households and mainland nonfinancial enterprises) to mainland GDP;
  - (b) the ratio of house prices to household disposable income;
  - (c) real commercial property prices;
  - (d) the wholesale funding ratio of Norwegian credit institutions.
- Indicator methodology and judgment:
  - Indicators expressed as “gaps” from estimated trends, using three different trend calculations.
  - No mechanical relationship between indicators and Norges Bank’s advice; advice based on professional judgment and also builds on ESRB recommendations where relevant.
- Historical application:
  - The four indicators stood at historically high levels at the end of 2013.
  - Norges Bank’s letter of advice dated December 4, 2013 concluded a buffer should be imposed at a rate of 1 percent from January 1, 2015.
  - The FSA concurred; Ministry of Finance agreed on a 1 percent buffer but decided to give banks an additional six months to meet the new requirement.
  - Alternative measure used by Norges Bank implied a buffer of around 0.75 percent; the Basel III credit-to-GDP gap did not imply the imposition of a buffer.

### Constraints on risk-weighted asset (RWA) calculations and model parameters
- LGD floor for IRB retail exposures secured by residential real estate:
  - Minimum EAD-weighted average LGD increased from 10 percent to 20 percent from January 1, 2014 (announced October 2013 on advice from the FSA).
  - Expected effect: increase average risk weight on residential mortgages from 10–15 percent to around 20 percent.
- Additional IRB constraints (consulted February 2014; announced July 1, 2014):
  - Minimum requirement on average PDs for IRB calculations on residential mortgages (banks to assume a minimum number of crisis years with PD averaging 3.5 percent in those years).
  - Tightening of risk classification and estimation of LGD (based on an FSA reference model linking LGDs to LTVs).
  - Banks required to adapt internal models by the end of 2014.
  - Combined effect estimated by FSA: could increase average risk weights on residential mortgages to 20-25 percent, compared with previous levels of 10–15 percent.
  - FSA rationale: correction to model data history over a benign period, aligning capital calculation with actual risk; may also help curb household credit growth and reduce systemic risk.
- Application to foreign banks’ operations in Norway:
  - Measures applied to Norwegian branches of Swedish and Danish banks.
  - Swedish FSA (Finansinspektionen) to instruct Swedish branches to take stricter requirements into account under Pillar 2.
  - Danish FSA (Finanstilsynet) to instruct Danish branches to follow stricter requirements under Pillar 1.
- Basel I floor:
  - Ministry of Finance announced October 2013 that the Basel floor rule will continue: RWAs of IRB banks not lower than 80 percent of Basel I RWAs, constraining ability to lower risk weights via internal models.

### Pillar 2 capital and supervisory expectations
- FSA Pillar 2 requirements on individual banks include a systemic risk element, taking into account all Pillar 1 buffers.
- FSA expects banks to operate above legal requirements, including Pillar-2 requirements (for individual banks).

### Maximum loan-to-value (LTV) ratio and mortgage lending guidelines
- Recommended upper limit: 85 percent LTV on residential mortgage lending (FSA guidelines state residential mortgage loan should normally not exceed 85 per cent of property value).
- Deviations allowed if borrower posts additional collateral or bank conducts specific prudent assessment.
- Historical tightening:
  - March 2010: recommended limit was 90 percent.
  - December 2011: tightened to 85 percent in revised guidelines due to house price and household debt growth.
  - December 2011: recommended upper LTV limit for interest only mortgages and home equity loans reduced from 75 percent to 70 percent.
- Scope and compliance:
  - Limits apply at individual borrower level and only to new lending; apply to Norwegian banks and foreign banks’ branches in Norway.
  - Proportion of new mortgages above 85 percent LTV:
    - 30 percent in 2011 (before tightening);
    - around 15 percent in 2012 and 2013, with around 10 percent at 85–100 percent LTVs, and 5 percent at LTVs of above 100 percent.
  - FSA monitors bank lending practices for compliance.
  - At current levels, recommended LTV limits have not generated a switch of mortgage lending to nonbank mortgage lenders.
- Rationale: regarded as both micro- and macroprudential tools to increase resilience, enhance consumer protection, dampen asset price inflation and sector-specific credit growth, and reduce potential future impact of negative house price shocks.
- Effectiveness:
  - Some cross-country research finds LTV and DTI measures, especially combined, can dampen house price inflation and credit growth and improve lender/borrower resilience.
  - Effect may wear off in dynamic markets, requiring successive tightening and structural measures to adjust housing demand and supply.

