Financial Stability 2/2004
3 Financial institutions
3.1 Banks’ results and financial strength
3.2 Risk outlook for banks
3.3 Other financial institutions
3.4 Developments in the largest financial conglomerates
3.5 Overall assessment of financial institutions
Boxes:
- Risk associated with loans to small enterprises and the new capital adequacy framework
- Norges Bank’s role in the event of liquidity crises in the financial sector
3.1 Banks’ results and financial strength
Bank’s results so far this year are better than they have been for several years due in part to very low interest rates and a pronounced cyclical upturn (see Chart 3.1). Pre-tax profits improved markedly from the first three quarters of 2003 to the same period in 2004 for all bank categories.10 The improvement is primarily a result of lower loan losses and higher earnings from commissions. The sharp increase in the banking index on the Oslo Stock Exchange (see Chart 1.8) indicates that investors consider the outlook for Norwegian banks to be favourable.
Chart 3.1
Banks’ net interest income continues to decline as a result of the fall in interest rates in 2003 and the beginning of 2004. Banks’ total interest margin was 2.78% at end 2004 Q2. This is lower than in 2003 when the average interest margin was 2.92%. The fall is mainly due to reduced lending margins.
Other operating revenues are higher this year than in 2003. This is primarily ascribable to higher earnings from commissions and a turnaround from strongly negative to positive capital gains on derivatives. Price gains on derivatives and securities and exchange gains are normally sensitive to changes in the economy and in the different markets. Banks’ cost-effectiveness, measured by operating costs as a percentage of average total assets (ATA), continued to improve in 2004 (see Chart 3.1).
In all bank categories, recorded loan losses have fallen sharply. Low interest rates, cost reductions and debt consolidation in enterprises contributed to reducing losses on loans to corporate customers. Low interest rates have also contributed to keeping loan losses low in the retail market. The improvement in the quality of credit through 2004 is also reflected in a pronounced decline in gross non-performing loans to both the household sector and non-financial enterprises (see Chart 3.2).
Chart 3.2
The Tier 1 capital ratio for all banks fell from 9.7% at end-2003 to 9.3% at end 2004 Q3. The Tier 1 capital ratio is still highest for small and medium-sized banks but is also solid for the largest banks.
3.2 Risk outlook for banks
Types of risk
Credit risk: the risk of a loss due to the inability of a counterparty to meet his obligations, for example when a borrower does not pay interest and/or instalments.
Market risk: the risk of losses due to changes in interest rates, exchange rates or share prices.
Liquidity risk: the risk of substantial extra expenses due to loss of financing, i.e. the bank’s lenders no longer being able or willing to extend credit to the bank, or to a counterparty failing to fulfil his obligations at the right time.
Banks are exposed to a number of types of risk. Loans to households, municipalities and non-financial enterprises account for close to three-quarters of banks’ total assets, making credit risk the primary source of risk for banks. Due to sharp growth in loans to the household sector in the last four years11, these loans now account for more than two-thirds of banks’ total loans to the non-financial sector.
Credit risk associated with loans to households
Banks have been willing to meet households’ high demand for loans. A continued rise in house prices and expectations of lower capital requirements for housing loans as a result of new capital adequacy rules may contribute to maintaining the strong growth in loans to households.
Average interest rates on new mortgage loans dropped approximately as much as Norges Bank’s key rate until mid-2004 (see Chart 3.3). Since the end of June 2004, however, interest rates on new housing loans have increased slightly. This may indicate that banks consider the risk associated with housing loans to be increasing. The average interest rate on all mortgage loans, with both fixed and floating rates, fell towards the end of the second quarter. A fall in banks’ lending rates that is approximately the same as the fall in the key rate may be interpreted as an indication of active competition between banks in Norway in the area of housing loans.
