As Norway falls deeper into an oil-induced slump, its financial watchdog is adjusting rules on how much capital banks must hold to cope with such shocks.
According to Credit Suisse, the changes will mean higher capital requirements for Norwegian banks and fewer rewards for investors, as the Oslo-based Financial Supervisory Authority imposes some of Europe’s toughest standards.
From 2016 onward, Norwegian banks will need to anticipate the fallout of stressed economic conditions on their operations, including losses from asset sales and increased funding costs. The adjustment marks an overhaul by the FSA of an eight-year-old framework now deemed out of step with the climate in which banks are operating.
“The FSA’s ambition is to strengthen the capital levels in Norwegian banks,” Jan Wolter, a director at Credit Suisse’s European banks team, said in an e-mailed response to questions. “We believe the extra capital requirement could dilute long-term returns in the Norwegian banking market.”
Under the new measures, banks will also have to evaluate risks from excessive debt accumulation. The government has imposed a 1 percent counter-cyclical buffer, which is an additional layer of capital imposed when regulators worry credit growth is too fast. It’s set to rise to 1.5 percent next year, as officials look for ways to deal with growing household debt levels.
The FSA’s additional rules, which cannot be met using hybrid instruments, may raise the minimum core Tier 1 equity requirement for Norway’s biggest bank, DNB, to as much as 15.5 percent of risk-weighted assets, Wolter said. The bank reported a 13 percent ratio in the second quarter.
While DNB generates enough profit to be able to meet the higher requirements, the new standards put its dividend policy at risk, according to Credit Suisse.
“A 50 percent pay-out ratio already in 2016, as consensus expect, could be too optimistic,” Wolter said. “Rather, we see a 30 percent pay-out ratio in the next three years as more likely.”
DNB said in July that, while its credit policies are based on assumptions of a “relatively low” oil price, it is monitoring closely the impact as related industries will face ”challenges.” Chief Financial Officer Bjoern Erik Naess warned that the bank expects to see an increase in impairments “from 2016 on-wards.”
The fallout of lower oil prices already has had a huge impact on Norway’s economy. Its central bank unexpectedly cut interest rates last week to a record low and signaled it may ease further as a 50 percent drop in Brent crude over the past year kills jobs in western Europe’s biggest oil producer.
The FSA published the revisions to its 2006 and 2007 framework last month. The changes are to the internal risk and capital assessments that regulators require banks to conduct. The agency also revealed its own methods for setting capital needs in excess of minimum global requirements, to make the process for determining so-called Pillar 2 add-ons more transparent, it said.
(Read this for some background on what regulators elsewhere in the Nordic region are doing.)