### Affordability checks
- Requirement: mortgage lenders must conduct affordability checks ensuring household net cash flow remains positive after an increase in interest rates.
- December 2011 guidelines increased stress test to a 5 percentage point increase in mortgage interest rates (up from 3 percentage points in March 2010 guidelines).
- Test based on external research institute data on living expenses at a granular level; FSA views this as preferable to less granular DSR, DTI or LTI ratio limits.

### Monetary policy interaction with financial stability
- Norges Bank stance:
  - Recognizes low interest rates may increase risk of financial imbalances.
  - Operates flexible inflation targeting; one criterion for interest path is that interest rates should mitigate risk of buildup of financial imbalances while keeping acceptable inflation and output developments.
  - In recent years has kept the key policy rate consistently a little higher than implied by medium-term inflation and output considerations; financial stability considerations have played a role.
  - Published forecasts suggest a small undershooting of the inflation target at the current 1.5 percent policy interest rate, and that the policy rate would be slightly lower if financial stability considerations were not taken into account.
  - Recognizes value in using combinations of instruments to achieve greater financial stability.
- Interaction with macroprudential tools:
  - Use of the counter cyclical capital buffer may affect monetary policy conduct, as both the buffer and interest rates affect the real economy through banks’ responses; more restrained lending growth will dampen economic activity and lower inflation.
  - No formal mechanism for coordination between monetary policy and macroprudential tools; but decisions are synchronized in time and based on the same view of the economy.

### Other macroprudential tools and fiscal/tax measures
- CRR Articles 458 and 459 list additional tools not yet used in Norway, including:
  - large exposure limits, public disclosure requirements on credit institutions, liquidity requirements, sector-specific risk weights targeting residential and commercial property asset bubbles, and limits on intra-financial sector exposures.
- Leverage ratio considerations:
  - Macroprudential buffers could be applied to the minimum leverage ratio in proportion to buffers on CET1 minimum capital ratios (UK has announced such an approach).
  - Norwegian banks stand well above the Basel III prospective Tier 1 leverage ratio of 3 percent.
  - Basel I RWA floor acts as a backstop to IRB model use; recent limits on mortgage lending RWAs address model risk.
- Fiscal and tax policy:
  - Could adjust tax incentives to purchase property rather than rent, or impose time-varying taxes on property transactions.
  - Previous tax commissions suggested housing tax reform; suggested measures not implemented.
  - Tax authorities have taken steps to improve housing value assessment, but no other major tax code proposals.
  - Ministry of Local Government and Modernization working to simplify planning and building regulations to help keep construction costs down and speed planning processes.

### Cross-border leakages, reciprocity, and market structure
- Market structure and foreign participation:
  - Foreign banks have a large market share in Norway; Swedish and Danish banks are the most important foreign players.
  - Largest bank subsidiary in Norway: Nordea Bank Norge (Swedish parent).
  - Largest branch: Handelsbanken (Swedish parent).
  - Second largest branch: Danske Bank (Danish parent).
  - Second largest subsidiary: Santander Consumer Bank (Spanish parent).
- Key concerns:
  - Long-standing differences in capital requirements across Nordic countries; Norway’s Basel I floor application is much stricter than other Nordic countries.
  - Concerns about differences in Pillar 1 and Pillar 2 use affecting published capital ratios.
  - Little sign of distortionary impacts on domestic market pricing and market shares; main impact may be reduced competitiveness in foreign markets.
- Reciprocity to limit leakages and arbitrage:
  - Reciprocity agreements restrict leakages and arbitrage; Norway has prioritized reciprocity agreements, particularly with Sweden and Denmark, to ensure branches from these countries are subject to same capital and other requirements as domestic banks lending to Norwegian borrowers.
  - Under CRR and CRD4 (once adopted under the EEA Agreement), legislative provisions across the EEA should ensure foreign banks from other EEA countries apply same tools to their lending to Norwegian borrowers.
  - Adjustments to mortgage RWAs in IRB models: reciprocity depends mostly on bilateral agreements with supervisory authorities in other countries; has worked effectively with Sweden and Denmark.
  - FSA Guidelines on mortgage lending standards apply directly to both subsidiaries and branches of foreign banks.
  - Potential issue: effectiveness of reciprocity agreements would be accentuated if Nordea Bank Group were to convert foreign subsidiaries into branches.

