Finanstilsynet proposes regulations on the retention of banks’ and insurance undertakings’ profits for 2019 until further notice

The spread of the coronavirus and measures to limit the contagion have, within a short period, caused extensive financial market turmoil and a sharp deterioration in the economic outlook. The Norwegian economy is also affected by the significant decline in oil prices.

Considerable uncertainty attends developments in the Norwegian economy and in the financial markets over the coming weeks. The shock that has now hit the economy and the markets is of a different nature than the shocks that have triggered financial crises in the past.

This is an extraordinary situation. The banks may suffer extensive losses, and lower interest rates and declining asset values will make it more challenging for life insurers to meet future obligations. Non-life insurers may also be affected as a result of increased claims payments.

In Finanstilsynet’s opinion, it is now important that Norwegian banks and insurance undertakings do not make allocations that impair their financial strength. For the time being, the institutions should therefore not pay dividends or make other profit distributions.

Pursuant to Section 1-7 of the Financial Institutions Act, the Ministry of Finance may make regulations concerning further requirements on financial institutions in the interest of promoting financial stability. Finanstilsynet assumes that this provision gives the Ministry a legal basis for adopting regulations on a general restriction on financial institutions’ right to distribute profits in a situation where they need to strengthen their financial position to promote financial stability. Against this background, Finanstilsynet has advised the Ministry of Finance to adopt regulations pursuant to Section 1-7 of the Financial Institutions Act in keeping with this.

A ban on dividend payments and other distributions will have a profound impact. However, in view of the widespread crisis the country is in, Finanstilsynet is nevertheless of the opinion that such a measure is necessary to promote financial stability.

Finanstilsynet would also like to emphasise that a general requirement to retain profits for 2019 does not mean that profits are confiscated, but that distributions are deferred. The institutions will have the opportunity to distribute dividends to owners and customers and gifts for the public good on a later date provided that the individual institution’s financial soundness and profit performance warrant such action.

The outcome of the ongoing crisis is highly uncertain. The regulations on the retention of profits for 2019 may be revoked later this year if this is in the interest of financial stability.