Chart 3.3
Historically, banks’ losses on loans to households have been low (see Chart 3.4). Banks’ holdings of non-performing loans to households have fallen recently (see Chart 3.2). Due in part to low interest rates, the household interest burden is low in spite of high debt growth (see Section 2.2). The risk of higher losses on loans to households is therefore considered to be relatively low in the short term. However, the high debt growth and historically high debt burden make households vulnerable to economic disturbances. A sharp increase in interest rates could make it difficult for parts of the household sector to service their debt.
Chart 3.4
Credit risk associated with loans to non-financial enterprises
Loans to non-financial enterprises account for more than 30% of banks’ gross lending to households, municipalities and non-financial enterprises. Experience shows that the majority of banks’ loan losses are related to loans to non-financial enterprises (see Chart 3.4).
The analysis in Section 2 stressed that enterprises are relatively solid with good profitability and a favourable outlook, at least in the short term. This is underpinned by the decline in banks’ holdings of non-performing loans to the corporate market. Banks’ lending is highest to the property management industry. The share of banks’ loans to non-financial enterprises that are property companies rose from 32% at end-2002 to nearly 35% at end-2003. Recorded losses on loans to the property industry have been relatively lower than losses to most other industries in recent years.
Banks are particularly vulnerable to defaults among large loan customers. Nordlandsbanken’s major losses on loans to Finance Credit and Dåfjord Laks are examples of this. Banks’ holdings of large loans in relation to total lending increased marginally from the end of the first half of 2003 to the end of the first half of 2004.12
Due to positive developments in the enterprise sector, credit risk associated with non-financial enterprises is considered to be relatively low and somewhat lower than in Financial Stability 1/2004.
Market risk
Banks’ holdings of securities classified as trading book are low (see Chart 3.5). Norwegian banks engage to only a limited extent in securities trading for their own account. Banks primarily have interest-bearing securities because these may be used as collateral for intraday loans and fixed-deposit loans from Norges Bank. Even if prices in equity and bond markets should fall from today’s relatively high level, the negative effect on banks’ earnings would be limited. Therefore, banks’ market risk is still considered to be relatively low.
Chart 3.5
Liquidity risk
Banking operations entail liquidity risk in several areas. Below, we will evaluate banks’ risk connected with providing payment services and thereafter the risk connected with the financing structure.13
Customer deposits accounted for about half of banks’ total assets at the end of June 2004. Less than 50% of the deposits from non-financial enterprises have no maturity and may be withdrawn without warning in connection with goods purchases, cash withdrawals, securities trading, foreign exchange trading and tax payments. When deposits have a term to maturity, the term is usually less than one month (see Chart 3.6).
Chart 3.6
Banks’ positions from different transactions are settled through their accounts in Norges Bank. If transactions are to be settled without delay in Norges Bank’s Settlement System (NBO), banks must have adequate liquidity when the transactions are received in NBO. Banks’ liquidity in NBO consists of a borrowing facility secured by pledged securities and deposits in accounts in Norges Bank. In the first three quarters of 2004, banks had on average NOK 110bn available in the settlement system at the beginning of the day. This included borrowing facilities corresponding to approximately NOK 90bn and deposits of roughly NOK 20bn (see Chart 3.7). The ratio between turnover and available liquidity in NBO provides an indication of how many NOK are settled with NOK 1 in liquidity. The ratio has been lower for the first three quarters of 2004 than for previous years. This may indicate that a higher settlement volume is possible with the existing liquidity, or that liquidity may be reduced without causing delays in the settlement system.
Chart 3.7
Payments in NBO fall due for settlement at different times during the day. Banks draw most heavily on their borrowing facility in NBO at mid-day (see Chart 3.8). In the period 2-13 August 2004, mid-day utilisation of borrowing facilities averaged NOK 8bn, whereas the highest observation was NOK 25bn. In this period, therefore, banks had ample liquidity to meet their obligations in payment settlements.
