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

Nemko Publishes Short Notes on China

Nemko has published a some updates related to China and new initiatives regarding standards, product safety and cyber security. 

Technip and FMC Technologies Shareholders Approve Business Combination

FMC Technologies Inc. and Technip S.A. have announced that the companies' respective shareholders have voted to approve the proposed business combination of Technip and FMC Technologies.

Nordsild

The fishing vessel "North Herring" belonging to Norsild Havfiske AS with factory from Melbu Systems was in August ready for cod fishing.

One of the Strongest Earthquakes in New Zealand in 200 years

NORSAR reports that New Zealand’s South Island was struck by one of the strongest earthquakes the country has observed in the past 200 years November 13, 2016.

Jotne Subsea Gas Lift for Balder Field

In April 2015, Jotne E&P was awarded an EPC contract to build the subsea gas lift manifold for Exxon Mobil on the Balder Field.

Jotne Awarded Contract for Subsea Protection Structure

In January 2016, Jotne E&P was awarded a contract for the delivery of a subsea protection structure and GRP cover for a Xmas tree at Balder field. The contract was awarded by Ocean Installer.

UiB and CMR in high-tech collaboration

Students from UiB last month joined an experiment with an ultra-high-speed camera. This was a part of the troubleshooting of the Field Kelvin Probe currently under development.

Hatteland Display at International Workboat Show 2016

Hatteland Display are highlighting its diverse portfolio of maritime displays and panel computers on its booth (#1658) at the International Workboat Show 2016 (IWBS 2016) this week.

Servogear Announces Upcoming Events

Servogear announces a busy end of November, beginning of December. They will be participating at important international exhibitions.