Norges Bank Backs Push for More Capital, Higher Risk Weights

Norway’s central bank backed a push for higher risk weights on mortgages and said the biggest lenders such as DNB ASA should be required to hold more in capital to guard against losses amid a potential property bubble.

While the bank hasn’t proposed specific numbers, risk weights on mortgages of 35 percent to 40 percent “are closer to our thinking” than the 15 percent that was proposed by Sweden yesterday, Deputy Governor Jan F. Qvigstad said in Oslo.

At the same time, the bank backed adding additional capital requirements, mapping out a scenario of a 5 percent buffer and a capital adequacy requirement of 15.5 percent. The country, which isn’t a European Union member, requires banks to hold common equity Tier 1 capital of at least 9 percent of their risk- weighted assets.

“Banks should make use of the opportunity available to them now to strengthen their capital positions and improve liquidity,” the central bank said in a financial stability report today. The corporate sector could face “substantial losses” if heavily indebted households have to make abrupt cuts in consumption, according to the report.

Below target inflation and falling rates abroad prompted Norway’s central bank to leave its benchmark interest rate unchanged at 1.5 percent last month, the lowest in more than two years, even as an economic recovery gains momentum, pushing household debt and housing prices to records. DNB had an average risk weight of 12.8 percent at the end of last year, according to the central bank.

The Financial Supervisory Authority said last month that while Norwegian banks are “solid and profitable” rising house prices and household debt are a concern. The regulator also said that banks should further strengthen their finances to build protection against global turmoil and meet tougher capital requirements.

A boom in Norway’s petroleum industry has helped to shield Europe’s second-largest oil and gas exporter from the fallout of the euro region’s debt crisis. Mainland output, which excludes oil and gas output, may grow 3.75 percent this year and registered unemployment will hold below 3 percent through 2015, the central bank forecasts.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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