Norway’s FSA Warns on Substantial Risks for Household Debt

Norway’s financial regulator said that the optimism gripping Norway can easily evaporate and trigger a retrenchment for debt-burdened Norwegian households.

“Weakened confidence in the Norwegian economy could lead to a fall in house prices or intensify an incipient decline, triggering substantial financial consolidation in the household sector,” the Oslo-based regulator said in a 2013 outlook report. “Knock-on effects to the wider economy may be substantial, and banks’ loan losses will rise.”

The financial watchdog in March threw its weight behind a government proposal to force banks to assign higher risk weights on mortgage loans as the nation looks for ways to cool its overheated property market. The nation has also proposed curbs on covered bond issuance and higher capital requirement to prevent a repeat of the 1990s crisis that sent Norway’s real estate prices plunging 40 percent.

The Finance Ministry in December proposed tripling risk weights to 35 percent, more than double the recommendation in neighboring Sweden, after house prices and private debt burdens soared to records. Lawmakers have also proposed higher capital requirements for its banks, including DNB ASA (DNB), and to implement them earlier than international regulators.

House prices in Western Europe’s biggest oil exporter have doubled since 2002, and rose an annual 7 percent last month, according to the Norwegian Association of Real Estate Agents. At the same time, household debt will swell to about 200 percent of disposable incomes this year, the central bank estimates.

Low interest rates have contributed to imbalances in the housing market. Norway’s central bank has held its benchmark interest rate at 1.5 percent for more than a year. Policy makers last month signalled a possible cut to match a 2009 record as they try to fight krone gains that are weighing on inflation.

HSBC Holdings Plc said yesterday that concern over a possible housing bubble and high household indebtedness in Norway and Sweden prompted them to take a “cautious view” on Nordic banks. The bank said higher mortgage risk weights may “significantly erode” the banks’ excess capital.

A number of lenders, including Norway’s biggest bank, DNB and pan-Nordic Nordea Bank AB (NDA), raised mortgage rates last month on anticipation that stricter rules are unavoidable.

The Finance Ministry has proposed raising core capital requirements to 10 percent by July next year, up from 9 percent. For systemically important banks, the target will rise to 11 percent in 2015 and 12 percent in 2016. A counter-cyclical buffer of as much as 2.5 percent could also be assessed.

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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