Banks, credit institutions, finance companies, payment institutions and electronic money institutions are key players in the financial system as providers of financing, payment services and savings products. Regulation and supervision are important contributors to well-functioning markets, financial stability and confidence in the financial system.
Facts about the banking sector
As at 31 December 2021, 117 banks, 31 mortgage companies, 29 finance companies, 33 payment institutions and six electronic money institutions were licensed to operate in Norway. In addition, foreign credit institutions had 35 branches in Norway. At the end of the year, 38 savings bank foundations and one financial foundation held a licence. Three debt information undertakings have a licence from the Ministry of Children and Family Affairs and are supervised by Finanstilsynet.
Developments in the economy and the securities markets
2021 was another year in which the Covid-19 pandemic had a strong impact on the Norwegian economy. The easing of Covid restrictions throughout the year resulted in a marked upturn in the economy, and during the summer, the level of activity was higher than before the pandemic. The service industries, which had previously been hit hard by containment measures, experienced the strongest upturn. GDP for mainland Norway rose further in the autumn, but growth slowed in the fourth quarter. The introduction of new containment measures towards the end of the year once again put a damper on activity in vulnerable industries. Unemployment has fallen considerably since its peak in spring 2020 and had virtually returned to pre-pandemic levels in the autumn of 2021. Owing to government support measures, there was a decrease in the number of bankruptcies in the business sector in 2021.
A large proportion of banks' lending is to the real estate sector. High household debt and high property prices still represent the key vulnerabilities in the Norwegian financial system. The debt burden of Norwegian households is high, both in historical terms and compared with other countries. Debt growth was somewhat higher in 2021 than before the pandemic, and many households have very high debt relative to income. After a sharp rise in house prices from summer 2020, growth slowed during the second half of 2021. The price level was nevertheless considerably higher than prior to the pandemic. Commercial property prices have risen markedly over many years and continued to increase through 2021.
Central banks in a number of countries quickly lowered their key policy rates in spring 2020 in response to the economic downturn, and policy rates remained low in 2021. Norges Bank raised its key policy rate twice during the year, to 0.5 per cent in December 2021, and was one of the first central banks to implement a rate hike. Short-term money market rates largely moved in tandem with the key policy rate, and the Norwegian 3-month money market rate remained low in the first half of 2021. After the summer, the rate increased somewhat but remains at a considerably lower level than before the pandemic.
Consumer price inflation has risen considerably in a number of countries over the past six months. Demand for goods and services has increased parallel to a weakening of globally important production chains. Shipping costs and commodity prices have risen steeply, and there is a shortage of input factors in some sectors. Adverse weather conditions have reduced crops and contributed to higher food and energy prices. It is uncertain whether the elevated level of inflation proves to be temporary.
Throughout the pandemic, massive quantitative easing by several central banks has provided considerable liquidity to the markets and contributed to driving up prices, inter alia on government bonds. Partly in consequence of this, there was a marked fall in government bond yields in March 2020. During autumn 2021, long-term bond yields increased in a number of countries due to expectations of higher economic growth, normalised interest rate levels, a reduction in central banks’ securities purchases and rising inflation. However, a flare-up of the pandemic and new shutdowns gave a certain downward pressure on interest rates towards the end of the year.
Stock markets recovered rapidly after the sharp decline following the outbreak of the pandemic. In most stock markets, prices were considerably higher at the end of 2021 than before the pandemic. High inflation in the second half of the year and negative real interest rates were the main factors that made equity investments appear more favourable than investments in the fixed-income markets.
Supervision, monitoring and control
Supervision of banks, credit institutions and finance companies should promote financially sound and well-capitalised financial institutions with good risk awareness, management and control. The provision of financial services must be compliant with the regulatory framework in the best interest of society and the users of these services.
Monitoring and analyses
Finanstilsynet monitors developments in the financial industry, the financial markets and the Norwegian economy on an ongoing basis. Analyses are regularly prepared of the capital and liquidity situation of banks and mortgage companies, and of the financial performance of finance companies, mortgage companies, individual banks and the banking sector as a whole. Public versions of the analyses are available on Finanstilsynet’s website. Reports on developments in households’ consumer debt, banks' utilisation of the flexibility quotas in the Lending Regulations and developments in banks’ loan losses and non-performing loans are also published on a regular basis. In macroeconomic surveillance, importance is attached to both the risk facing banks as a result of economic developments and the risk that the banks as a group pose to the financial system and the economy. In June and December each year, Finanstilsynet publishes the Risk Outlook report, which contains analyses of the prospects for financial stability. Finanstilsynet also publishes an annual Risk and Vulnerability Analysis (RVA) that summarises the work on ICT security in the financial sector and how the industry and individual institutions comply with the regulations.
In Risk Outlook December 2021, Finanstilsynet analysed two possible pathways for the Norwegian economy based on climate scenarios from the Network for Greening the Financial System and Bank of England. In the first scenario, the transition to a low-emission society starts immediately and takes place with no major costs to the real economy. In the alternative scenario, the restructuring starts later and is characterised by a sudden and disorderly transition both in Norway and internationally. Finanstilsynet's calculations indicate that in such a scenario, banks could suffer significant losses on corporate loans.
Reporting from the institutions
The institutions' reporting constitutes an important basis for analyses and supervisory follow-up in the form of off-site and on-site inspections. All banks, mortgage companies and finance companies in Norway report to ORBOF (a database for accounting information from banks, mortgage companies and finance companies), which is a cooperation between Finanstilsynet, Norges Bank and Statistics Norway. In addition, a selection of Norwegian banks, mortgage companies and finance companies report a key figures form with selected accounting items to Finanstilsynet on a quarterly basis.
Credit institutions report capital adequacy and liquidity positions etc. to Finanstilsynet under the EU’s Capital Requirements Directive (CRD IV) and Capital Requirements Regulation (CRR). The reporting includes capital adequacy, accounting data, liquidity ratios, large exposures, leverage ratios and encumbered assets. The reporting is fully harmonised across the EU, and reporting requirements are constantly changing. In addition, new reporting areas are added. This requires continuous adaptation and further development of the reporting material and the reporting systems. Finanstilsynet also obtains reports from finance companies, payment institutions and electronic money institutions, account information service providers, savings bank foundations and financial foundations.
