Eight Banks Picked as Too Big to Fail for Norway’s Economy

Norway’s financial regulator identified eight banks it said are systemically important to the $500 billion economy and recommended the lenders face the nation’s highest capital requirements.

DNB Bank, Nordea Bank Norge, SpareBank 1 Nord-Norge, SpareBank 1 SR-Bank, SpareBank 1 SMN, Sparebanken Vest, Sparebanken Soer and Sparebanken Pluss should be designated as systemically important financial institutions, the Financial Supervisory Authority told the Finance Ministry, according to a statement today. Sparebanken Soer and Sparebanken Pluss are merging, the FSA said.

Banks deemed too big to fail will be subject to an extra 2 percent capital requirement of their risk-weighted assets, raising the total minimum ratio to 11 percent in 2015 and 12 percent in 2016, from the current 9 percent. Norway is pushing ahead with stricter rules than much of the rest of Europe to guard against financial imbalances as household debt surges in Scandinavia’s richest economy.

Including a proposed counter-cyclical buffer, the total requirement could swell to 14.5 percent. The FSA also proposed a liquidity cover ratio of 100 percent for the designated banks from July 1, 2015. Banks will be required to hold 110 percent of the existing “liquidity indicator 1,” until a definition and calibration is completed for the long-term net stable funding ratio, according to the letter to the ministry.

Norges Bank

Dorte Drange, a spokeswoman at the ministry, said the government is working on a response to the letter.

The eight banks met criteria that included assets of at least 10 percent of mainland gross domestic product or the total in Norway, a market share of at least 5 percent of lending to the Norwegian public and 10 percent of corporate lending in one or several regions. Banks with a critical role in the financial infrastructure were also chosen, the FSA said.

While the Norwegian central bank said in the letter that it backs the FSA’s methodology, it questioned two of the criteria. The bank argued that the limits on lending to the public and the regional market-share should be increased. The bank also said that only the largest lender in each region should be designated systemically important, which would mean that only DNB ASA would meet the criteria.

The central bank said that being designated could be an advantage for the banks because it could give an impression of reduced risk and that a greater number of such banks could contribute to cementing the existing structure in the market, according to the letter.

Topping Basel

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.

DNB, the largest Norwegian bank, has been raising mortgage rates and loan prices to help cover the cost of more capital. The lender estimated last month a capital need of 40 billion kroner ($6.7 billion) to 60 billion kroner through 2016.