3 Financial markets regulation developments internationally and in Norway

3.1 Introduction

The cause of financial crises is often that financial imbalances are allowed to develop over time. When the financial system is closely interconnected across national borders, imbalances and crises can spread quickly from one country to another. The economic setback suffered by the global economy after the 2008 international financial crisis is one example of how severe and lasting the social effects of financial crises can be. A fairly positive trend in the years preceding the crisis led many to believe that financial markets were fundamentally stable. Moreover, in the period before the crisis, the belief that financial stability could be promoted by a financial industry which was less regulated by the authorities was also strengthened. The collapse in international financial markets in the autumn of 2008 has generated broad agreement internationally that authorities must give greater emphasis to regulation and supervision to ensure financial stability. Comprehensive processes have been launched to formulate new rules, including in the G20, the International Monetary Fund (IMF), the Basel Committee, the Financial Stability Board (FSB), the OECD and the EU. These international processes will first and foremost influence Norwegian law when changes to current EU regulations in the financial markets area are incorporated into the EEA Agreement. Norway is participating in the work being done in this area.

In the past couple of years, the Ministry of Finance has reported regularly to the Storting on the most important processes which have been initiated to improve international and Norwegian financial markets regulation following the financial crisis, including in the annual financial markets reports and the national budget reports. This chapter is based on earlier accounts presented by the Ministry to the Storting, and on subsequent developments. Developments in the past year are characterised by the fact that the various proposals have become more concrete, and that the implementation of comprehensive regulatory changes is moving closer. Among other things, the European Commission has put forward proposals concerning the transposition of the Basel III standards into EU law (CRD IV), which are now being discussed in the Council and the European Parliament. Regarding insurance, it appears likely that, following a process taking several years, the Solvency II rules for insurance companies will be implemented in national legislation by 2013 and enter into force on 1 January 2014. Still, the final wording of key new EU rules is far from determined.

The regulatory developments in Norway now largely reflect the work being done on new rules in the EU. In Norway, efforts are being focused, among other things, on how best to implement the expected EU/EEA rules corresponding to the Basel III standards (the CRD IV rules), and how macroprudential supervision of the finance sector should be organised in Norway. In these efforts, the Ministry will continue to emphasise the need to utilise national flexibilities, so that the Norwegian regulatory framework makes the best possible contribution to financially sound financial institutions. This will also contribute to the competitive position of Norwegian financial institutions. Moreover, a Nordic working group comprising members from the ministries of finance has been appointed to assess the challenges facing the Nordic countries with respect to with the introduction of the Basel III /CRD IV rules. The implementation of the Solvency II rules is another important part of the Norwegian regulatory developments ahead, cf most recently the decision of the Storting of 1 March 2012 to approve the incorporation of the Solvency II directive into the EEA Agreement (Recommendation 192 S, 2011–2012).

3.2 New capital and funding requirements for credit institutions

3.2.1 Introduction

The international financial crisis evidenced that banks should have more capital that can absorb losses incurred during banks’ ongoing operations. Internationally, many banks did not have enough capital, and not of high enough quality, to support the banks as going concerns. In addition, many banks had insufficiently robust funding structures, which were unable to withstand disruptions in international money and credit markets.

During the financial crisis, there was reason to fear that also Norwegian banks would have difficulties meeting their liabilities at maturity, primarily due to difficulties in refinancing short-term debt in financial markets, but also due to the fact that certain assets became less liquid. The crisis revealed that banks’ access to funding can change rapidly, and that this can quickly threaten the stability of the international financial system. In Norway, however, we also saw that certain rules and circumstances contributed to shielding the Norwegian banking system, for example the rules on consolidation, tier 1 capital definitions and the capitalisation of the Norwegian Banks’ Guarantee Fund.

In view of the experiences from the financial crisis, the Basel Committee put forward new recommendations on stricter capital and liquidity requirements for banks, referred to as the Basel III standards, in December 2010. On 20 July 2011, the European Commission proposed new legislation to transpose the Basel III standards into EU law. The Commission’s proposed framework is referred to as CRD IV, as it can be regarded as the third revision of the current EU Capital Requirements Directives1. The Commission’s proposal involves replacing the current CRD with:

1. a regulation containing prudential capital and liquidity requirements for credit institutions and investment firms

2. a new directive governing national rules on the access to operate as a credit institution or investment firm.