Chart 3.8
On the whole, banks’ financing has been relatively stable since Financial Stability 1/2004. At end 2004 Q3, customer deposits and bond debt amounted to 64% and 25% respectively of gross lending to households, municipalities and non-financial enterprises. Since Financial Stability 1/2004, customer deposits and bond debt have increased considerably less than gross lending to households, municipalities and non-financial enterprises. This has contributed to a slight fall in the liquidity indicator14 for all banks as a whole.
Since Financial Stability 1/2004, the category “other savings banks” has continued to increase its stable funding more than its illiquid assets so that the value of the liquidity indicator has increased (see Chart 3.9). The category “other commercial banks” has increased its lending in 2004 for the first time in a number of years. Lending growth has been financed primarily by issuing short-term paper and by interbank debt. This is considered short-term debt and the liquidity indicator has therefore been reduced for this category.
Chart 3.9
The value of the liquidity indicator for DnB NOR has generally been above 100 for several years. The value has fallen somewhat since Financial Stability 1/2004. The bank has also reduced its short-term foreign debt, which is currently at about the same level as in previous years (see Chart 3.10).
Chart 3.10
Funding from the parent bank to the foreign owned subsidiaries Nordea Bank Norge and Fokus Bank has declined since Financial Stability 1/2004 (see Chart 3.10). Bond debt has also been reduced. On the other hand, the share of funding in the form of short-term paper in NOK and customer deposits has increased.
On the whole, liquidity risk is still considered to be relatively low and unchanged compared with six months ago.
Risk associated with loans to small enterprises and the new capital adequacy framework
The Basel Committee on Banking Supervision presented new guidelines for estimating banks’ capital adequacy (Basel II) on 26 June 2004.1 The purpose of the new regulations has been to better adapt the rules to banks’ risk and encourage banks to improve their risk management.
According to the current regulations, loans to all non-financial enterprises are 100% risk-weighted irrespective of the underlying risk. The new regulations contain three methods for calculating capital requirements for the credit risk of non-financial enterprises: the standardised approach (SA), the internal rating-based foundation approach (IRBF) and the internal rating based advanced approach (IRBA) (see Chart 1).
Chart 1
In SA, enterprises with total loans of less than EUR 1m from a single bank are defined as small and medium-sized enterprises (SMEs) and are given a risk weight of 75%. One prerequisite for this is that the enterprise is a part of a well diversified lending portfolio. The risk weight of enterprises with total loans exceeding EUR 1m depends on whether they have a credit rating or not. Enterprises with a credit rating are assigned a risk weight based on this rating, while enterprises without a credit rating are given a risk weight of 100%. In IRBF and IRBA, banks will use their own credit risk models to determine the capital requirements.2 The model must be approved by the supervisory authorities. Enterprises are classified first according to which portfolio they belong to – the retail or the corporate portfolio. An SME forming part of a bank’s corporate portfolio is given a risk weight discount based on the size of the enterprise’s income. SMEs in the retail portfolio are assigned a risk weight calculated using a special retail formula.
Almost half of the non-financial enterprises in Norway have bank debt. Of these enterprises, 88% have debt of less than EUR 1m, while 99.5% have total income that is less than EUR 50m.3 This means that most non-financial enterprises in Norway would be classified as SMEs. Using Norges Bank’s SEBRA database and model, we have calculated bankruptcy probabilities for SMEs in different industries and regions. Historically, bankruptcy probabilities have on average been far higher for SMEs than for large enterprises in periods of economic expansion and contraction alike (see Chart 2). This fact makes it relevant to assess the effect of the more favourable treatment of SMEs under the new regulations, and whether this can be justified with respect to risk.
Chart 2
The more favourable treatment of SMEs under the new regulations rests on the assumption that there is lower correlation between SMEs than there is among large enterprises. The reasoning is that SMEs have a larger amount of enterprise-specific risk.4 However, traditional financial theory indicates that the enterprise-specific diversification gain falls rapidly with the number of enterprises. For example, when the number of enterprises in a lending portfolio is increased from about 30 to 40, the diversification gain will be limited. Some of the industry- and region-specific credit risk can be removed by spreading lending across several industries and regions. Chart 3 shows that developments in average bankruptcy probabilities for SMEs have been approximately the same in most major industries in Norway in the period 1998-2003. The same applies to developments in different regions in Norway. This indicates that spreading the loans across different industries and regions offers limited possibilities of reducing risk associated with loans to SMEs.
