The legislative proposal put forward by the Ministry today is based on the Basel III standards and the European Commission's proposal for a legal framework to implement the Basel III standards in the EU (the CRD IV framework). It is expected that official decisions on the CRD IV framework will be made shortly.
The proposal includes a new minimum requirement on common equity tier 1 capital (CET1 capital), and four new buffer capital requirements, for credit institutions and parent companies of banking groups. For investment firms, the Ministry only proposes a new minimum CET1 capital requirement, and hence no buffer capital requirements. The proposed new system for capital requirements is in line with the new international standards (Basel III and CRD IV).
– We choose to introduce the new capital requirements somewhat earlier than what is required by the international transposition dates, says Minister of Finance Sigbjørn Johnsen.
The new requirements
The proposal states that credit institutions shall have a CET1 capital ratio of at least 4.5 per cent. The current 8 per cent total capital ratio minimum requirement is continued, meaning that there will be an additional requirement of at least 3.5 per cent tier 1 or tier 2 capital. Moreover, the proposal includes a 2.5 per cent capital conservation buffer requirement and a 2 per cent systemic risk buffer requirement, both of which will have to be met by CET1 capital. The sum of the proposed new minimum CET1 capital ratio requirement and these buffer requirements is a 9 per cent CET1 capital requirement, effective from 1 July 2013. This is equivalent to the EBA's CET1 capital ratio target level of 9 per cent for the 71 largest banks in the EEA area, which Finanstilsynet (the Financial Supervisory Authority of Norway) has said all Norwegian credit institutions should also fulfil. Per year-end 2012, all Norwegian credit institutions had a CET1 capital ratio of at least 9 per cent.
Today's legislative proposal prescribes an increase in the systemic risk buffer requirement from 2 to 3 per cent for all credit institutions from 1 July 2014, so that there in total will be a CET1 capital ratio requirement of 10 per cent from 1 July 2014. The Ministry furthermore proposes a separate capital buffer requirement for systemically important institutions of 1 per cent CET1 capital from 1 July 2015, increased to 2 per cent CET1 capital from 1 July 2016.
The increases in the systemic risk buffer requirement and the capital buffer requirement for systemically important institutions may require a gradual increase in Norwegian credit institutions' CET1 capital ratios. Per year-end 2012, Norwegian banks in total had a CET1 capital ratio slightly above 11 per cent, which was more than 1 percentage point above the level at year-end 2011.
In addition to establishing specific requirements by law, the Ministry proposes a statutory authority to issue rules on a counter-cyclical capital buffer requirement of between 0 and 2.5 per cent CET1 capital. This buffer requirement is to be determined by the Ministry in a regulation, in accordance with the economic situation and the advice of Norges Bank in collaboration with Finanstilsynet. Today's proposal also contains reporting requirements for institutions' leverage ratio, and an expanded statutory authority to implement other rules on capital requirements, liquidity etc. that will be introduced in the EEA area, i.e. the rest of the CRD IV framework.
Read more: Legislative proposal (only in Norwegian)