The Ministry of Finance discussed the Basel III standards and the CRD IV proposal in greater detail in the Financial Markets Report 2010 and the National Budget 2012, among other documents. While the Basel III standards take the form of minimum requirements, leaving countries free to introduce stricter rules at their own discretion, a large part of the CRD IV proposal is worded in a manner that leaves national authorities with little flexibility to introduce stricter rules. This is expressed by the fact that the Commission has proposed some rules in the form of a regulation and that important parts of the proposed directive prescribe so-called maximum harmonisation.2

In its proposal, the European Commission envisages that the new rules on capital and liquidity shall enter gradually into force in EU Member States from 1 January 2013, taking full effect by 1 January 2019. The proposal is now being discussed in the Council and the European Parliament. Denmark has the Council presidency in the first half of 2012, and is thus responsible for mediating a compromise text in the Council. The presidency also represents the Council in the trilogue with the Parliament and the Commission. The draft compromise texts put forward by the Danish presidency on 6 January 2012, 1 March 2012 and 2 April 2012 include greater scope for national flexibility in the CRD IV than in the Commission’s original proposal. The drafts include, among other things, national flexibility to set higher capital buffer requirements on the basis of systemic risk considerations (e.g. through a particular systemic risk buffer requirement), and to set higher risk weights for certain lending exposures.

On 31 May 2011, the Ministry issued a public consultation on the report NOU 2011: 8 on new financial legislation prepared by the Norwegian Banking Law Commission. The consultation was closed for comments on 30 September 2011. The report of the Banking Law Commission contained a draft of a new Financial Undertakings Act, which is to contain all Norwegian legislation relating to financial undertakings and financial groups. The draft law also contained draft rules to implement new EEA rules corresponding to the CRD IV rules. The consulted bodies largely supported the structure of the draft act proposed by the Banking Law Commission. Moreover, the Ministry on 24 October 2011 issued a public consultation on a memorandum from Finanstilsynet (the Norwegian financial supervisory authority), also containing draft rules for the implementation of new EEA rules corresponding to the CRD IV rules, with a deadline for comments on 6 January 2012. As mentioned in the Ministry’s consultation letter of 24 October 2011, the Ministry envisages incorporating new EEA rules corresponding to the CRD IV rules into the new Financial Undertakings Act, which is to be based on the draft proposed by the Banking Law Commission in the NOU 2011: 8 report. The Ministry aims, depending on the adoption of the CRD IV in the EU, to submit a proposition to the Storting on the new Financial Undertakings Act in the autumn of 2012.

3.2.2 Capital requirements

3.2.2.1 New capital requirements for banks and other credit institutions

The capital adequacy rules are based on three pillars, cf. the discussion in Box 2.8 in Chapter 2. Pillar I concerns minimum capital requirements, while pillars II and III basically deal with self-assessment of capital needs and the publication of information, respectively. The capital requirements in pillar I are expressed as minimum requirements in the form of a ratio, where the denominator comprises risk-weighted value assets and some off-balance sheet items. The numerator is capital. The minimum requirement applicable to the tier 1 capital ratio is currently 4 per cent, while total capital (the sum of tier 1 and tier 2 capital) must amount to at least 8 per cent of risk-weighted assets. The higher the calculated risk of an asset, the higher the risk-weighted total assets, and thus the higher the capital requirement. Institutions’ risk weights therefore influence how much tier 1 capital and total capital institutions must have behind each loan. For most institutions, the risk-weighted assets are much lower than the total assets (the balance sheet).

Banks and other credit institutions’ regulatory capital, and particularly their tier 1 capital, absorbs losses incurred during institutions’ ongoing operations, and thus serves to prevent losses in such institutions from reaching creditors and depositors.

The current capital adequacy rules were first discussed in detail for the Storting in connection with their implementation into Norwegian law through the Decision of the Odelsting No. 81 (2005–2006), cf. also the Ministry’s Proposition No. 66 (2005–2006) to the Odelsting.