In recent years, the European Banking Authority (EBA) has compiled increasing volumes of information on developments in the respective countries’ financial markets for use in its supervisory and analysis activity. Finanstilsynet collects data for Norwegian financial institutions and is responsible for reporting data from Norwegian institutions to the EBA. Since December 2020, Finanstilsynet has submitted CRD/CRR data for all Norwegian credit institutions to the EBA's centralised database system EUCLID. As a consequence of delayed incorporation of the ‘Banking package’ into Norwegian law, however, no such data have been submitted to the EBA after May 2021.
Finanstilsynet received fraud reports from payment service providers (banks and payment institutions) for the first and second half of 2021 in accordance with the requirements of the Payment Services Directive (PSD2). Since the first reporting in 2020, the quality of the half-yearly reporting has constantly improved. Data for payment card and online banking fraud are published in Finanstilsynet's Risk and Vulnerability Analysis (RVA).
2021 was the first year payment service providers, i.e. banks and payment institutions, submitted an overall assessment to Finanstilsynet of the operational and security risks associated with the provider's payment services. The reporting requirement follows from the regulations on payment services systems.
Financial soundness and profitability of Norwegian banks
After a marked deterioration in banks' financial performance in 2020, largely due to higher loan losses and weaker net interest income following the outbreak of the pandemic, banks' profitability improved in 2021. The rise in profits was mainly a result of low loan losses, reflecting a significant release of provisions in some of the largest banks. In addition, the banks recorded higher commission and fee income in step with the gradual reopening of society up to December 2021. After the first three quarters of 2021, the banks’ total return on equity was 11 per cent (annualised), see chart below. This was close to 2 percentage points higher than in the corresponding period of the previous year and roughly on a level with the years prior to the onset of the pandemic.
Pre-tax profits and return on equity in Norwegian banks
At-end September 2021, Norwegian banks’ CET1 capital ratio was 18.1 per cent, compared with 17.8 per cent a year earlier. The banks' leverage ratio was 7.6 per cent at end-September.
As at 30 September 2021, Norwegian banks' total effective capital requirement (including the weighted average Pillar 2 requirement) was 13.7 per cent. This gave an overall margin to the capital requirement of 4.4 percentage points. The announced future increases in banks' capital requirements, including the countercyclical capital buffer and the systemic risk buffer for banks using the standardised approach and the foundation IRB approach, will affect this margin. See further account in Risk Outlook December 2021.
Tier 1 capital ratio
Banks' funding mainly comprises deposits from customers and funding in the money and capital markets. Owing to an increase in the share of long-term funding over several years and higher liquidity buffers, Norwegian banks were better equipped to face a tighter liquidity situation at the start of the pandemic. In early March 2020, the risk premiums on banks' bond funding increased appreciably to roughly the same level as during the global financial crisis in 2008, and there was limited access to new funding. However, market conditions improved relatively quickly, partly as a result of extensive measures by a number of central banks. At end-September 2020, risk premiums had almost returned to the level prior to the market turmoil in March, and the banks were able to obtain money and capital market funding the usual way. Through 2021, risk premiums were at the lowest levels recorded over the last ten years, and there was ample access to funding.
Finanstilsynet is keeping a close watch on the financial institutions’ liquidity situation, including how they meet the minimum liquidity buffer requirement (LCR) and other liquidity and financing indicators. The institutions’ own assessments of liquidity and funding risk are also reviewed in connection with the supervisory assessment of risk and capital needs (SREP) and at on-site inspections.
Follow-up of the Pillar 1 capital requirements
The Pillar 1 capital requirements set out minimum and buffer requirements for own funds. Finanstilsynet each year advises the Ministry of Finance on which financial institutions should be considered systemically important in Norway, based on clear regulatory criteria. Systemically important institutions are subject to a buffer requirement of 1 or 2 per cent, depending on their size and their market share of lending to the private non-financial sector in Norway. In line with advice from Finanstilsynet, the Ministry of Finance defined DNB Bank ASA, Kommunalbanken AS and Nordea Eiendomskreditt AS as systemically important in Norway in 2021. In September 2021, the Ministry of Finance decided that Norges Bank shall set the level of the countercyclical capital buffer in Norway. Every second year, the Ministry of Finance sets the level of the systemic risk buffer based on advice from Norges Bank. Finanstilsynet shall provide relevant information and assessments concerning both the countercyclical buffer and the systemic risk buffer.
Finanstilsynet also provides guidance on how different parts of the regulations should be understood. The follow-up of Pillar 1 capital requirements also encompasses banks' internal models for calculating capital requirements for credit risk (IRB models). Ten Norwegian institutions have permission to use such models. In order to obtain permission from Finanstilsynet, the institutions must document that the models are suited to measure risk, that they are used as part of the banks' risk management, credit approval process and internal and external reporting of risk, and that they are tested (validated) on a regular basis. Finanstilsynet considers these aspects when processing applications and when following up the institutions after permission has been granted. The follow-up takes place partly in the form of on-site inspections and partly as reviews of validation reports and capital requirements reports from the institutions. In 2021, Finanstilsynet issued a circular on banks' IRB models that sets out its expectations regarding banks’ use of the IRB approach. The circular is followed up in the processing of applications from the banks for model changes and at on-site inspections.
In 2021, Finanstilsynet carried out three such inspections of banks' IRB models, two of which were part of ordinary credit inspections. Weaknesses in the banks' methods for testing (validating) the models and following up the validation results were among the key topics addressed in the inspection reports.
Follow-up of the Pillar 2 capital requirements – implementation of the supervisory review and evaluation process (SREP)
Every year Finanstilsynet carries out an assessment of individual institutions’ overall risk. Based on this risk assessment, Finanstilsynet regularly sets individual capital requirements for the institutions, called Pillar 2 requirements. The Pillar 2 requirements cover risks that are not, or are only partially, covered under Pillar 1. The institutions are divided into groups according to size and risk profile, which determines how frequently Pillar 2 requirements are set. For the two systemically important institutions DNB Bank ASA and Kommunalbanken and institutions followed up by international supervisory colleges, Pillar 2 requirements are normally set each year.