*Source: _cr15257 - 50.      The purpose of the counter cyclical capital buffer is to strengthen the financial*

### 71.      Even with reciprocity, there may be implications from the nonequivalence in minimum

### _cr15257 - 71.      Even with reciprocity, there may be implications from the nonequivalence in minimum

### Macroprudential differences across Nordic countries
- Different sets of macroprudential tools are being utilized across the Nordic region, with different levels of calibration.
- Differences reflect, at least in part, differences in the economic and financial cycles across these countries:
  - House prices are furthest overvalued in Norway and Sweden.
  - House prices are only marginally overvalued (if at all) in Finland.
  - Denmark experienced a significant downward correction in house prices since 2006 to levels that are no longer believed to be overvalued.

### Table 1: Use of Macroprudential Policy Instruments in Norway, Sweden, Denmark and Finland (selected entries preserved exactly)
- Systemic risk buffer
  - Norway: 3 percent for all banks, from July 2014
  - Sweden: 3 percent for four major banks, from January 2015
  - Denmark: Available under EU legislation but not used
  - Finland: Available under EU legislation but not used
- D-SIB capital surcharge
  - Norway: 1 percent from July 2015
  - Sweden: 2 percent from July 2016
  - Denmark: 2 percent from January 2015 (Pillar 2 additional SRB for four major banks)
  - Finland: 1–3 percent, phased in between 2015 and 2019
  - (Denmark and Finland entries note availability or phasing; Finland entry preserved verbatim)
- Counter cyclical capital buffer
  - Norway: 1 percent from July 2015
  - Sweden: 1 percent from September 2015
  - Denmark: Available on phased in basis, from 0.5 percent in 2015 to 2.5 percent from 2019
  - Finland: Available under EU legislation but not used
- Maximum LTV ratio
  - Norway: Recommended upper limit of 85 percent from December 2011
  - Sweden: 85 percent from 2010. Proposals in November 2014 for stricter amortization of loans with LTVs above 70%
  - Denmark: 80 percent (only on first mortgages from mortgage banks)
  - Finland: 90 percent (from July 2016), based on all assets pledged as collateral; and 95 percent for first time buyers
- Maximum loan to income ratio
  - Norway: No, but 5 percent interest rate movement in affordability tests
  - Sweden: No
  - Denmark: No
  - Finland: No
- Adjustments to sector-specific risk weights / Average risk weight on residential mortgages
  - Norway: LGD floor in IRB calculations for retail exposures secured by residential real estate increased to 20 percent.
  - Sweden: Risk weight floor on residential mortgage lending increased from 15 percent to 25 percent, from September 2014
  - Denmark: No
  - Finland: No
- Additional table notes (preserved text fragments)
  - Norway: increased from 10–15 to around 20 percent from January 2014. In addition, various PD and LGD restrictions on IRB models for residential mortgage lending, applicable from end-2014. Expected to result in minimum 20-25 percent risk weighting

### Legal framework and institutional structure — overview
- Norway’s institutional structure reflects reforms after the Norwegian banking crisis in the early 1990s, emphasizing macroprudential policy and higher minimum capital ratios.
- Responsibilities:
  - FSA: supervision of financial institutions and markets (including payment systems) and assesses financial stability.
  - Norges Bank: analyses risk factors, assesses the financial stability outlook, oversees payment and settlement systems.
  - Ministry of Finance: prepares legislative proposals and adopts ministerial regulations; ultimate responsibility for financial stability resides with the Ministry of Finance.
- The Ministry of Finance, the Norges Bank and the FSA each have specific responsibilities relating to macroprudential policy and cooperate closely.

### Decision-making and accountability
- The institutional structure for macroprudential policy was reviewed in 2011 and early 2012 and remained broadly unchanged: the Ministry of Finance is responsible for the counter cyclical capital buffer and other macroprudential capital requirements set out in the CRR and CRD4.
- There is no committee or council that takes, recommends or oversees macroprudential policy decisions; the Ministry of Finance plays the central role.
- There is no external membership of any macroprudential decision-making body, but:
  - Majority of members of the boards of the Norges Bank and the FSA are external.
  - The FSA’s Macroeconomic Surveillance unit is developing a model for macroeconomic analysis in collaboration with the University of Oslo and the Norwegian University of Science and Technology.
  - Norges Bank supports doctoral courses and both Norges Bank and the FSA participate in external committees and bodies (ESRB, three ESAs, ECB networks, Nordic-Baltic cooperation bodies).
  - Norges Bank and the FSA follow external research from Statistics Norway, Norwegian universities and business schools, and the IMF.
  - Authorities regularly hire external experts for specific projects.