Chart 3
On the basis of the bankruptcy probabilities we have calculated the capital adequacy requirement under different assumptions (see Table 1).5 We have used capital adequacy formulae as defined in the new Basel II Accord.6 “Basel I” refers to the current capital adequacy regulations.7
Table 1
The results indicate that the capital requirement for SME loans could fall with both SA and IRBF compared with the current regulations. The results also indicate that the SME discount under the new regulations is substantial. The capital requirement for SMEs would be approximately 35% higher with SA and 30% higher with IRBF if the SME discount were removed.
Will banks allocate enough capital?
The above results provide grounds for asking whether the banks will have allocated enough capital for the credit risk related to SMEs even if they have complied with the minimum requirement in the new regulations.8 However, Pillar 2 of the new regulations makes it possible for the supervisory authorities to raise the minimum requirements for capital adequacy. Moreover, the use of ever more advanced risk management systems and the generally sound capital adequacy of Norwegian banks may make gradual and risk-adjusted adaptation possible. Banks' sources of funding may also "penalise" banks that reduce their capital adequacy disproportionately by increasing the risk premium associated with banks' funding.9
1) The regulations enter into force in 2006/2007.
2) When capital requirements are calculated using the internal rating based approaches, only banks’
unexpected loan losses are taken into account. In addition, banks must calculate
expected losses and compare this amount with actual loan losses. Any difference is subtracted from or added to the bank’s capital.
3) Source: Norges Bank’s SEBRA database.
4) For example, the risk of an enterprise’s management making incorrect decisions which are independent of developments in different industries, regions and economic developments in general.
5) We consider only credit risk associated with non-financial enterprises (limited companies). Risk-reducing measures are not taken into account. We do not have sufficient information to calculate the capital requirement with IRBA.
6) The bankruptcy probabilities will be lower than the default probabilities (i.e. PD in the formulae in the new regulations). The IRBF calculation in Table 1 therefore underestimates the capital requirement somewhat. However, it is unlikely that use of default probabilities will alter the general conclusions.
7) The new regulations have previously been subjected to a number of impact analyses. The analyses indicate that the capital requirement for
credit risk will be substantially reduced for most banks, both in Norway and in other European countries.
8) More detailed analyses will be necessary before any clear conclusions can be drawn.
9) Pillar 3 involves extensive requirements regarding the reporting of information on capital adequacy, risk exposure and other aspects of banks’ activities.
3.3 Other financial institutions
Norwegian banks have entered into alliances or become part of financial conglomerates that also include other financial institutions (see Annex Tables 12 and 13). Developments in these financial institutions may therefore have an impact on banks’ results.
Mortgage companies
Mortgage companies provide medium- and long-term credit to enterprises, municipalities and to some extent individuals against collateral in the form of real estate or production equipment (secured loans). Mortgage companies finance their activities primarily by issuing notes and bonds.
For the last twelve months to end-September 2004, mortgage companies’ lending rose by 13.5%. Mortgage companies’ lending growth has not been at such a low level since January 2003. Mortgage companies’ pre-tax profits declined in the first three quarters of 2004 compared with the same period of 2003 measured as a per cent of ATA (see Chart 3.11). The Tier 1 capital ratio fell from 10.0% to 9.4% in the same period.
Chart 3.11
Mortgage companies are part of a number of the large financial conglomerates in Norway. The mortgage company accounts for one-third of total assets in the Fokus Bank Group and was responsible for 54% of group profits in 2003. In DnB NOR and Nordea Bank Norge, the mortgage companies account for a considerably smaller portion of total assets. The mortgage companies in the three above-mentioned financial conglomerates constitute approximately 20% of the mortgage companies in Norway measured by total assets.