In June 2020, Finanstilsynet decided that no Pillar 2 decision should be made in the second half of 2020 due to the pandemic situation. This decision was in accordance with the EBA's guidelines on the pragmatic 2020 supervisory review and evaluation process to adapt the SREP to the circumstances brought about by the pandemic. In consequence of this, the SREP and the determination of Pillar 2 requirements were postponed by one year for institutions for which a SREP should have been conducted in 2020.
In 2020 and the first half of 2021, Finanstilsynet worked on a new and digital analytical solution for risk assessment of banks. The analytical solution will streamline the work on risk analyses and enable a more flexible and in-depth analysis of the individual institution, also for longer periods of time. The digital analytical tool also facilitates analysis and comparisons of risk exposure across institutions and groups of institutions. In 2021, Finanstilsynet facilitated digital submission of the institutions' internal assessments of risk and capital needs, ICAAP and ILAAP, by introducing a separate Altinn form. This is also expected to help streamline the SREP in the future.
Finanstilsynet made two Pillar 2 decisions in 2021. The decisions are published consecutively on Finanstilsynet's website. The Pillar 2 requirements mainly reflect credit risk, concentration risk, market risk and operational risk. In addition, 18 institutions in groups 2, 3 and 4 have received preliminary SREP reviews.
At year-end 2021, Pillar 2 requirements or capital requirements had been set as part of the licence terms and conditions for 109 banks, mortgage companies and finance companies among the total of 149 relevant financial institutions. 26 of the 40 institutions that were not subject to such requirements had total assets below NOK 5 billion and a CET1 capital ratio that was minimum 6 percentage points above the prevailing minimum requirements and buffer requirements under Pillar 1. No individual capital requirements are normally set for these institutions as long as their capital adequacy level is maintained.
Circular 12/2016 describes Finanstilsynet’s methodologies for assessing institutions’ risk and capital needs (SREP). The circular was updated and was due to be circulated for comment in the first half of 2021. However, since CRD V was not incorporated into Norwegian law in 2021 and the European Banking Authority (EBA) had announced an update of the European guidelines to reflect CRR II and CRD V, Finanstilsynet chose to postpone the submission. The circular has been updated in accordance with the guidelines and is expected to be circulated for comment during the first quarter of 2022.
At an on-site inspection, Finanstilsynet makes a more thorough review of the risks facing an institution. The inspection is risk-based following an assessment of the institution’s size, risk areas and risk showing a negative deviation. After the inspection has been concluded, an inspection report is prepared. On-site inspections are an important means to uncover weak management and control or high levels of risk in the institutions. The dialogue with management and the board of directors provides the opportunity to guide and advise the institutions to enable necessary action to be taken at an early stage.
In 2021, Finanstilsynet conducted a total of 15 ordinary on-site inspections at banks, mortgage companies and finance companies and a total of four follow-up inspections addressing the banks' offshore exposure. At the inspections, particular emphasis is placed on the institutions’ lending activity to enable detection of heightened risk and shortcomings in terms of loss and write-down assessments and exposure monitoring.
In addition to the above-mentioned inspections, nine inspections were carried out at banks and two at payment institutions related to IT infrastructure, security, outsourcing and emergency preparedness. Three inspections were carried out of banks' internal models for calculating capital requirements for credit risk. Four special inspections addressing measures against money laundering and terrorist financing were conducted at banks.
Finanstilsynet continued to place great emphasis on sustainability and climate risk in its supervisory activity in 2021. Finanstilsynet included follow-up of sustainability risk, including climate risk, in supervisory modules for the various risk areas, and sustainability risk was on the agenda at all ordinary inspections in 2021.
Systemically important institutions and institutions reviewed by supervisory colleges
Supervision of major banks operating in several countries in Europe is coordinated through supervisory colleges in which the relevant countries' supervisory authorities are represented. Finanstilsynet is the coordinating authority in the supervisory college for the DNB Group and participates in supervisory colleges for five foreign financial institutions that operate in Norway through subsidiaries or branches. The work of the colleges follows guidelines set by the EBA.
The supervisory college for the DNB Group consists of, in addition to Finanstilsynet, the supervisory authorities in five of the countries where the Group is represented. The college focuses on preparing Joint Decisions on DNB's risk level and capital needs, liquidity and recovery plan. The Joint Decisions cover both the Group and its subsidiaries. In addition to the collaboration in the DNB College, Finanstilsynet maintains direct contact with the supervisory authorities of some of the other countries in which DNB operates. In the course of 2021, four inspections were conducted at DNB Bank ASA. In addition, an inspection was carried out at DNB Eiendom AS. Moreover, regular meetings are held with the Group's management and board chair, the statutory auditor and the internal auditor. There are also regular meetings with DNB related to, among other things, the bank's financial reporting, risk and regulatory compliance, as well as IT development. In addition, Finanstilsynet assessed and commented on the bank's recovery plan in 2021.
During the year, Finanstilsynet laid down Pillar 2 requirements for Kommunalbanken. Finanstilsynet also followed up the bank after the inspection of market and liquidity risk carried out in 2020. The inspection report has been published on Finanstilsynet's website. A meeting was also held with Kommunalbanken’s board chair and management.
Finanstilsynet participates in the supervisory college for Bank Santander S.A. and conducted an ICT and AML/CFT inspection at the bank in September 2021. Since the onset of the Covid-19 pandemic, the college has followed up the bank through regular meetings addressing operational risk, capital adequacy and credit risk. Finanstilsynet also contributes to joint assessments and decisions concerning the bank's risk level and capital requirements, liquidity and recovery plan.
On the advice of Finanstilsynet, the Ministry of Finance decided on 1 July 2021 that Nordea Eiendomskreditt AS, for the first time, should be regarded as systemically important. During 2021, Finanstilsynet followed up the institution through the supervisory college for the Nordea Group and meetings with the institution.
Other large institutions
Every year, Finanstilsynet carries out risk assessments of the other major banks in Norway (category 2). Category 2 comprises large and medium-sized banks that mainly operate in the domestic market and have high market shares nationally or regionally. In 2021, this category comprised 13 banks and banking groups. The risk assessments provide a basis for making inspection priorities and for assessing the banks' capital needs (SREP). The institutions are also regularly followed up, partly through dialogue meetings and partly through the collection of information. Seven of the category 2 banks received preliminary SREP feedback during 2021. Three ordinary inspections were carried out among the category 2 banks in 2021. One of the inspections concerned market and liquidity risk, while the other two focused on credit risk, including the follow-up of offshore exposures and IRB models. In addition, one follow-up inspection of offshore exposures and one inspection of IRB models were carried out. Finanstilsynet conducted two special inspections on compliance with the anti-money laundering legislation and four IT inspections among the banks in this category.
