In 2019, Norway is set to implement EU capital requirement regulations not already incorporated in domestic legislation. These regulations, the capital requirements regulation (CRR) and the capital requirements directive (CRD IV), include capital discounts for banks' SME customers. In our view, given the Norwegian financial supervisory authority's (FSA's) ambition to uphold banks' total core equity requirements through higher Pillar 2 requirements, reduced capital charges for SME customers are likely to be financed by higher capital charges for other customers. In the case of Norwegian savings banks, the burden is most likely to shift to mortgage loan customers.
"We believe that this will lead to higher margins on mortgage loans to offset lower margin requirements for SME customers. We also expect that large banks with low levels of SME loans will be able to cut lending rates more and therefore stand to gain market share", says credit analyst Geir Kristiansen at NCR.
Norway will also be forced to remove the transitional Basel I floor for IRB banks. This is a prerequisite if IRB banks are to benefit from the SME discount. The FSA has signalled that higher common equity Tier 1 (CET1) ratios due to the removal of the Basel I floor will be offset by higher capital requirements. Nevertheless, the change should allow IRB banks to benefit from the SME discount and to report CET1 ratios that are more comparable with those of Swedish and other European banks.
If you have any questions, please contact:
Geir Kristiansen, Analyst, +47 90 78 45 93, geir.kristiansen@nordiccreditrating.com
Sean Cotten, Lead analyst, +46 732 32 43 78, sean.cotten@nordiccreditrating.com