Moody’s says Norway FSA risk weight plan positive

A proposal by the Norwegian Financial Supervisory Authority (Finanstilsynet) to tighten risk weights for residential mortgages is credit positive as it would press Norwegian banks to further strengthen their capital bases, Moody’s said on Monday.

The proposal was included in a letter Finanstilsynet sent to Norway’s finance ministry on 4 March. Moody’s said that the letter followed the authorities expressing concerns that risk weights for residential mortgages are too low and fail to reflect increased risks in the mortgage market, particularly rising household indebtedness and house prices.

“Risk weights average 10%-13% for banks that use the internal ratings-based (IRB) approach for calculating capital requirements, which is lower than many other European banking systems,” said the rating agency.

In its letter Finanstilsynet contemplates various measures to implement the goal of increasing risk weights. Moody’s said that for IRB-banks one would be increasing the loss given default from 10% to 43%, so as to bring banks’ risk weights to more than 35% on average. The measure may also apply to banks using the standardised approach for calculating capital requirements.

Other measures could be lowering the upper loan-to-value (LTV) limit for mortgages qualifying for a 35% risk weight to 60%, as opposed to the current 80%, or increasing the risk weight for well-secured mortgages from 35% to 40%.

Moody’s said that the measures, if implemented, would mean that Norwegian banks will need to hold more capital for residential mortgages.

Moody’s also noted that a previous Finanstilsynet requirement that all banks maintain a core Tier 1 ratio above 9% by the end of June 2012 led Norwegian banks to bolster their capital last year with equity issues and/or retained earnings.

“Further focus on capital is credit positive for Norwegian banks because it increases their buffer against potential losses,” said the rating agency.

Moody’s highlighted that the proposed higher capital requirements could help control loan growth, as banks’ and mortgage companies’ residential mortgages increased over 9% in the country last year.

“More controlled loan growth would be positive from a credit risk perspective and could help curb house price appreciation, which Statistics Norway reported rose close to 7% in 2012, thus reducing the risk of a sudden price decline,” said Moody’s.