In the Financial Markets Report 2010 and the National Budget 2012 report, the Ministry explained that the Basel III standards and the expected CRD IV rules will imply the introduction of higher minimum capital requirements for credit institutions. The minimum capital requirement (total capital as a percentage of risk-weighted assets), will still be 8 per cent, but a larger proportion of this must be tier 1 capital, which in turn must comprise a larger proportion of common equity tier 1 (CET1) capital, cf. Figure 3.1. CET1 capital is largely the same as own funds or equity capital, and is the part of the tier 1 capital which is used first to absorb losses. As the figure shows, under the Basel III proposal, the CET1 capital must amount to at least 4.5 per cent of risk-weighted assets, while the tier 1 capital (which includes certain types of hybrid capital) must amount to at least 6 per cent. The aim of increasing the risk-weighted capital requirements is to bring credit institutions’ capacity to bear losses more in line with the actual risk. The Basel III standards also include a capital conservation buffer requirement composed of CET1 capital, which must amount to at least 2.5 per cent of risk-weighted assets. According to the standards and the CRD IV proposal, a lower capital conservation buffer than this target will imply constraints on institutions’ distributions of earnings until the buffer target is reached.

Kilde: Basel Committee and the European Commission

Until now, credit institutions’ capital requirements have been fixed requirements, not affected by economic cycles or other time-dependent variables. Accordingly, it has largely been left to the individual institutions themselves to build appropriate buffers on top of minimum requirements in prosperous times, in order to have sufficient capital to draw on in leaner years. The Basel III standards and the CRD IV proposal include a counter-cyclical capital buffer requirement, which is to vary between 0 and 2.5 per cent CET1 capital of risk-weighted assets, depending on the economic situation. According to the CRD IV proposal, the counter-cyclical buffer requirement is to be applied in periods of excessive credit growth or other developments implying increased systemic risk. Like the capital conservation buffer requirement, a lower counter-cyclical capital buffer than the target in force will imply constraints on institutions’ distributions of earnings until the buffer target is reached, The counter-cyclical capital buffer requirement is discussed in more detail in section 3.8 on macroprudential supervision.

It has been found that, in many institutions, the risk-weighted assets have been particularly low as a consequence of the use of internal risk models within the IRB approach to the calculation of capital requirements. The Basel Committee has therefore recommended that the new, risk-weighted capital requirements should be supplemented by a new tier 1 capital requirement for non-risk-weighted assets (the balance sheet and certain off-balance sheet items), a so-called “leverage ratio” requirement. This requirement is intended to limit how much debt an institution can have relative to its balance sheet assets. A leverage ratio requirement can also ease the comparison of solvency across institutions which utilise different risk models and accounting standards. Both the Basel Committee and European Commission aim to implement a leverage ratio backstop in the form of a tier 1 capital requirement of 3 per cent of non-risk-weighted assets. Initially it is envisaged that the leverage ratio will be included as a pillar II measure, and that, following a process of data gathering and review, a decision will subsequently be made on whether to introduce the leverage ratio as a binding pillar I measure from 2018.

In the European Commission’s CRD IV proposal, authorities’ existing pillar II powers are largely retained, meaning that supervisory authorities will still have the ability to impose capital requirements on specific institutions beyond the minimum requirements under pillar I (following the pillar II supervisory review process), cf. Figure 3.1. A new element which may be included in pillar II under the new CRD IV is that institutions and supervisory authorities must also assess what risk the institution presents to the financial system as a whole, rather than only identifying risks to the institution.

Much of the strengthening of international minimum requirements relates to the quality of capital, i.e. what types of capital can be included in the numerator of the capital ratios. In Norway, we have utilised the flexibility in international rules and standards to impose stricter definitions of tier 1 and tier 2 capital. Moreover, many Norwegian institutions have adapted to the current minima with good margins of safety. The changes in capital requirements in line with the Basel Committee and European Commission proposals are unlikely to increase Norwegian institutions’ capital needs abruptly, since the institutions already largely meet these requirements, cf. Figure 3.2A. The figure shows that the largest banks have the lowest tier 1 capital ratios. Nevertheless, it appears that all Norwegian banks will satisfy the new of CET1 capital requirement of 4.5 per cent and the new capital conservation buffer requirement (CET1 capital) of 2.5 per cent. If a maximum counter-cyclical buffer requirement of 2.5 per cent (CET1 capital) is also taken into account, only two Norwegian banks do not already meet the combined requirements.3

