The Norwegian Ministry of Finance is proposing to increase capital buffers to compensate for lower risk exposure amounts (REAs) for the country's banks, most of which are likely to see a net increase in capital requirements as a result. Although the proposed increase in capital buffers appears to be equal for all Norwegian banks, the reduction of REAs following the implementation of the capital requirements regulation (CRR) and the capital requirements directive (CRD IV), is likely to be more beneficial to larger banks -- which tend to use internal ratings-based (IRB) capital models -- due to the removal of the Basel I floor.
"Bank alliances and the resultant cost sharing have enabled the Norwegian savings bank sector to thrive, but increased capital requirements would have to be met by individual banks", says Geir Kristiansen, credit analyst at NCR. "The heavier burden on the banks using the Standard approach would be a competitive disadvantage relative to the larger banks and could trigger increased consolidation within the sector."
Among our selection of banks, only BN Bank AS (BN), predominantly a residential mortgage lender, would be better off in terms of lower capital requirements given lower risk weights for residential mortgages after the removal of the floor. In addition, the owners of Samspar, i.e. the smaller banks in the SpareBank 1 Alliance, would benefit through proportional consolidation of Samspar's holding in BN. Other banks using the Standard approach would, however, face significantly higher capital requirements if the proposals are put into effect.
Analyst contact details:
Geir Kristiansen, Analyst, +47 90 78 45 93, geir.kristiansen@nordiccreditrating.com
Sean Cotten, Chief Rating Officer, +46 735 600 337, sean.cotten@nordiccreditrating.com