The Ministry of Finance sets the systemic risk buffer rate. Norges Bank is responsible for preparing a decision basis and providing advice on the buffer rate to the Ministry of Finance at least every other year. The decision basis is to contain analyses based on relevant indicators, recommendations and guidance from the European Systemic Risk Board (ESRB) and Norges Bank’s assessment of structural vulnerabilities and other systemic risks of a long-term nature. In this work, information and assessments are to be exchanged with Finanstilsynet (Financial Supervisory Authority of Norway).

Principles for Norges Bank’s advice

Norges Bank provides advice on the systemic risk buffer rate in accordance with the following principles:

The systemic risk buffer should reflect the assessment of structural vulnerabilities in the financial system. Structural vulnerabilities are persistent features of the financial system that change rarely or little from year to year. Vulnerabilities may, for example, reflect high debt levels or banking sector interconnectedness. Structural vulnerabilities increase the risk that negative shocks will have more serious consequences for the financial system and the Norwegian economy.

The systemic risk buffer is not intended to reflect vulnerabilities that can be fully addressed by other capital requirements. The systemic risk buffer is intended to contribute to ensuring that banks hold sufficient capital to weather future downturns. The buffer rate is based on an assessment of the total need for capital in the banking sector. In this assessment, other capital requirements and the economic costs of the capital requirements should be taken into account. In the event of a pronounced downturn, the buffer rate can be lowered if a countercyclical capital buffer rate reduction is insufficient. The systemic risk buffer should only be reduced if the banking system is assessed to be sufficiently capitalised to weather the downturn.

The systemic risk buffer should as a main rule apply to all exposures in Norway. This is because the effect of structural vulnerabilities on banks in a downturn is uncertain. However, in situations where vulnerabilities in individual sectors are particularly high and where more targeted measures are insufficient or unavailable, an systemic risk buffer for a subset of sectoral exposures can be considered.

Information basis for the advice

Advice on the level of the systemic risk buffer is based on four assessments and on the principles described above. The four assessments are:

1. Structural vulnerabilities in the financial system. Assess persistent features of the financial system that could trigger or amplify a pronounced downturn.
2. Other macroprudential measures. Assess whether macroprudential measures other than the systemic risk buffer are better suited to addressing the vulnerabilities.
3. Banks’ overall capital needs. Assess whether banks are sufficiently capitalised to avoid amplifying a downturn.
4. Banks’ adjustments in response to a change in the systemic risk buffer rate. Assess banks’ response and related effects on the economy before any advice is given on changing the buffer rate.

The four assessments will be based on a broad set of indicators and analyses. There will not be a mechanistic relationship between Norges Bank’s advice on the systemic risk buffer and developments in indicators and analyses. Advice on the level of the buffer is also based on judgement. The information basis will be updated as data volumes expand and new methods and indicators are developed.

For more information about the information basis, see Norge Bank Papers 5/2022.