Changes to Norwegian capital requirements ‘credit positive’

Changes to capital requirements announced by the Norwegian ministry of finance that are in line with the latest EU Capital Requirements Directive (CRD) are credit positive for the country’s banks, Moody’s said today (Thursday), in that they will strengthen the financial institutions’ capital buffers.

Norwegian minister of finance Siv Jensen

According to the rating agency, the changes announced by the ministry last Friday (22 August), which will take effect on 20 September, are in line with its expectations that Norway, which is not in the EU, will nevertheless follow EU rules when it deems them helpful domestically.

Moody’s noted that while Norway implemented the main rules from the EU Capital Requirements Regulation/CRD IV last year, the regulations have not yet been implemented in full – although the country is still ahead of some other European countries.

The rating agency cited several amendments that it said strengthen the requirements for equity and debt with respect to Common Equity Tier 1 (CET1) capital, Additional Tier 1 (AT1), and other subordinated capital. It noted that: equity certificates, which are frequently issued by Norwegian savings banks, are eligible as CET1 capital; AT1 coupons must be non-cumulative, and non-payment not considered an event of default; and the loss-absorbing trigger level has been set at 5.125% of CET1 capital.

The exact timelines for grandfathering of old-style hybrid debt instruments was also set, according to Moody’s, with banks being allowed to include the full amount of old-style capital instruments in their capital ratios until the end of 2014, although recognition declines each year between 1 January 2015 and 31 December 2021.

“As for the banks we rate, an average of just over 10% of Tier 1 capital consists of hybrid securities, part of which are old-style and may need to be refinanced before 2021,” said the rating agency, which detailed how much hybrids each has outstanding. “The overview suggests that as of the second quarter, Storebrand Bank (Baa1 negative, D+/baa3 stable4) and Sparebanken More (A3 negative, C-/baa2 stable) would be most affected.

“Indeed, Storebrand Bank called all its old-style hybrid securities following the release of its second quarter financial results and Sparebanken More is in the process of calling part of its hybrid securities.”