The countercyclical capital buffer is intended to strengthen banks’ solvency and mitigate the risk that banks amplify an economic downturn. According to the capital framework, the countercyclical capital buffer is intended, in principle, to range between 0 percent and 2.5 percent. Norges Bank will normally set the buffer rate in the upper part of this range. If a downturn will or could cause a marked reduction in credit supply, the countercyclical capital buffer rate should be lowered. Norges Bank sets the countercyclical capital buffer rate each quarter.

Activity in the Norwegian economy is still high, and the labour market is tight. At the same time, the policy rate is having a tightening effect, and pressures in the economy are easing.

Many households are highly indebted, and property prices have increased substantially over many years. Such vulnerabilities may amplify a downturn in the Norwegian economy (see Financial Stability Report – 2023 H1).

Household debt growth has slowed gradually in recent years. However, in response to high debt levels and higher interest rates, households will need to spend a larger share of income on interest payments than they have for a long time. Low unemployment and accumulated savings better equip households to meet higher expenses. Looking ahead, it is uncertain how much households will tighten consumption in response to high inflation and higher interest rates. A sharp tightening of consumption may lead to higher bank credit losses. This may induce banks to tighten credit standards, thus amplifying a downturn.

House prices rose at the beginning of 2023, after having fallen in autumn 2022. Since May, house prices have edged down again, and the number of unsold existing homes has increased. Future house price developments are uncertain. Large and abrupt falls in house prices may result in higher bank credit losses. A potential fall in house prices is cushioned by the low level of residential construction.

Commercial property selling prices have fallen over the past year owing to higher yields. Many commercial real estate (CRE) firms are highly indebted and therefore vulnerable to a fall in prices and increased financing costs. A number of CRE firms hold considerable bond debt that will soon mature. However, banks have limited exposure to firms with the weakest financial strength and substantial bond debt maturing in the near future. Nevertheless, an economic downturn accompanied by a sharp fall in selling prices and rental income may result in considerable bank losses.

Creditworthy firms and households appear to have ample access to credit. In Norges Bank’s lending survey for 2023 Q2, banks as a whole reported unchanged credit standards for firms and households. Banks reported some further tightening of standards for CRE firms. For Q3, banks expect unchanged credit standards. Risk premiums in the corporate bond market are still higher than normal, particularly for CRE firms.

Norwegian banks are solid, liquid and highly profitable. Higher interest margins have contributed to high profitability in recent quarters. At the same time, credit losses have been low. In the event of a sharp downturn, credit losses may become so large that bank profitability turns negative, and banks draw down the capital buffers that they have built up. Stress tests and sensitivity analyses, including those in Financial Stability Report 2022, show that banks are resilient and are capable of absorbing losses and maintaining lending, even in the event of a sharp economic downturn. The countercyclical capital buffer rate of 2.5 percent helps banks to remain resilient.

The Committee unanimously decided to keep the countercyclical capital buffer rate at 2.5 percent.

Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Jeanette Fjære-Lindkjenn

16 August 2023

Norges Bank sets the countercyclical capital buffer rate each quarter. The rate is published together with the policy rate decision in January and August and together with Financial Stability Report in May and November. The next decision on the countercyclical capital buffer will be published on 8 November.