### Ministry of Finance — powers, practice, and resources
- Powers and responsibilities
  - Minister of Finance has constitutional responsibility for economic, budgetary and fiscal policy; financial stability; financial markets regulation (including macroprudential policy); and management of the government Pension Fund.
  - Ministry takes central role in setting the SRB, the counter cyclical capital buffer and the capital surcharge on SIFIs.
  - Ministry may lay down further requirements in regulations under the Financial Institutions Act in the interest of promoting financial stability, giving wide macroprudential powers.
- Exercise of powers
  - Powers are exercised on basis of recommendations and advice from the Norges Bank or the FSA.
  - Some powers delegated to the FSA and to the Norges Bank; Ministry would consider further delegation after gain of experience.
  - The Ministry stated in a white paper to the Storting in 2012 that authority to set the counter cyclical capital buffer requirement will lie with the Ministry of Finance until some experience with this new tool is gained.
- Behaviour and accountability
  - Ministry has shown willingness and ability to take a long term view in economic policy.
  - Political debate example: FSA guidelines on mortgage lending standards and recommended upper limit on LTVs were debated during the 2013 election campaign; Ministry raised issue with FSA in February 2014.
  - Ministry took a different view to Norges Bank advice on timing of counter cyclical buffer (a six month delay) and to FSA on designation of D-SIFIs.
  - Financial stability defined in the Financial Institutions Act (exact text preserved): “Financial stability entails that the financial system is sufficiently robust to receive deposits and other repayable funds from the public, channel funding, execute payments and redistribute risk in a satisfactory manner.”
  - Ministry’s systemic risk definition from Financial Markets Report 2012 preserved: “Systemic risk may be defined as the risk of disturbances in the supply of financial services due to problems in all or part of the financial system, which may have serious negative repercussions for production and employment.”
  - Relevant legislation does not address potential trade-offs between financial stability and other objectives (monetary stability and economic growth), but policies are generally designed with attention to interdependencies.
  - The Ministry is accountable to the Parliament; policy goals are presented in National Budget white papers, the annual Financial Markets Report, and other white papers and bills.
- Staff and resources
  - Financial Markets Department in the Ministry of Finance has a staff of approximately 25 persons.
  - A staff of approximately 10 persons is devoted to business cycle analysis and monetary policy matters in the Ministry’s economic policy department.
  - Taken together, these two units have roughly a fifty-fifty distribution of economists and legal professionals.

### Norges Bank — roles, analysis, and resources
- Roles and responsibilities
  - Under regulation on the counter cyclical capital buffer, Norges Bank draws up a basis for the decision on the level of this buffer and provides advice to the Ministry of Finance; regulation requires Norges Bank and the FSA to exchange relevant information.
  - Under the Central Bank Act, Norges Bank informs the Ministry of Finance when measures are needed by others in relation to monetary, credit, or foreign exchange policy.
  - Norges Bank publishes analysis and research on macroprudential issues including cyclical aspects of financial stability, networks and interconnectedness, leading indicators of crises, and transmission mechanisms of tools.
  - Norges Bank has extended its macroeconomic model for monetary policy analysis and forecasting to include a banking sector and several financial frictions.
  - Norges Bank develops a “heat map” to track changes in cyclical and structural measures of systemic risk vulnerabilities.
  - Norges Bank has responsibilities related to financial infrastructure: supervision of clearing and settlement of interbank payment transfers; oversight of payment system and securities settlement system in line with international principles.
- Publications and accountability
  - Publishes an annual Financial Stability Report (may make recommendations to financial institutions collectively), a quarterly financial stability assessment (part of its quarterly report on monetary policy), a quarterly survey of bank lending, an annual Financial Infrastructure Report, and an annual money market survey.
  - Independence safeguarded by the Central Bank Act; Norges Bank is accountable to the Ministry of Finance for the decision basis and advice on the counter cyclical capital buffer.
- Staff and structure
  - Norges Bank has approximately 35 staff working on financial stability issues.
  - Financial Stability Department has three units: Macroprudential (15 staff), Banking Analysis (15 staff), and Financial Infrastructure (9 staff).
  - Most staff are economists with a Master Degree; approximately 25 percent have a PhD.
  - Closer links have been developed since 2008 between monetary policy and financial stability staff within Norges Bank.

