Background 

Norges Bank is responsible for preparing a decision basis and providing advice on the systemic risk buffer (SyRB) for banks at least every other year. The Ministry of Finance sets the SyRB rate. The SyRB requirement was introduced in Norway in 2013 and was increased to 4.5 percent in 2020. In 2022, the Ministry decided to keep the SyRB unchanged at 4.5 percent, in line with Norges Bank’s advice. 

Owing to vulnerabilities in the financial system, negative shocks can have serious consequences for the financial system and the Norwegian economy. The SyRB helps to ensure that banks hold sufficient capital to weather future downturns. The SyRB should reflect the assessment of structural vulnerabilities in the financial system, ie persistent features of the financial system that change rarely or little from year to year. 

The decision basis for the advice on the SyRB comprises this letter and three attachments: Financial Stability Report 2024 H1, the assessment of a sectoral SyRB and indicators for assessing structural vulnerabilities. The decision basis is in line with recommendations and guidance from the European Systemic Risk Board (ESRB). Norges Bank’s framework for advice on the systemic risk buffer is also attached. In drawing up the decision basis, Norges Bank has exchanged information and assessments with Finanstilsynet (Financial Supervisory Authority of Norway) (see also attached letter from Finanstilsynet). 

Assessment of structural vulnerabilities 

In the assessment of the SyRB, Norges Bank places particular emphasis on two structural vulnerabilities in the Norwegian financial system: i) many households are highly indebted and ii) banks’ CRE exposures are high. In addition, Norges Bank attaches weight to banks’ high exposures to customers vulnerable to climate transition and to the fact that one bank’s funding is another’s liquidity reserve. 

Household leverage remains high historically and compared with other countries. Over the past two years, leverage has declined somewhat but is higher than prior to the pandemic. High indebtedness makes households vulnerable to loss of income, higher interest rates or a fall in house prices. In the event of unexpected negative shocks, many households may reduce consumption sharply, which could impair firms’ earnings and banks may face higher losses on corporate exposures. This constitutes a risk to the financial system and may amplify a downturn in the Norwegian economy. 

Experience from banking crises in Norway and abroad have shown that losses on CRE exposures have been an important cause of solvency problems in the banking sector. Banks’ CRE lending accounts for around half of total corporate exposures. This share has been stable in recent years. Many CRE firms have high debt-to-revenue ratios, and profitability has diminished owing to higher interest expenses in recent years. However, high employment and rising rental income have enabled most firms to cope with higher interest expenses. Higher interest rates have also resulted in lower commercial property prices in recent years. If demand for commercial premises were to fall markedly, driven by, for example lower employment or structural changes such as a rise in remote working, both rental income and selling prices would fall. If a fall in selling prices leads to negative equity in banks’ collateral and firms default on their debt, banks may incur losses. 

Climate change and energy transition will lead to higher costs for many households and firms in the years ahead. Costs related to emission taxes and energy efficiency improvements, and expenses related to damage caused by changes in weather and climate are expected to increase. Banks have large exposures to some sectors that are particularly vulnerable to climate transition, including shipping and oil extraction. In addition, higher energy efficiency standards are in the pipeline for the real estate sector, where banks also have large exposures. In the event of abrupt changes, business and household costs may entail higher losses for banks than would otherwise have been the case. At the same time, investment needs relating to climate transition may increase. 

Banks are interconnected through interbank exposures and common or similar securities in their liquidity reserves. Covered bonds issued by other Norwegian banks’ account for a substantial portion of banks’ liquidity reserves, the share of which has changed little in recent years. This interconnectedness implies that problems at one bank can more easily spread to other banks. If there are simultaneous fire sales of covered bonds by a number of banks, prices may fall sharply. Fire sales inflict losses on banks. This may occur at the same time as banks incur substantial credit losses, for example in a downturn with a sharp fall in property prices. The main instrument to protect against this vulnerability are current liquidity requirements, which reduce the risk of fire sales and thus a sharper fall in the value of banks’ liquidity portfolios.  

Other instruments 

Financial system vulnerabilities are addressed by a number of different measures. Requirements for banks’ capital, liquidity and lending standards help improve financial system resilience and may also mitigate vulnerabilities. 

