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Norway Tightens Bank Rules Measuring Losses in Event of Default

Norway will tell its banks to base their capital ratios on bigger loss assumptions in the event of a default.

The Finance Ministry in Oslo said yesterday banks in Scandinavia’s richest economy per capita will need to raise their loss-given-default floor on mortgage assets to 20 percent from 10 percent, according to a statement on its website. The rules will become effective from January and banks will also need to ensure their subsidiaries follow the new requirement, the ministry said.

The outgoing government of Prime Minister Jens Stoltenberg is tightening bank standards as it hands over power to a Conservative-led coalition that has discussed easing lending caps. Norway’s financial regulator has argued in favor of stricter rules amid concern the nation’s housing market is overheating.

Finance Minister Sigbjoern Johnsen, who steps down this week with the Labor government that lost last month’s election, said banks will keep existing rules based on a floor calculated under Basel I. Doing so means that the basis for calculations isn’t weakened for banks using internal models, he said.

“Continuation of Basel I rules according to existing rules and an increase in the minimum demands for the LGD parameter will prevent this and provide an impact with what has been communicated and expected in the market,” Johnsen said.

Lowest Probabilities

The Financial Supervisory Authority is also working on going through the banks’ models, in part with a view to increasing the lowest loss probabilities used.

“After such a review, Norwegian banks will probably have somewhat higher and more equal mortgage weights,” the ministry said.

The government said earlier this year that an LGD floor of 20 percent would give risk weights on mortgage assets of 20 percent or more.

Authorities in Norway have struggled to stabilize the housing market after near record-low borrowing rates fueled credit growth in western Europe’s biggest oil producer. Regulators have responded by capping lending, tightening capital requirements and raising risk weights. Norway is also stress testing covered bond issuance to prevent banks from fueling mortgage market imbalances.

Incoming Prime Minister Erna Solberg has promised to look over a 2011 guideline capping mortgages at 85 percent of a home’s value. Solberg is due to take over government together with coalition partner, the Progress Party, on Oct. 18.

Norway’s FSA, the central bank and the International Monetary Fund have all sounded the alarm on risks facing the nation’s housing market after prices doubled over the past decade and household debt swelled to a record 200 percent of disposable incomes.

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