### Financial Supervisory Authority (FSA) — roles, powers, and resources
- Roles and responsibilities
  - FSA makes recommendations to credit institutions on upper limits for LTV ratios and on affordability checks as part of guidelines for prudent residential mortgage lending.
  - Constrains some parameters under which credit institutions calculate risk weighted assets using their own internal ratings-based models.
  - Can take account of systemic risks in setting institution-specific Pillar 2 capital requirements.
  - Can make recommendations or issue warnings to financial institutions, collectively or individually.
- Independence and accountability
  - Operational independence safeguarded by the FSA Act; administrative agency acting under the general responsibilities of the Ministry of Finance, managed by an independent board and a director appointed by the King in Council.
  - FSA is accountable to the Ministry of Finance for its macroprudential functions through reporting.
  - Compared with Basel Core Principles, independence of the FSA could be strengthened: Ministry has powers to issue instructions to the FSA, set priorities annually, decide the FSA’s budget and limit total resources.
- Emphasis and publications
  - FSA increased emphasis on financial stability following the early 1990s crisis; combines supervision of individual institutions with macroeconomic assessments.
  - Publishes an Annual Report, an annual Risk Outlook report, and an annual report on ICT-related risks and vulnerabilities.
- Staff and composition
  - FSA has 28 staff working specifically on financial stability issues.
  - The Macroeconomic Surveillance unit and the Analysis and Reporting unit total 28 staff.
  - Majority have a master degree; some have financial sector experience and some have research background and a PhD.
  - Significant interaction with on-site supervision staff and staff from the Solvency Regulation section.

### Coordination and information sharing
- Norges Bank and the FSA are required to exchange relevant information for counter cyclical buffer decisions.
- Authorities follow implementation of macroprudential policies in other countries (examples preserved): Belgium, New Zealand, South Korea, Sweden, Switzerland, and the United Kingdom relating to residential and commercial property markets.
- Norges Bank and the FSA engage with external research, academic collaborations, and international macroprudential networks.

*Source: _cr15257 - 71.      Even with reciprocity, there may be implications from the nonequivalence in minimum*

### 95.      The Ministry of Finance is responsible for the coordination of the activities of the three

### _cr15257 - 95.      The Ministry of Finance is responsible for the coordination of the activities of the three

### Coordination and institutional arrangements
- The Ministry of Finance is responsible for coordination of macroprudential policy and crisis management across the three authorities.
- Tripartite meetings (Ministry of Finance, the Norges Bank and the FSA) were established in 2006, generally held every six months but more frequently when needed (for example during the international financial crisis in 2008–2009 and in subsequent periods of volatility of international financial markets).
- Tripartite meetings:
  - Serve as an important channel for information exchange on economic developments and the state of financial markets.
  - Do not constitute a comprehensive overview of the financial stability outlook nor provide an effective mechanism for coordination of macroprudential policy measures taken by the three authorities.
  - Do not discuss regulatory issues.
- Regular bilateral meetings (usually quarterly) occur between:
  - the Ministry of Finance and the FSA,
  - the Norges Bank and the FSA,
  - the Norges Bank and the Ministry of Finance.
- The Norges Bank and the FSA have a general obligation to submit matters of special importance to the Ministry of Finance before decisions are made (paragraph 96).
- The central role of the Ministry of Finance in macroprudential policy:
  - Brings decisions on banking sector-wide capital requirements into one place (the Ministry of Finance).
  - Requires inputs from the Norges Bank and the FSA and forces a decision on the counter cyclical capital buffer each quarter.
  - Means macroprudential decisions cannot be fully shielded from political considerations.
  - May risk undermining the independence of the Norges Bank in monetary policy and of the FSA in micro-prudential regulation because macroprudential tools overlap transmission channels with monetary and microprudential policies.
- The Norges Bank:
  - Plays an important—if not central—role through monetary policy decisions, published advice on the counter cyclical capital buffer, identification of financial stability risks, and research and analysis.
  - Is well placed to contribute to coordination of monetary and macroprudential policies.
  - May have relatively little involvement in instruments such as recommended upper limits on LTV ratios.
- There is clear evidence of strong willingness to apply macroprudential policy tools in Norway; Norway has been considerably more active in using macroprudential tools than most other countries.

