Norway Boosts Capital Requirements to Stem Banking Risk

Norway proposed raising capital requirements at its banks to protect the economy from financial losses amid warnings Europe’s second-richest economy is in the grip of a housing bubble.

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

“The international financial crisis has shown how vulnerable banks are and how fast a loss of confidence can spread,” Finance Minister Sigbjoern Johnsen said in the statement.

Norway is trying to pad its banks against losses after house prices doubled since 2002 and private debt burdens swelled to a record. Lawmakers are moving ahead of international regulators amid concern the oil-rich nation’s mortgage market needs curbs to take effect earlier than implementation dates set by the Basel Committee on Banking Supervision.

Norway, which like Switzerland isn’t a European Union member, has required banks to hold common equity Tier 1 capital of at least 9 percent of their risk-weighted assets. DNB ASA, the largest bank, had capital of 10.5 percent at the end of last year. Norwegian lenders had “a bit more” than 11 percent in core capital at the end of last year, according to the ministry.

DNB slid 1.3 percent to 86.4 kroner as of 12:48 p.m. in Oslo.

Risk Weights

Norway is also considering proposals that include tripling risk weights assigned to mortgage assets and stemming issuer reliance on covered bonds.

A number of banks, including DNB and pan-Nordic Nordea Bank AB, raised mortgage rates this month on anticipation that stricter rules are unavoidable. The Finance Ministry today also released a consultation paper outlining four different potential risk-weight models, ranging from about 20 percent to 35 percent.

Home prices in Western Europe’s biggest oil exporter rose an annual 8.5 percent last month, according to the Norwegian Association of Real Estate Agents. Household debt will grow to more than 200 percent of disposable incomes this year, the central bank estimates. In the years leading up to Norway’s 1990s property bubble, the debt ratio reached about 150 percent.

Banks in neighboring Sweden must set aside at least 10 percent core Tier 1 capital of risk-weighted assets this year, with the minimum requirement rising to 12 percent in 2015. Basel sets a 7 percent minimum by 2019, while the European Banking Authority has set a temporary 9 percent target for some banks.