In 2021, ten ordinary inspections were carried out at medium-sized banks (category 3) and small banks (category 4). Category 3 comprises other banks and independent mortgage companies and finance companies with total assets in excess of NOK 5 billion. Category 4 comprises other institutions with total assets below NOK 5 billion. Eleven of the category 3 and category 4 banks received preliminary SREP feedback during 2021. Ten ordinary inspections were conducted among the institutions in categories 3 and 4. All the inspections addressed credit risk, market risk, liquidity risk and operational risk, as well as climate risk. Three special inspections concerning the institution’s AML work were also carried out, as well as one inspection relating to ICT among the small and medium-sized banks. In addition, Finanstilsynet also followed up companies with particular challenges, which was resource-demanding.
Systemically important branches
The EBA’s ‘Guidelines on supervision of significant-plus branches’ emphasise the need to broaden host country supervision of systemically important branches. Finanstilsynet regards the branches of Nordea Bank, Handelsbanken and Danske Bank as systemically important in Norway. Finanstilsynet therefore provides input to assessments of the groups' capital, liquidity and recovery plans under the auspices of the supervisory colleges for the three banks and makes annual assessments of the branches' significance for financial stability. In addition, Finanstilsynet participates in special colleges focusing on anti-money laundering efforts in Nordea and Danske Bank.
During 2021, Finanstilsynet followed up an AML/CFT inspection carried out in Nordea in 2020. Finanstilsynet also participated in regular meetings of the college to monitor the bank's risk situation. Furthermore, Finanstilsynet reviewed the bank's recovery plan and provided feedback on this.
Finanstilsynet followed up an on-site AML/CFT inspection carried out at Danske Bank in 2019, where a daily fine was levied on the bank. Finanstilsynet also participated in regular meetings of the supervisory college, which included assessments of the bank's recovery plan.
In 2021, the supervisory college for Handelsbanken shared information and held meetings on a regular basis. Finanstilsynet was also involved in the assessment of the bank’s recovery plan.
Debt information undertakings
The Debt Information Act, which came into force in autumn 2017, opens up for granting private actors a licence to establish registers for receiving and surrendering debt information. The purpose of the Act is to help improve credit assessments and prevent debt problems among private individuals. Three undertakings established debt registers in 2019, and Finanstilsynet carried out inspections of these in 2021. The inspections addressed the undertakings' ICT and risk management systems, focusing on measures taken to ensure that personal data are protected and that the debt information is correct and available to the recipients at all times.
Supervisory follow-up of particular themes
Financial institutions' dividend distributions
As a result of the economic uncertainty surrounding the Covid-19 pandemic, Finanstilsynet and other European supervisory authorities have placed great emphasis on preserving the institutions’ financial soundness. In December 2020, the European Systemic Risk Board (ESRB) issued a recommendation to national authorities to request banks and insurers to refrain from making dividend distributions, etc. until 30 September 2021, unless the institutions applied extreme caution and the distributions did not exceed the conservative thresholds set by the national supervisory authorities. On 20 January 2021, Finanstilsynet communicated an expectation that Norwegian banks which, after making a prudent assessment based on the ESRB's recommendation, find that distributions are warranted, limit total distributions to 30 per cent of cumulative annual profits for the years 2019 and 2020 up until 30 September 2021. Throughout 2021, Finanstilsynet assessed and monitored the dividend payments of a number of banks.
On 7 September 2021, the Ministry of Finance announced that Norwegian banks may resume normal dividend distributions after 30 September 2021. Several Norwegian banks made additional dividend payments in the fourth quarter of 2021. Pursuant to the Financial Institutions Act, institutions are required to notify Finanstilsynet if dividend distributions exceed 50 per cent of annual profits. The distribution of more than 100 per cent of annual profits may only take place with Finanstilsynet's permission.
Banks' offshore exposure
Since 2016, Finanstilsynet has monitored the offshore exposure of four banks, aiming to follow up developments in exposure and portfolio quality and the banks' level of impairment losses. At end-June 2021, the four banks’ total exposure was approximately NOK 46 billion, down close to NOK 8 billion since year-end 2019 and approximately NOK 2 billion since year-end 2020.
The banks are observing a slight increase in activity in the offshore sector, with a higher number of contracts and longer contract terms. However, rate levels remain low. Tonnage is still in surplus supply, and uncertainty prevails about the evolution of the Covid-19 pandemic and future demand.
During the second half of 2021, banks and other creditors entered into several major restructuring agreements with borrowers, while other restructuring processes are still ongoing. A consequence of this is that the banks convert debt into equity in these firms.
The EBA's stress test of banks
During 2021, the European Banking Authority (EBA) carried out a stress test of 50 European banks, including DNB Bank ASA. The stress test is initiated and coordinated by the EBA and undertaken in cooperation with national competent authorities, including the Single Supervisory Mechanism (SSM), the European Central Bank (ECB) and the European Systemic Risk Board (ESRB). The stress test is based on methodology developed by the EBA and scenarios prepared by the ESRB, and the banks use their own models and calculations within this framework. Finanstilsynet is responsible for quality control of and dialogue with DNB. The stress test is an important common supervisory tool in the EU/EEA and contributes, among other things, to a common European platform for assessing banks' resilience in a forward-looking perspective. The EBA stress test is resource-demanding both for the participating banks and for the supervisory authorities.
The stress scenario represents a severe economic downturn with persistently low interest rates and negative effects of the Covid-19 pandemic and covers the period from 2021 to 2023. DNB's stress test result is heavily influenced by impairment losses on loans but also reflects losses related to operational events and a reduction in net interest income.
As a preventive measure against solvency crises, all banks are required to draw up recovery plans indicating what steps can be taken to restore their financial position if it has weakened considerably. Finanstilsynet considers whether the banks’ recovery plans are of adequate quality and realistic.