### Information gathering, data quality, and information sharing
- Legal and operational powers:
  - The FSA Act gives the FSA power to require any information from financial institutions in Norway.
  - The Norges Bank Act gives the Ministry of Finance the power to order financial institutions in Norway to give the Norges Bank any information necessary for the Norges Bank to conduct its duties.
- Data access and coverage:
  - Authorities have access to macroeconomic statistics and detailed micro data on households (from tax returns), corporates (from annual balance sheets) and banks (monthly and quarterly reports on balance sheets).
  - Collectively, authorities have access to a broad set of relevant and generally good quality data.
- Identified data gaps and quality issues:
  - Bank losses are mainly reported on an aggregate level, making it difficult to measure actual credit risk in corporate and household sectors.
  - Detailed regulatory reporting on banks’ balance sheets is at the level of the regulated firm, not group level.
  - Only limited information is available on intra-bank exposures within banking groups.
  - Data on the commercial property market is limited, especially outside Oslo.
  - More efforts are needed to collect necessary data to improve funding stress tests.
- Ongoing improvements:
  - The new reporting standard for financial institutions (FINREP) will include reporting on the group level.
  - Work is being undertaken to collect data on commercial property markets.
- Information sharing:
  - No serious legal obstacles to information sharing.
  - The Norges Bank Act and the FSA Act permit the FSA and the Norges Bank to share any information with each other.

### Effectiveness, objectives, and measurement of macroprudential policy
- General uncertainty:
  - The effectiveness of actual and potential macroprudential policy tools remains uncertain, in Norway as elsewhere (paragraph 100).
  - Most countries have limited experience with these tools and there are empirical challenges in identifying effects of individual instruments.
  - A common problem is the absence of a clear statement of objectives and expected transmission mechanisms and impacts of macroprudential instruments, against which outcomes could be assessed.
- Tools focused on resilience:
  - Tools such as the counter cyclical capital buffer and higher risk weights on residential mortgages are aimed primarily at increasing resilience of financial institutions and have a reasonably direct impact on resilience (paragraph 101).
  - Uncertainties remain on whether such measures act as binding constraints if banks hold surplus capital; reduce probability/depth of future crises; affect price and availability of bank lending; or lead to circumvention through less regulated nonbanks or branches of foreign banks.
  - The Norges Bank is at early stages of a project to estimate costs and benefits of the counter cyclical capital buffer and develop a modeling framework to calibrate the buffer rate appropriately.
- Tools aimed at dampening financial cycle:
  - Upper limits on LTV ratios and similar tools aim partly to dampen the financial cycle; their impacts are more difficult to identify (paragraph 102).
  - The Norges Bank has estimated effects of a higher equity ratio on banks’ funding costs and lending and used its macroeconomic model to estimate effects of macroprudential tools on household and non-financial corporate lending.
  - The FSA evaluated the effect of guidelines for prudential mortgage lending and concluded these guidelines contributed to better residential mortgage lending practices, mitigated systemic risk build-up, and arguably prevented debt problems among financially vulnerable borrowers.
- Lack of long-term objectives:
  - There are no clearly specified objectives of macroprudential policy relating to the longer-term path of financial stability indicators (paragraph 103).
  - Key indicators (credit growth, household debt, property prices, banks’ wholesale funding) are closely monitored, but no specific policy objectives for desired long-term levels have been formulated.
- Tool choice, calibration, and cumulative impacts:
  - It has not always been clear how individual macroprudential tools have been chosen and calibrated (paragraph 110).
  - Detailed analysis by the Norges Bank forms the basis for Ministry of Finance decisions on the counter cyclical capital buffer, but less detailed explanations exist for SRB, capital surcharge on G-SIBs, recommended upper limits on LTV ratios, and loan affordability stress tests.
  - The combination of the SRB, D-SIB surcharge and counter cyclical capital buffer results in almost a doubling of the minimum CET1 capital ratio from 7 percent to 13 percent for banks subject to all three additional buffers (paragraph 111).
  - Only limited analysis in official reports of what the “optimal” risk-weighted capital ratio might be.
  - A Norges Bank staff memo estimated that the optimal level of the CET1 capital ratio (excluding the Basel 1 RWA floor) is between 13 and 23 percent for Norwegian banks (footnote reference).
- Measures of effectiveness:
  - There are no existing or proposed measures of the effectiveness of macroprudential instruments in meeting objectives (paragraph 112).
  - Authorities should develop a clearer analytical framework setting out objectives, instrument contributions (individually and collectively), and measurement of effectiveness.