Finance companies
Finance companies are engaged in different kinds of lending activities. These include leasing, car financing, card-based loans and consumer loans. Finance companies are primarily financed by their owners. In the last twelve months to end-September, finance companies’ lending rose by 11.8%. This is the highest lending growth since February 2003. In the last three years, there has been an increase in repayment loans. Leasing declined from 2002 to 2003 but has increased somewhat in the last year (see Annex Table 10).
Finance companies’ profits were higher in the first three quarters of 2004 than in the same period of 2003 (see Chart 3.12). Tier 1 capital rose from 8.3% to 9.1% in the same period.
Chart 3.12
Finance companies account for a small share of total assets in DnB NOR, Nordea Bank Norge and the Sparebank 1 alliance. Together, the finance companies in these conglomerates constitute approximately one-third of the finance companies in Norway measured by total assets. Developments in the finance companies will be of limited importance for banks.
Life insurance companies
Life insurance companies’ equity holdings (trading book) as a share of total assets have increased by 4 percentage points in the last year after a slight decline in 2003. The increase in the last year is probably due to the upswing in equity prices during the period. The equity share at end 2004 Q3 was 14% (see Annex Table 11).
The share of bonds “held until maturity” rose from 27% at end 2002 Q3 to 37% at end 2003 Q3. The share has fallen 2 percentage points in the last year. The share of short-term paper and bonds held as trading book has declined in the last two years.
From 2003 Q3 to 2004 Q3, life insurance companies’ pre-tax profits before payments to customers remained unchanged, while value-adjusted profits, which include changes in the adjustment fund, declined (see Chart 3.13). Due to the low equity share and the high share of foreign equities, the strong upswing in the Oslo Stock Exchange since spring 2003 has had little impact on income from financial assets so far this year.
Chart 3.13
The two Norwegian financial conglomerates DnB NOR and Storebrand have 18% and 84% respectively of their total assets in life insurance. Storebrand’s life insurance activities accounted for nearly 90% of Storebrand’s group profit in 2003. Vital’s contribution to DnB NOR’s profits was a little more than 14%. Developments in life insurance are therefore important for these financial conglomerates. Together DnB NOR and Storebrand have nearly 65% of the life insurance market in Norway.
The life insurance companies’ buffer capital15 rose from 4.3% at end 2003 Q3 to 5.1% at end 2004 Q3.
3.4 Developments in the largest financial conglomerates
In recent years, the largest Norwegian financial conglomerates’16 earnings have been weaker and less stable measured by return on equity than the largest Nordic financial conglomerates (see Table 3.1). This is primarily because the Norwegian conglomerates operate with a higher equity ratio and loan losses have been more extensive than in the other Nordic conglomerates. Improved profits, mainly due to a sharp reduction in loan losses in 2004, have contributed to bringing the largest Norwegian conglomerates’ return on equity into line with the ROEs of other Nordic conglomerates.
Table 3.1
Financial conglomerates may choose to operate with different equity ratios for different reasons. An alternative return measure is total profits as a per cent of total assets. The largest Nordic financial conglomerates’ profits for the first three quarters of 2004 were between 0.5% and 0.9% of total assets (see Chart 3.14).17 Banking operations clearly make the largest contribution to results. DnB NOR had the highest relative return of all the largest Nordic financial conglomerates.
Chart 3.14
There have been relatively small changes in the largest financial conglomerates’ Tier 1 capital ratio so far in 2004. The lowest Tier 1 capital ratio recorded was 6.9%.
3.5 Overall assessment of financial institutions
Banks’ results are currently better than they have been in several years due in part to economic growth and low interest rates. Finance companies’ results have also improved, while results for mortgage companies and insurance companies are somewhat weaker than in 2003. The results in financial institutions as a whole are considered to be solid.