The systemic risk buffer is not intended to reflect vulnerabilities that can be fully addressed by other capital requirements. The Lending Regulation is also justified by vulnerabilities related to the high indebtedness of many households. The Regulation appears, however, to have a more direct impact on household borrowing, while the SyRB improves banks’ loss absorbing capacity. Risk-weight floors are justified by vulnerabilities related to both households and commercial property but are primarily a backstop that prevents banks’ capital levels from becoming too low following a fall in banks’ risk weights. The countercyclical capital buffer (CCyB) should reflect the assessment of cyclical vulnerabilities in the financial system, while the SyRB should reflect structural vulnerability. Systemically important banks are required to maintain a larger capital buffer because problems in a systemically important bank can have severe negative consequences for the economy. This is a structural vulnerability that is not part of the justification for the SyRB. 

Assessment of banks’ total capital needs 

In 2022, Norges Bank analysed the economic costs and benefits of bank capital requirements (see Financial Stability Report 2022). The Bank’s estimates indicate that Norwegian banks’ capital ratios are within a reasonable range for what banks’ long-term capital adequacy should be. The analysis also shows that economic costs are higher if banks adjust to a capital adequacy ratio that is too low rather than too high. 

Stress tests conducted by Norges Bank and Finanstilsynet show that a severe economic downturn could result in such large bank losses that banks will draw down their capital buffers. Norges Bank’s stress tests take into account that financial system vulnerabilities amplify economic downturns, and the depth of the crisis will therefore depend on current vulnerabilities. The stress test in Financial Stability Report 2024 H1 is based on a scenario that includes a severe downturn in the Norwegian economy and a sharp fall in property prices. The stress test shows that the capital buffers of the largest Norwegian banks as a whole are sufficient to absorb losses in such a scenario. There is uncertainty as to how large losses will be in a downturn. Downturns can also occur in rapid succession, and overall losses can therefore be substantial. A sensitivity analysis in the stress test illustrates how higher losses and a weaker interest margin may induce banks to draw down the SyRB. In the event of a pronounced downturn, the SyRB rate can be lowered if a CCyB rate reduction is insufficient. The SyRB should only be reduced if it can contribute to dampening the downturn and the banking system is assessed to be sufficiently capitalised to weather the downturn. 

In the assessments of banks’ overall capital needs, it is the banks’ equity capital available to absorb losses that is of importance. The analyses are based on current capital regulations. Regulatory changes ahead have been signalled, such as the introduction of the EU’s updated capital framework (CRD VI/CRR III). This can result in somewhat lower risk weights for Norwegian banks, particularly for standardised approach banks. The changes are likely too minor to significantly affect overall capital needs.1  

Exposures subject to the SyRB requirement 

The SyRB requirement should apply to both Norwegian and foreign banks’ exposures in Norway. This is because the requirement is based on structural vulnerabilities in the Norwegian financial system, and foreign banks account for a large share of the Norwegian lending market. If the Norwegian authorities are to maintain national governance over time, it is important that other countries recognise Norwegian regulations so that Norwegian capital requirements also apply to foreign banks’ exposures in Norway. Accordingly, the SyRB rates of EU countries will apply to Norwegian banks’ exposures in the relevant country. This facilitates mutual cross-border recognition (reciprocation) of banking regulation. 

A number of countries have introduced sectoral SyRBs in recent years and the IMF has pointed out that it can be appropriate to introduce a sectoral SyRB for CRE exposures in Norway. Norges Bank has assessed whether parts of the current SyRB should be replaced with a sectoral SyRB, but the Bank does not propose such a change (see attachment for further details). The effect of vulnerabilities on the composition of banks’ losses in a downturn is uncertain. Losses can arise in many different sectors, suggesting that an SyRB requirement should apply to all exposures in Norway.  

Overall assessment of the level of the SyRB 

Structural vulnerabilities in the Norwegian financial system are at approximately the same level as when the SyRB requirement was last assessed in 2022. There is little change in the structural features giving rise to vulnerabilities, but vulnerabilities related to climate transition are assessed to be more important than previously.  

An SyRB at 4.5 percent helps to ensure that banks hold sufficient capital to weather future downturns. The SyRB requirement should continue to apply to all exposures in Norway for Norwegian and foreign banks. 

Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to advise the Ministry of Finance to keep the SyRB rate unchanged at 4.5 percent. 

​​Sincerely,​ 

Ida Wolden Bache
Governor 

Torbjørn Hægeland
Executive Director 

Attachments:
Financial Stability Report 2024 H1
Assessment of sectoral SyRBs 
Set of indicators for the SyRB
A framework for advice on the systemic risk buffer, Norges Bank Papers 5/2022
Letter from Finanstilsynet (in Norwegian only) 

​​Copy to:​
​​Finanstilsynet​