### Analysis coverage and systemic risk monitoring
- The Norges Bank and the FSA undertake and publish high-quality analysis of risks to financial stability but use a limited range of analytical tools (paragraph 106).
- Limited analysis of interconnectedness within the financial system.
- Stress tests include only limited stresses of banks’ funding and liquidity.
- Focus areas:
  - Most analysis concentrates on banks due to banking sector dominance.
  - Norges Bank and the FSA also focus on clearing and settlement systems, banks’ IT and outsourcing, and the insurance sector.
  - The FSA includes assessments of insurance companies due to importance of financial conglomerates, significant pension liabilities and savings managed by life insurers, and the role of insurance companies as institutional investors.

### Conclusions (selected)
- Authorities focus on major cyclical risks to financial stability, including oil prices, low interest rates, the credit: GDP ratio, household debt, residential and commercial real estate prices, banks’ reliance on wholesale funding, and regional issues (paragraph 104).
- Levels of most key systemic risk indicators are at historic highs, though since 2012 they have fallen back toward long-run estimated trends (paragraph 105).
- Norway has taken a large number and range of macroprudential policy actions:
  - Higher capital requirements (additional capital buffers and restrictions on mortgage lending RWAs).
  - Guidelines on banks’ mortgage lending standards (recommended upper limits on LTVs and affordability tests).
  - A degree of “leaning against the wind” in monetary policy setting (paragraph 108).
- Primary emphasis has been on banking-focused, capital ratio focused tools designed to strengthen bank resilience; less emphasis on containing systemic risks at source or maintaining accumulated imbalances at tolerable levels (paragraph 109).
- Coordination issues remain across multiple decision makers, especially outside core capital buffers (paragraph 120).
- Norway has established reciprocity arrangements for macroprudential instruments, particularly within the Nordic region, including reciprocity for the counter cyclical capital buffer and risk weights on residential mortgages where banks use IRB models; further progress is expected once CRD4 and CRR become part of the EEA Agreement (paragraph 113).

### Recommendations
- Recommendation 1: Objectives and Analytical Framework (paragraphs 121–122)
  - Increase efforts to produce a more comprehensive and coordinated framework for macroprudential policy in Norway, including:
    - A clear specification of the objectives of macroprudential policy.
    - The intended objectives of macroprudential instruments, both individually and collectively.
    - The expected benefits and costs of using these instruments.
    - Possible interactions with microprudential tools and with monetary policy.
    - Post-implementation reviews of the effectiveness (including associated costs) of these instruments.
  - Within this framework, consider the potential importance of objectives that extend beyond bank resilience:
    - Place more emphasis on using a range of macroprudential and other policy measures to contain risks at source.
    - Set broadly defined medium to long term ranges for key financial stability ratios as a communication tool to explain authorities’ actions.
    - Be clear about the extent to which the framework includes these additional objectives while recognizing challenges in specifying and operating such a framework.
- Recommendation 2: Addressing Specific Vulnerabilities
  - (Heading appears in source; no further text provided in the supplied content.)

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 123.      The authorities should take additional measures to constrain the growth of house

### _cr15257 - 123.      The authorities should take additional measures to constrain the growth of house

### Measures to constrain house prices and household indebtedness
- Stricter LTV and amortization guidelines—reducing the recommended upper limits on LTVs to constrain lending and house price; taking a more explicit counter cyclical approach; taking a tougher approach to exceptions, for example by limiting the proportion of mortgages that can exceed the recommended upper level; providing more specific guidance on prudent amortization schedules; and considering whether it would be more effective to introduce rules rather than guidelines for LTV and amortization requirements.
- Adding loan to income or debt service ratio limits to supplement the affordability (interest rate stress test) guideline.
- Where lending standards are raised or lowered on a counter cyclical time-varying basis, the relevant authorities should follow a similar approach to that taken with determining the counter cyclical capital buffer by specifying clearly the primary indicators that will be used to set and calibrate these measures.

