Looking for a specific product?

Make a search for products & suppliers, articles & news.

Risk weights under the IRB approach

The Ministry of Finance has amended a rule regarding the calculation of risk-weighted assets under the IRB approach. In order to strengthen the banks internal models to promote financial stability, the minimum requirement for banks' estimates of the parameter Loss Given Default (LGD) is increased from 10 pct. to 20 pct. for mortgage loan exposures. In accordance with new EU legislation, this minimum requirement will apply for branches of foreign banks operating in Norway. Existing rules regarding the so-called Basel I floor is continued as present.

 

–In the Revised National Budget 2013 I informed that the Ministry would return to the question on the calculation of risk weights under the IRB approach this autumn. Internationally, much attention is paid to the use of internal models for the calculation of risk-weighted assets, and especially risk-weights of residential mortgage loans and corporate loans. Significant shortcomings have been uncovered in these models, and this may call for revisions and closer monitoring of banks' use of models.

In my opinion it is important that the sum of risk-weighted assets is not weakened for banks using the IRB approach. A continuance of the Basel I floor, in addition to an increased minimum requirement on LGD estimates, will help ensure this. These measures will have an effect that is well in line with what has been communicated to and is expected by the market, says Minister of Finance Sigbjørn Johnsen.

On 22 March 2013, the Ministry of Finance issued a public consultation on draft proposals for four rules that were possible alternatives to the current backstop on the level of risk-weighted assets, the so-called Basel I floor.The Ministry stated in the consultation letter that it would be important that any new rules would not weaken the sum of risk-weighted assets compared to the level ensured by the Basel I floor rule, and emphasised that a continuance of the Basel I floor rule was an option. In Norway, the Basel I floor rule is a backstop for IRB banks' risk-weighted assets, whereby risk-weighted assets cannot be lower than 80 pct. of banks' risk-weighted assets calculated according to the Basel I rules.

The EU's CRR/CRD IV framework implies, as a main rule, an obligation to continue a Basel I floor rule until 31 December 2017, with a possibility of further extension. In Norway, this will be fulfilled by a continuance of the current Norwegian Basel I floor rule.

Most respondents to public consultation of 22 March 2013 asked the Ministry to consider the competitive situation for Norwegian banks and so-called host-country regulation. Risk weights on loan exposures depend, among other variables, on the estimates of Probability of Default (PD) and the aforementioned LGD. Under the new EU rules, national authorities may, on the basis of financial stability considerations, choose to increase the minimum requirement on LGD estimates for exposures secured by property in their territory. Such a measure will therefore apply for branches of foreign banks as well as for domestic banks. In order to strengthen banks' internal models to promote financial stability, the LGD minimum requirement in Norway is increased from 10 pct. to 20 pct. for mortgage loan exposures. The amendment enters into force on 1 January 2014. The impact of this measure for Norwegian IRB banks will be modest, because the Basel I floor rule will be the effective lower limit for these banks' risk-weighted assets.

Moreover, the Financial Supervisory Authority of Norway is currently reviewing banks' internal models, with a view to increasing the lowest PD estimates. It is likely that this review will result in somewhat higher and more uniform risk weights on residential mortgage loan exposures for Norwegian banks.

 

Related news

Latest news

Trainee weekend in Hafjell and Bremanger daily life

First joint kick of seminar

Pentair and Stahl Tranberg had their first customer event presenting both companies heat tracing solutions for customers.

Untrue rumours about an on-going incident at the Halden Research Reactor in Norway

The Norwegian Radiation Protection Authority has become aware that stories about an ongoing incident involving a “meltdown” at the Norwegian Institute for Energy Technology (IFE) reactor situated in Halden are currently ci...

Gulf Notified Body meeting in Manama Bahrain

At the end of January, the GSO (Gulf Standards Organization) arranged the first meeting with the present group of 23 Notified Bodies. These Notified Bodies are authorised by GSO to certify the electrical products as curren...

SMART SYSTEM USES POST OFFICE VEHICLES TO ANALYZE ROADS.

During the spring thaw period in Sweden, many small roads are closed to traffic despite the fact that they are fit for use. The BiFi research project has analysed the roads’ bearing capacity in real time using Internet-con...

Children with poor vitamin B12 status early in life struggle more with tasks, recognition and interpreting feelings

Small children with low levels of vitamin B12 had more difficulties solving cognitive tests, such as the ability to do puzzles, recognize letters and interpret other children’s feelings.

BP Awards Schlumberger Contract for Mad Dog 2 Project

Export Conference 2017: A changing world

Register for this year’s most important conference for Norwegian exporters. We can promise you an interesting and inspirational day!

Meet Elkem Silicon Materials at the Ceramics Expo 2017

Elkem Silicon Metrials invites to meet their team at the Ceramics Expo 2017. This is North America’s largest, free-to-attend exhibition for Ceramic manufacturing and applications.