The requirement for recovery plans is set out in the Financial Institutions Act and applies to all Norwegian banks, mortgage companies, parent companies and holding companies of financial groups as well as finance companies that are part of a financial group. The requirement also applies to certain investment firms. Finanstilsynet’s circular 10/2019 on recovery plans describes Finanstilsynet's expectations as to the contents of the plan. According to the circular, small non-complex entities (SREP categories 3 and 4) may be subject to simplified recovery plan requirements provided that the entity is not considered to have functions of critical importance to society.
In 2021, Finanstilsynet reviewed and provided written feedback on DNB’s recovery plan and on 14 recovery plans for banks in SREP categories 2, 3 and 4. In addition, Finanstilsynet was involved in the supervisory colleges' assessment of the recovery plans of Danske Bank, Handelsbanken, Nordea and Santander.
Follow-up of special requirements in the Payment Services Directive (PSD2)
Interface for trusted third parties
Pan-European rules for payment services set requirements for interfaces that give payment agents and account information service providers, so-called trusted third parties (TPP), right of access to payment accounts belonging to customers of account servicing payment service providers. Account servicing payment service providers are required to ensure that TTPs are given such access. There are still deficiencies in the interfaces offered by a number of banks, and Finanstilsynet devoted substantial resources to following up the account servicing payment service providers' obligations in 2021. Finanstilsynet also engaged in dialogue with the EBA and other countries' supervisory authorities, primarily in the Nordic region, regarding how the regulations should be understood in relation to Norwegian payment solutions, such as direct debits, e-invoices and Vipps. According to the regulations, both account servicing payment service providers and payment initiation service providers (TTPs) must report any problems relating to the interfaces. Finanstilsynet received around 30 such reports from account servicing payment service providers and 13 from TTPs in 2021, some of which also reported in accordance with the ICT Regulations' incident reporting requirements.
Strong customer authentication
The Regulations on Systems for Payment Services set requirements for strong customer authentication (SCA) when the customer logs into the payment account via the web, initiates an electronic payment transaction or takes action that may involve the risk of fraud or other abuse. The rules on SCA entered into force on 1 January 2021. A few providers faced unforeseen challenges, which caused certain delays. Some providers also implemented SCA solutions that were not well-suited for the users of the payment services. During the year, several of these established more user-friendly solutions.
The volume of consumer loans has decreased significantly over the past couple of years. The decline in lending volume must be seen in the light of strong growth in the years up to 2018. The regulation of consumer loans and the establishment of debt registers in 2019 have probably also contributed to the decline. In addition, the pandemic has affected travel activity and consumption and thus the use of credit cards. The volume of non-performing consumer loans remains high and is at its highest in banks with consumer loans as their main business.
The sharp drop in lending volume in the consumer loan market continued in 2021. The institutions included in Finanstilsynet’s survey of the consumer loan market experienced a 12 per cent decline in lending from end-September 2020 to end-September 2021, see chart below. Adjusted for the sale of portfolios of non-performing loans to finance companies, there was a reduction of 7 per cent. Households' total debt increased by 5.1 per cent during the corresponding period.
Twelve-month growth in the Norwegian consumer loan market and domestic household debt (C2)
The level of non-performing consumer loans is higher than for other types of loans. For several years, there has been an increase in non-performing loans, both in terms of volume and as a share of total consumer loans. Despite a certain reduction in 2021, non-performing loans remained at a high level at end-September, see chart below. 13.0 per cent of the consumer loans provided by the institutions in the selection were non-performing at end-September 2021, which was 1.0 percentage point lower than at year-end 2020. Non-performing loans at Norwegian consumer loan banks represented 19.1 per cent at end-September 2021, down 1.4 percentage points compared with year-end 2020.
Share of non-performing consumer loans more than 90 days past due*
*Gross non-performing consumer loans , including Norwegian institutions’ exposures abroad.
Compliance with the Lending Regulations
Every quarter, Finanstilsynet obtains reports on compliance with the Lending Regulations’ flexibility quotas for residential mortgages from 29 financial institutions and branches of foreign undertakings. The reports show the share of mortgages granted that do not meet the regulatory requirements on debt servicing capacity, debt-to-income (DTI) ratio, loan-to-value (LTV) ratio or instalment repayments.
According to Section 12 of the Lending Regulations, financial institutions may grant residential mortgages that do not meet one or more of the regulatory requirements for up to 10 per cent of the value of total residential mortgages granted outside the municipality of Oslo and for up to 8 per cent, alternatively for up to NOK 10 million, of the value of residential mortgages granted in the municipality of Oslo. In the second and third quarter of 2020, the flexibility quota was temporarily increased to 20 per cent for residential mortgages throughout Norway. With the exception of the level in the second and third quarter of 2020, the share of residential mortgages that do not meet one or more of the regulatory requirements over time has been between 5 and 7 per cent throughout the country. In the third quarter of 2021, this share was 6.7 per cent for residential mortgages outside Oslo and 5.8 per cent for residential mortgages in Oslo. These loans are primarily in breach of the requirement for a maximum DTI ratio.
In the first quarter of 2021, one institution exceeded the flexibility quota for residential mortgages outside Oslo and two institutions exceeded the flexibility quota for residential mortgages in Oslo. In the second quarter, no institutions exceeded the flexibility quota for residential mortgages outside Oslo, but two institutions exceeded the flexibility quota for residential mortgages in Oslo. No institutions exceeded the flexibility quotas for residential mortgages in the third quarter. Finanstilsynet follows up entities that exceed the flexibility quotas.
Finanstilsynet collects quarterly reports on compliance with the Lending Regulations’ flexibility quota provisions for consumer loans from 33 Norwegian banks, branches of foreign institutions and institutions engaged in cross-border activity in Norway. The reports show the share of mortgages granted that do not meet the regulatory requirements on debt servicing capacity, DTI ratio or instalment repayments.
According to Section 15 of the Lending Regulations, financial institutions may grant consumer loans in breach of one or more of the regulatory requirements for up to 5 per cent of the value of total consumer loans granted each quarter. Over time, the share of consumer loans in breach of one or more of the regulatory requirements has been around 2 per cent of total consumer loans granted. In the third quarter of 2021, this share was 2.4 per cent, an increase of 0.2 percentage point from both the second quarter of 2021 and the third quarter of 2020. The loans were primarily in breach of the maximum DTI ratio requirement.
