Norwegian banks are already broadly in compliance with the basic Tier 1 capital requirement of 6 per cent. This is because Norway has imposed stricter regulation in some areas than other countries and because the banks have devoted their creditable profit performances to strengthening their equity capital positions. However, the new additional requirement of a capital conservation buffer of 2.5 per cent over and above this with effect from 2016-2018 will entail a new obligation for banks in Norway as elsewhere.
This emerges in the report “Financial market trends 2010” in which Finanstilsynet examines the repercussions of the Basel Committee’s new capital adequacy rules for Norwegian banks.
“In sum, the new requirements mean that Norwegian banks will, in the years ahead as at present, need to devote a significant portion of their net profit to strengthening their equity capital,” says Finanstilsynet’s Director General, Bjørn Skogstad Aamo.
“The financial crisis has in many countries shown the levels to which costs can rise in the shape of economic decline and unemployment when the banks are unable to fill their role in society. To lessen the likelihood of this happening again, there is now an international consensus calling for tighter requirements on banks’ financial and liquidity positions,” says Mr Aamo.
Stricter requirements will in future be placed on financial institutions’ capital adequacy to bring it more into line with the risk borne by such institutions and with the costs inflicted on society by financial crisis. Qualitative and quantitative requirements are also being introduced on financial institutions' liquidity to ensure that they have sufficient liquidity available in a crisis-like situation to honour their obligations in the short term and ensure funding that assures stability in the longer term.
The Basel Committee recently published concrete proposals for new requirements to be implemented in the years 2013 to 2018. The European Commission is in February expected to publish its proposal for follow up within the EU in the form of a revised Capital Requirements Directive (CRDIV).
In 2011 Finanstilsynet will present to the Ministry of Finance its recommendation with regard to incorporating the new rules into Norwegian legislation, says Director General Skogstad Aamo.
Since the quantitative liquidity requirements have yet to be finally defined, it is too early to say how Norwegian banks will be affected. The impression thus far is that the rules might pose some challenges.
The EU’s new rules for insurance companies (Solvency II), to apply as from 2013, have been in preparation for some time and are not directly related to the financial crisis.
- In Norway it appears to be the life insurance companies that will face the most demanding challenges as a result of the new framework. It is likely that they will need more capital, will have to gear their business to substantial changes in the asset management rules and to implement major technical adjustments, according to Finanstilsynet’s report.
New supervisory structure in Europe
The financial crisis triggered a greater focus on overall risk in the financial system and the need for better collaboration and coordination between central banks and supervisory authorities.
- The EU’s future supervisory architecture has now been adopted, and will be in place as from 1 January 2011. It will comprise two main components: a body responsible for monitoring overall risk in the system (European Systemic Risk Board) and three European Supervisory Authorities assigned overall responsibility for adopting supervisory guidelines and coordinating supervision of cross-border institutions and market conduct (European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities Markets Authority), according to Finanstilsynet’s report.
The main responsibility for day-to-day supervision of individual financial institutions will remain with the national supervisory authorities.
Consumer, investor and borrower protection
Work done in the field of consumer, investor and borrower protection is extensive and forms a natural part of Finanstilsynet’s effort to assure financial stability and well-functioning markets.
“In the last two years or so Finanstilsynet has closely monitored sales and the advice given by investment firms. A wide-ranging survey of banks’ advice on savings products in 2009 and 2010 is now in progress. The survey will be followed up with on-site inspections at six to eight banks to check that advisory processes and product ranges meet statutory requirements and are suited to consumer needs,” says Director General Skogstad Aamo.
The report specifically details Finanstilsynet’s effort to assure that the advice given by investment firms and banks about their savings products is sound and objective.