Positive economic developments and low interest rates have contributed to strengthening borrowers’ debt-servicing capacity. Therefore, banks’ credit risk associated with loans to the household and enterprise sectors is considered to be relatively low in the short term. Banks’ market and liquidity risk is also considered to be relatively low. However, the sharp rise in debt has made households more vulnerable to economic disturbances. A sudden debt consolidation among households could also reduce their demand for goods and services and thus reduce the earnings and debt-servicing capacity of many enterprises. This would lead to increased loan losses and reduce financial institutions’ revenues from financial services.
Norges Bank’s role in the event of liquidity crises in the financial sector
Financial crises can be costly for both government budgets and overall production. The authorities therefore attempt to prevent financial crises from arising. In Norway, the Ministry of Finance has the ultimate responsibility for financial stability, as part of its responsibility for economic policy. Kredittilsynet (the Financial Supervisory Authority) is responsible for supervising institutions, and has broad powers to intervene in the event of crises or potential crises. Central banks have traditionally had the role of lender of last resort, which means that the central bank can supply extraordinary liquidity to the individual bank or banking system when demand for liquidity cannot be met from alternative sources.1
Norges Bank’s principles and guidelines for supplying extraordinary liquidity have changed over time. During the regulatory regime in the financial sector from after World War II and up to the early 1980s, the interbank and money markets were weakly developed, and Norges Bank relatively often provided loans to banks with liquidity problems. With the deregulation of the financial sector in the 1980s, the efficiency of the interbank and money markets increased, and the central bank attempted to limit its responsibility to mainly providing liquidity to the banking system as a whole. However, the banking crisis led to a sharp increase in the granting of loans on special terms to individual banks (S-loans). No S-loans have been provided since the banking crisis.
At present, the liquidity of the interbank, money and capital markets is sound. Norwegian banks have access throughout the day to liquidity (intraday loans) via standing facilities in Norges Bank’s Settlement System (NBO). When a liquidity shortage arises in the banking system as a whole, the central bank normally supplies more liquidity to the system through monetary policy operations (fixed-rate loans or possibly currency swaps). Liquidity is always supplied against collateral in specific interest-bearing securities.
Banks that are sound and have good risk management systems will normally enjoy confidence in the markets, and will therefore also have adequate access to liquidity. However, the failure of banks’ own or central payment settlement systems, a drying up of liquidity in international money and capital markets, loss of confidence in the financial situation of banks or in the economy of the country itself may occur and lead to liquidity problems.
In crisis situations, the question of approving other types of securities (for example equities) as collateral for loans in Norges Bank or departing from the requirement regarding provision of collateral in the general loan schemes will rapidly arise.2 In the event of liquidity problems in the individual institution, Norges Bank can provide loans on special terms. A basic principle that was stressed during the banking crisis is that Norges Bank shall not provide solvency support.
Central banks must always have a contingency plan for liquidity crises in the financial sector. Most recently in March 2004, the Executive Board of Norges Bank discussed the role of the Bank in connection with liquidity crises in the financial sector, and particularly the criteria for providing S-loans. It was established that extraordinary provision of liquidity should be restricted to situations where financial stability may be threatened if such support is not provided. This is in line with the stance Norges Bank has previously expressed in letters and speeches since the banking crisis.3
Norges Bank has several lending arrangements at its disposal. The Executive Board discussed the Bank’s response to various types of liquidity problems. A distinction was made between liquidity problems that 1) arose suddenly as a result of operational failure of payment systems or failure of financing markets, and 2) resulted from more fundamental problems in individual banks.
1) Acute liquidity problems in individual banks will probably lead to insufficient cover for payment settlements in NBO. Norges Bank may approve other types of collateral, or depart from the requirement regarding provision of collateral for intraday loans in order to ensure the execution of payment settlements. Such a move would be made in the interests of maintaining the efficiency of and confidence in the payment system.
An acute shortage of liquidity in the banking system as a whole would probably lead to many banks having insufficient cover for payment settlements in NBO, also at the end of the day, and to short money market rates rising. Norges Bank may approve another type of collateral or depart from the requirement that collateral must be provided for fixed-rate loans. Such a move would be aimed at bolstering financial stability and/or avoiding an undesirable increase in short-term money market rates.