In the first quarter, no institutions were in breach of the flexibility quota provision for consumer loans in the Lending Regulations. In the second and third quarter, one and two institutions, respectively, exceeded the flexibility quota. Finanstilsynet follows up entities that exceed the flexibility quota.
Residential mortgage lending survey
Finanstilsynet regularly examines banks' lending practices. In the residential mortgage lending survey carried out in autumn 2021, 30 of the largest (Norwegian and foreign) banks reported data on close to 8 000 new instalment loans and 4 000 new lines of credit secured on residential property granted after 1 August 2021. The number of loans reported by each bank roughly corresponds to the banks' market share in the residential mortgage market.
The survey shows that total debt as a share of gross annual income (DTI ratio) is still on the rise among borrowers who take out new residential mortgages. In the survey conducted in autumn 2021, the total DTI ratio was 9 percentage points higher than in 2020 and 29 percentage points higher than in 2016, which is the year before the DTI ratio came under regulation. Both the average loan amount and the borrowers' average gross annual income were higher in this year's survey.
The share of lending volume granted to borrowers with total debt exceeding five times gross annual income has been stable since 2017. At the same time, a large and increasing proportion of new loans have been taken out by borrowers with a high DTI ratio, and in the 2021 residential mortgage lending survey, 47 per cent of total loans granted went to borrowers whose total debt exceeded four times income.
Debt-to-income (DTI) ratio*. New instalment loans and lines of credit
*Maximum debt relative to income was not regulated until 1 January 2017.
On 18 August 2021, Boligbanken ASA was granted a licence to start operations. The bank cannot accept ‘eligible deposits’ as mentioned in Section 19-3 (2) of the Financial Institutions Act. The bank may only grant credit or furnish guarantees etc. to housing companies.
In September 2018, S-Foretaket was granted a licence to operate as a bank. As the licence terms and conditions were not fulfilled by the deadline, Finanstilsynet revoked the licence in May 2021.
In June 2020, ESSB ASA was granted a licence to operate as a bank. As the licence terms and conditions were not fulfilled by the deadline, Finanstilsynet revoked the licence in September 2021.
In January 2021, an application from Lumify AS to operate as a finance company was rejected. In September 2021, Lumify AS submitted a new application for a licence to operate as a finance company. The application is under consideration.
In March 2021, NFH 200111 AS was granted a licence to operate as a finance company. The rationale behind the application was that NFH would take over and continue the pawnbroker operations of Nordea Finans Norge AS. The company was granted permission to start operations in June 2021. Permission was also granted for the transfer of the portfolio. The company changed its name to Lånekontoret AS in July 2021.
In May 2019, Debex AS was granted a licence to operate as a finance company. As the licence terms and conditions were not fulfilled by the deadline, Finanstilsynet revoked the licence in January 2021.
In June 2021, Fin2018 AS was granted a licence to operate as a finance company. The company will offer financing to small and medium-sized enterprises with annual turnover between NOK 5 million and NOK 100 million. The company plans to offer the products factoring, invoice purchases, lines of credit and annuity loans. The licence will not become valid until Finanstilsynet receives confirmation that the licence terms and conditions have been met.
In June 2021, Front Payment AS was granted a licence to operate as a finance company. The licence is limited to factoring activities in accordance with the application. The company was granted permission to start operations in September 2021.
In April 2021, Visma Finance AS was granted a licence to operate as a finance company. The company will provide the services leasing, factoring and other financing activities. The company was granted permission to start operations in November 2021.
In December 2021, Finanstilsynet revoked IBM Finans Norway AS' licence to conduct financing activities with effect from 1 January 2022. The reason for this was that the company no longer offers licensable services.
Branches and cross-border activities – credit institutions
During 2021, Finanstilsynet received notifications from three foreign credit institutions about their plans to establish a branch in Norway. These were Facit Bank A/S, headquartered in Denmark; Aros Kapital AB, headquartered in Sweden; and Svea Bank AB, headquartered in Sweden. In addition, several foreign credit institutions reported cross-border activity to Norway directly from another EEA country. Bank Norwegian ASA was the only Norwegian institution reporting cross-border activity in 2021, to Spain and Germany.
In 2021, six institutions were granted a licence to operate as payment institutions. Of these, two were licensed to provide the following two new payment services: account information services and payment initiation services. In 2021, one account information service provider was also registered. In addition, the licences of one payment institution was extended to include the two new payment services.
In the course of 2021, Finanstilsynet received three applications for a licence to operate as a payment institution / electronic money institution. One of the institutions applied for permission to provide the two new payment services.
Providers of payment services that are exempted from the licensing obligation pursuant to the Financial Institutions Regulations are required to notify Finanstilsynet. During 2021, Finanstilsynet processed a number of notifications from institutions subject to the exemption for ‘payment instruments that can only be used within a limited network or to acquire a very limited range of goods or services’.
Mergers and demergers
In January 2021, Norwegian Finans Holding ASA and Bank Norwegian AS were given permission to merge, with Bank Norwegian as the acquiring company. The merger was completed in July 2021, and the company has changed its name to Bank Norwegian ASA.
In February 2021, SpareBank 1 Nordvest and Surnadal Sparebank were given permission to merge, with SpareBank 1 Nordvest as the acquiring bank. The merger was completed in May 2021. The banks' operations have been continued under the name SpareBank 1 Nordmøre.
In February 2019, Nordea Bank Abp was given permission to acquire 100 per cent of the shares of Gjensidige Bank ASA and its subsidiary Gjensidige Bank Boligkreditt AS. The last-named companies have changed their names to Nordea Direct Bank ASA and Nordea Direct Boligkreditt AS, respectively. One of the terms of the permission is that the merger of the banks would be completed within 15 months after the permission was granted. The deadline has since been extended, most recently in December 2021, when it was set for 31 December 2022.
In April 2021, DNB Bank ASA applied for permission to acquire 100 per cent of the shares in Sbanken ASA. The Ministry of Finance granted permission for the acquisition on 1 July 2021. In November 2021, the Norwegian Competition Authority decided to intervene against the acquisition. DNB has appealed the Competition Authority's decision. The appeal will be considered in 2022.