### Fiscal and structural measures to reduce long-term demand and supply imbalances
- Tax policy—reducing or removing the tax deductibility of mortgage interest payments; reducing or removing the favorable treatment of real estate within the wealth tax, and by introducing a higher imputed rental income from property; and considering the use of transaction taxes as a counter cyclical instrument.
- Planning requirements—improving the speed and predictability of planning applications; releasing more land for housing development; and considering the impact of minimum space and energy efficiency requirements on the availability and price of housing.
- Recommendation: The recommendation here is not necessarily to use all these instruments. There may be less need for stricter lending standards for financial stability purposes if more fundamental structural measures can dampen the growth of house prices and household indebtedness.

### Limits on banks’ wholesale funding and related recommendations
- The forthcoming LCR and NSFR requirements may not be sufficient to address all significant funding risks, in particular the risks arising from:
  - (i) the proportion of short-term wholesale funding (where even if short-term funding is broadly matched by high quality liquid assets, a bank would still have limited time to adjust—beyond the sale or repoing of high quality liquid assets—to the withdrawal of wholesale funding by expanding other sources of funding);
  - (ii) the potentially greater propensity of foreign funding to be withdrawn; and
  - (iii) the mismatch between the maturity of currency swaps (and other hedging techniques) and the maturity of the underlying exposures.
- The authorities should consider whether more direct limits (either overall, or more bank-specific) should be placed on:
  - the proportion of short-term wholesale funding, in particular from abroad; and
  - the mismatch between the maturity of currency swaps (and other hedging techniques) and the maturity of the underlying exposures.
- Running more severe stress tests, with a greater emphasis on adverse funding and liquidity scenarios, could help the authorities to identify the most effective measures here, and to avoid imposing too many simultaneous restrictions on banks’ funding and liquidity structures.
- Such limits could be permanent or time-varying in response to the financial cycle.

### Covered bonds monitoring and potential constraints
- The authorities should continue their close monitoring of banks’ issuance of covered bonds, and consideration of the point at which such issuance should be limited.
- Limits on covered bond issuance should therefore continue to be considered, either through a general regulation or on a bank-by-bank basis.
- There is scope to introduce some price-related constraints on covered bond issuance, by linking the proportion of a bank’s funding through covered bonds to risk-sensitive deposit insurance premia (because covered bonds tend to reduce the quality of assets available to other creditors of a bank in liquidation or resolution) or to capital requirements.

### Recommendation 3: Regional Issues and Reciprocity
- The authorities should continue to make progress on establishing and implementing reciprocity agreements.
- Reciprocity arrangements for the systemic risk buffer await EEA agreement on the adoption of EU capital requirements legislation.
- The authorities should also review the continued use of the Basel 1 RWA floor in light of the development of other international standards, including the leverage ratio and amendments to the basis on which banks can use internal-ratings based models to calculate their capital requirements; and monitor the banking market for any signs that differences across countries in micro- and macro-prudential regulation are distorting competition.

### Recommendation 4: Institutional Structure
- More standardized and transparent procedures for giving advice to the Ministry of Finance. This should include extending the general approach for the giving of advice (quarterly) on the countercyclical capital buffer to the D-SIB capital buffer, the systemic risk buffer (every two years), and risk weights under the IRB approach. This advice given to the Ministry of Finance by the Norges Bank and the FSA should be published in full at the time when the advice is given, not after the decision has been made.
- A more transparent “comply or explain” approach by decision-makers (including the Ministry of Finance) that have received published advice from other official bodies—this should include a fuller rationale for macroprudential decisions, and how the decision-making body has responded to the advice and recommendations it has received.
- An annual broader overview of the collective purpose, impact and effectiveness of the use of macroprudential instruments, and whether there is a need to employ other instruments.
- Enhancing the independence of the FSA.
- Greater delegation of decision-making powers over macro-prudential instruments in due course to the Norges Bank or the FSA, based on clear mandates, objectives and accountability and with formal advice-giving procedures between these two bodies.
- Alternative: Some macroprudential policy functions could be exercised through a formal Committee with core membership of the Ministry of Finance, the Norges Bank and the FSA, and possibly external members. The powers of the Committee would be (at least) to make recommendations to its core members, and possibly to employ (some) instruments directly. A Committee could also lead the design of an analytical framework for the objectives and instruments of macroprudential policy.
- Caution: It may be too early to introduce potentially disruptive change to an institutional structure that has worked reasonably well; a Committee can create uncertainty over the division of responsibilities and the relationships between individual institutions and the committee. Further consideration should be given to addressing the risks of excessive “group think” within a generally tight-knit grouping of institutions and individuals.
- Footnote reference: 16

*IMF staff report excerpt (document _cr15257).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15257.pdf_