In order to reduce the risk of Norges Bank rewarding high risk-taking by banks and/or incurring losses, extraordinary intraday loans or fixed-rate loans should be reserved for situations where it is evident that liquidity problems are of a short-term nature and are not due to more fundamental problems.
2) Liquidity problems in individual banks will often be a symptom of poor risk management and/or a deterioration in profitability and financial strength, which lead to loss of market confidence. Pursuant to the Bank Guarantee Act, Kredittilsynet has broad powers to require the implementation of measures targeting the causes of liquidity problems. The Norwegian Banks’ Guarantee Fund can provide various types of support to boost the financial strength and liquidity of a bank undergoing a crisis. Norges Bank may provide S-loans to improve liquidity. A bank that does not have a financial basis for further operations may be placed under public administration (in receivership). In such case, the Norwegian Banks’ Guarantee Fund is obligated to disburse the guaranteed deposit (NOK 2m per depositor per bank).
The Executive Board approved the following principles and guidelines for extending S-loans in March 2004:
- S-loans should be restricted to situations where financial stability may be threatened if such support is not provided.
- In most cases, a decision about an S-loan will be a matter of special importance that must first be submitted to the Ministry of Finance. Norges Bank will request that Kredittilsynet make an assessment of: the causes of the liquidity problems, the liquidity and solvency situation of the banks in crisis, and measures that may solve the liquidity problems.
- Before an S-loan is provided to banks that have, or are at risk of developing, weak capital adequacy, there should be a plan to recapitalise the bank.
- S-loans should be provided against full provision of collateral or guarantees.
- The interest on the S-loan should be made higher than the market rate applying generally.
1) For a review of literature on central banks’ role as LLR, see Freixas, X., C. Giannini, G. Hoggarth and F. Soussa (1999): “Lender of last resort: a review of the literature”, Bank of England,
Financial Stability Review: November 1999.
2) Section 3 of the regulation relating to banks’ access to loans and deposits in Norges Bank (FOR 2001-04-25 no. 473) reads: “Norges Bank may issue more detailed conditions for accepting or rejecting collateral, and in special cases may approve other collateral or depart from the requirement for collateral.”
3) ee for example the submission of 17 December 1999 from Norges Bank to the Ministry of Finance in connection with the follow-up of the Storting’s treatment of the Smith Commission’s report on the Banking Crisis. The submission states that “Should a situation arise in which the financial system itself is at risk, Norges Bank, in consultation with other authorities, will consider the need for, and if necessary initiate, measures that may help to bolster confidence in the financial system.
10 I.e. in the two largest Norwegian banks and in the categories “other commercial banks”, “other savings banks” and “branches of foreign banks”.
11 The household sector also includes the self-employed.
12 Source: Kredittilsynet (Financial Supervisory Authority). A large loan is defined as an exposure that accounts for more than 10% of owners’ capital.
13 Banks are also exposed to liquidity risk connected with delayed payment of large loans, counterparty exposures or reduced earnings, but this is not discussed in detail in this report.
14 A value of 100 indicates that banks have balanced illiquid assets (loans and fixed assets) with stable sources of funding (customer deposits, equity and bonds). An increase in this ratio indicates a reduction of liquidity risk. Banks’ drawing facilities are not taken into account.
15 Buffer capital is calculated as the sum of Tier 1 capital over and above the minimum requirement, additional provisions with an upper limit of one year’s interest rate guarantee and the adjustment fund.
16 With the exception of Storebrand, activities in these financial conglomerates are primarily focused on traditional banking activities. The Norwegian conglomerates in Table 3.1 account for nearly three-quarters of both the banking market and the life insurance market in Norway.
17 In the chart, Nordea Bank Norge is included in Nordea Bank AB and Fokus Bank is included in Danske Bank.