In May 2021, SpareBank 1 BV and Sparebanken Telemark were given permission to merge, with SpareBank 1 BV as the acquiring bank. The merger was completed in June 2021. The banks' operations have been continued under the name SpareBank 1 Sørøst-Norge.
On 27 May 2021, DNB ASA and DNB Bank ASA were granted permission to merge, with the bank as the acquiring entity. The merger was completed on 1 July 2021.
In September 2021, Nordax Bank AB was granted permission to acquire up to 100 per cent of the shares in Bank Norwegian ASA. In addition, permission was granted for Bank Norwegian to become a subsidiary of Nordax Bank. The long-term plan is to merge Bank Norwegian into Nordax Bank. Following a merger, Bank Norwegian’s operations will be carried out through a branch of Nordax Bank.
In November 2021, Nordiska Kreditmarknadsaktiebolaget (publ.) and Nordiska NAV 1 AB were granted permission to acquire 100 per cent of the shares in Folkefinans AS. In addition, permission was granted for Folkefinans AS to become a subsidiary of Nordiska and Nordiska NAV 1. Nordiska Kreditmarknadsaktiebolaget has a licence from Finansinspektionen to conduct financing activities.
Assessment of business restrictions – debt collection
During 2021, Finanstilsynet considered whether debt collection activities have a ‘natural connection’ to the business that may be conducted by finance companies pursuant to the Financial Institutions Act. Finanstilsynet is of the opinion that debt collection activities, i.e. collecting receivables on behalf of others, are a type of business that, by its nature, differs from financing activities. This is supported by the fact that in order to conduct debt collection activities, a licence pursuant to the Debt Collection Act is required. In addition, such activites are subject to specific requirements. Finanstilsynet is therefore of the opinion that debt collection activities do not have a ‘natural connection’ to the business that may be conducted by finance companies. The matter is now under consideration by the Ministry of Finance.
Recovery and resolution
In 2021, Finanstilsynet prepared resolution plans and set new minimum requirements for own funds and eligible liabilities (MREL) for 14 banks, placing particular emphasis on the banks' management information systems and access to the financial infrastructure in a crisis situation. The banks were Bank Norwegian, DNB, OBOS-Banken / OBOS Finans Holding, Sbanken, Sparebanken Møre, Sparebanken Sogn og Fjordane, Sparebanken Øst, Sparebanken Sør, Sparebanken Vest, Sparebank 1 Møre, Sparebank 1 Nord-Norge, Sparebank 1 SR-Bank, Sparebank 1 SMN and Sparebank 1 Østlandet.
Finanstilsynet has headed the resolution college for the DNB Group and participated in the resolution colleges for six banks with extensive operations in Norway (Handelsbanken, Danske Bank, Nordea, Santander, Swedbank and Skandinaviska Enskilda Banken (SEB)).
Pursuant to the Financial Institutions Act, Finanstilsynet shall approve the method used by the Norwegian Banks' Guarantee Fund to determine members’ contributions. In 2022, Finanstilsynet approved a revised method for calculating contributions to the deposit guarantee fund.
In 2021, a joint crisis management exercise was carried out by the Norwegian Banks' Guarantee Fund, the Ministry of Finance, Norges Bank and Finanstilsynet. The exercise focused on the handling of a bank that got into financial difficulties and eventually had to be subject to resolution. The purpose of the exercise was to test the framework for dealing with problems in banks which was implemented in Norway after the EU rules on bank recovery and resolution and deposit guarantee schemes entered into force on 1 January 2019.
Resolution / public administration
On 22 June 2021, Finanstilsynet notified the Ministry of Finance that Optin Bank ASA was deemed to be in or to soon be facing a crisis situation and advised the Ministry that the bank should be placed under public administration. On 23 June, the Ministry of Finance made a decision in line with the recommendation, and on the same day, Finanstilsynet appointed an administration board to perform the liquidation. Optin Bank was a relatively newly established bank with limited lending activity, mainly targeting the consumer loan market. Deposits totalled approximately NOK 270 million, divided among roughly one hundred depositors. Most of the deposits were guaranteed by the deposit guarantee scheme and were disbursed by the Norwegian Banks' Guarantee Fund.
In November 2020, DNB Bank ASA and Sparebank1 Bank og Regnskap AS (owned by 13 banks in the Sparebank1 alliance) applied for approval of a cooperation agreement on the development of a technical platform for bank-integrated corporate governance systems (ERP solutions) for corporate customers. According to the agreement, the banks will jointly own the company Bank og Regnskap Holding AS, which in turn will have a large ownership interest in Uni Micro AS. Uni Micro AS will develop the technical platform. The Ministry of Finance approved the cooperation agreement on 8 September 2021.
In February 2021, Finanstilsynet granted permission for a significant change of ownership interests in a cooperating group organised through Verd Boligkreditt AS, whereby Aasen Sparebank, Askim & Spydeberg Sparebank, Drangedal Sparebank, Nidaros Sparebank, Sparebank 68 Grader Nord, Selbu Sparebank, Sparebanken Din, Stadsbygd Sparebank, Tolga-Os Sparebank and Ørland Sparebank will acquire ownership interests in Verd Boligkreditt.
In June 2021, Finanstilsynet approved a cooperation agreement between the banks in Lokalbank and LB Selskapet AS. The cooperating banks in the Lokalbank alliance are Aasen Sparebank, Askim & Spydeberg Sparebank, Drangedal Sparebank, Nidaros Sparebank, Selbu Sparebank, Sparebank 68° Nord, Sparebanken DIN, Stadsbygd Sparebank, Tolga-Os Sparebank and Ørland Sparebank. The banks in the alliance have established a jointly owned company, LB Selskapet AS. LB Selskapet will be the alliance's tool for implementing measures, for example related to procurement. LB Selskapet will not operate as a financial institution. The banks have equal ownership interests in LB Selskapet AS.
Implementation of the EU’s solvency framework
The EU's solvency framework comprises a directive that includes licensing requirements, rules on corporate governance and supervisory review (CRD) and a regulation on minimum own funds and liquidity coverage requirements (CRR). The framework is based primarily on the Basel Committee's capital and liquidity standards (Basel III).
The EU regulations, in the form of CRD IV and CRR (I), were included in the EEA Agreement in 2019 and entered into force in Norway on 31 December 2019. These legal acts were amended by the so-called banking package, and the current regulations are therefore referred to as CRD V and CRR II in the EU. These regulatory changes are expected to be incorporated in the EEA Agreement and enter into force in Norway during the first half of 2022.
The EU’s package for the introduction of the latest Basel III reforms is under preparation. These reforms include the revised standardised approach for calculating credit risk and a floor on capital requirements calculated according to the IRB approach. On 27 October 2021, the European Commission published its proposed rules, which have been circulated for consultation to the European Council and Parliament. The proposed date of entry into force in the EU is 1 January 2025.
Circular on exposures to be classified as high risk
In December 2020, Finanstilsynet published circular 5/2020 on exposures to be classified as high risk. In a letter of 25 May 2021, the Ministry of Finance announced that the institutions should apply a different understanding of the law than set out in Finanstilsynet’s circular. In consequence of this, Finanstilsynet published a new circular (2/2021) that replaced circular 5/2020.
Circular on valuation requirements for loan origination and monitoring
In 2020, the EBA laid down guidelines on loan origination and monitoring. The guidelines set out expectations for institutions’ valuation of immovable and movable property, including the use of statistical models in the light of requirements laid down in various EU regulations for credit institutions. In October 2021, Finanstilsynet published a circular (5/2021) specifying how Finanstilsynet expects Norwegian financial institutions to meet the valuation requirements.
Consultation on the calculation of institution-specific buffer rates
Following changes in the systemic risk buffer requirements from 31 December 2020, institutions required to meet the capital buffer requirements laid down in the Financial Institutions Act must calculate their institution-specific requirements for both the systemic risk buffer and the countercyclical capital buffer.
Following the rule change, Finanstilsynet received several enquiries about how the institution-specific systemic risk buffer requirement should be calculated, and therefore prepared draft regulations. Finanstilsynet also proposed that the rules on the calculation of the countercyclical capital buffer, which are currently set out in circular 17/2016, should be incorporated in the regulations. The proposal was circulated for comment on 2 July 2021.
Finanstilsynet received responses from three consultative bodies. The amendments to the regulations were adopted on 12 January 2022 subject to some adjustments after the consultation.
Regulations on the obligation to notify outsourcing of activities
On 15 September 2021, Finanstilsynet laid down new regulations on the obligation to notify outsourcing of activities etc. The new regulations entail that a wider range of of institutions will be subject to the notification obligation. The notification obligation will apply to outsourcing of activities that are critical or important to the institutions. The regulations entered into force on 1 January 2022.
Consultation document on authorisation to decide on dividends
Pursuant to the Public Limited Liability Companies Act, the general meeting may give the board authorisation to resolve distribution of dividends. On commission from the Ministry of Finance, Finanstilsynet prepared a consultation document containing draft regulations that make this provision of the Public Limited Liability Companies Act applicable to financial institutions that are not organised as private or public limited companies. The provision was included in the Financial Institutions Regulations and entered into force on 1 March 2021.
Report on amendments to regulations on employees' right to representation on financial institutions' governing bodies
On commission from the Ministry of Finance, Finanstilsynet submitted a report in March 2021 on amendments to regulations of 23 December 1977 no. 9386 on employees' right to representation on the governing bodies of savings and commercial banks. The regulations were laid down pursuant to the former Commercial Banks Act and Savings Banks Act but apply until further notice. The regulations contain detailed rules on the election of employee representatives to governing bodies in savings and commercial banks.
Finanstilsynet proposes that the regulations be revoked, and that regulations of 24 August 2017 no. 1277 on employees' right to representation on the boards of directors and corporate assemblies etc. of limited companies and public limited companies etc. (the Representation Regulations) be made applicable to financial institutions. Finanstilsynet proposes that this be carried out by including a reference to the Representation Regulations in the Financial Institutions Regulations.
Consultation document on the implementation of amendments to the Securitisation Regulations
On commission from the Ministry of Finance, Finanstilsynet submitted a consultation document to the Ministry of Finance in September 2021 on the implementation of amendments to the Securitisation Regulations. The amendments include a new framework for so-called simple, transparent and standardised (STS) securitisation for synthetic securitisations. The amending regulation includes rules making it easier to securitise non-performing loans.
Consultation document on banks’ cash services
Pursuant to the Financial Institutions Act banks shall, in accordance with customers' expectations and needs, accept cash from customers and make deposits available to customers in the form of cash. In the Financial Markets Report 2021, the Ministry of Finance pointed out that banks have scaled back their cash services over many years, and that the individual bank is not obliged to maintain the offering on behalf of the community. This has created uncertainty as to whether the Financial Institutions Act's requirement for cash services will be met in the future.
On commission from the Ministry of Finance, Finanstilsynet prepared a consultation document containing draft regulations requiring each bank to ensure that customers are able to deposit and withdraw cash, either through the bank itself or through agreements with other cash service providers. The Ministry circulated the document for comment on 13 September 2021. The deadline for response was 10 December 2021.
Consultation document on credit card rewards
On 22 June 2021, Finanstilsynet was commissioned by the Ministry of Finance to prepare a consultation document on the need for further regulation of credit card rewards on the basis that consumers should be enabled to make sound and well-founded borrowing decisions. Credit card rewards are defined as all benefits the customer can achieve by acquiring or using a credit product. The most common rewards are travel insurance, bonus schemes, discounts and cash back linked to the use of credit cards. Finanstilsynet’s consultation document, containing its proposal for regulation, was sent to the Ministry of Finance in January 2022. The proposal entails that if a lender or business offers benefits, for example in the form of insurance, discounts, bonuses etc. linked to the use of credit cards, the benefits must be offered on equal terms to consumers who wish to pay by debit card.
Consultation document on charges for cross-border payments
On 10 September 2021, Finanstilsynet was commissioned by the Ministry of Finance to prepare a consultation document on amendments to Norwegian law to implement Regulation (EU) 2019/518. The legal act amends Regulation (EC) no. 924/2009 as regards alignment of charges for national and cross-border payments in euro. The changes entail, among other things, a duty to disclose information on currency conversion charges. In the consultation document, Finanstilsynet proposes implementation of the Regulation by incorporation into the new Financial Contracts Act.