According to the Commission’s CRD IV proposal, EU Member States will have to implement the new capital requirements gradually from 2013 to 2019. Under the transitional provisions in the CRD IV proposal, however, member states may introduce or phase in the new risk-weighted minimum requirements earlier than this, e.g. by full implementation from 1 January 2013. It seems that the buffer requirements can also be introduced from 2013, i.e. earlier than the proposal’s phase-in plans. As mentioned, the Ministry takes the view that it is important for Norway to continue to utilise national flexibilities under the EEA Agreement, to ensure that the Norwegian regulatory framework continues to make the best possible contribution to financially sound financial institutions. The extent of this flexibility will depend on the final wording of the EU legislation, and on the decisions of the EEA Joint Committee. It is particularly important for Norway and the other EEA/EFTA countries that, in the future, the rules are not subject to maximum harmonisation, but rather minimum harmonisation, as they have been until now, and as the Basel Committee has envisaged in its Basel III standards. This view has been communicated to the European Commission in a memorandum of 12 January 2012 from the EEA/EFTA countries. In the memorandum, the main message with regard to capital requirements was summarised as follows:

“The EEA EFTA States are … of the opinion that each EEA Member State must retain the necessary competence to set higher capital requirements than the minimum capital requirements where this is appropriate based on financial stability considerations.”

The financial crisis revealed that the social costs of banks suffering financial difficulties can be very large. The more equity capital a bank has, the smaller the risk of financial difficulties, as this capital can absorb losses during ongoing operations. Internationally, it was evident during the financial crisis that many banks did not have enough capital, and not of high enough quality, to support the banks as going concerns. Higher capital requirements, and in particular higher CET1 capital requirements, are therefore socially benefitial.

It is not necessarily the case that banks’ overall funding costs will increase with the equity capital ratio, cf. Box 2.9 in Chapter 2. Since more equity capital means less risk for both owners and creditors, banks can expect a decline in the return on equity required by investors, as well as a decline in their funding costs. From a social perspective, it is also worth noting that if banks with low equity capital ratios are considered more attractive investment objects than banks with higher equity capital ratios, this may partly be due to perceptions by owners and creditors that their assets are subject to an implicit government guarantee. When something serves the interests of owners and creditors, the opposite may be true of society. In the case of implicit government guarantees, increased funding costs for banks resulting from a higher equity-to-assets ratio will not represent a social cost.

It is preferable to introduce stricter capital requirements while the economy is performing fairly well. For many European countries, it may be difficult to introduce stricter capital requirements for banks, because their economies are suffering downturns. The Norwegian economy is relatively strong. It may be sensible to introduce the new capital requirements in Norway now, while economic conditions are good, so that the increased capital can function as a buffer when economic conditions worsen. In other words, there are good reasons for introducing the new capital requirements more quickly in Norway than required by the expected new EEA/EU rules.

3.2.2.2 Further on risk weights and risk-weighted assets

Banks employ either risk weights set by the authorities (the standardised approach) or risk weights calculated using internal risk models (the internal ratings based approach, or the IRB approach) when setting the denominator in the regulatory capital ratios. Internal models are, among other things, based on the losses the individual bank previously has suffered on similar assets. As mentioned in Chapter 2, there is considerable uncertainty as to how well suited current IRB models are for calculating future risk. For example, banks have historically only suffered very small losses on residential mortgages. The risk weights for residential mortgages produced by the IRB approach are therefore often very low. Accordingly, statutory capital requirements may have very different effects on actual capital requirements for different methods of calculating risk weights. The lower the risk weight, the higher the capital ratio for a given amount of capital. However, a transitional arrangement, referred to as the “Basel I floor”, requires banks which employ the IRB approach to have total capital corresponding to no less than 80 per cent of the minimum capital requirement under the Basel I rules. This floor prevents use of internal models from excessively reducing risk-weighted assets. In practical terms, this is ensured by requiring banks not to lower their risk-weighted assets below 80 per cent of the value of their risk-weighted assets calculated in accordance with the Basel I rules. In Norway, this transitional arrangement originally applied until 31 December 2011, but was extended indefinitely in December 2011. Similar transitional arrangements currently apply in all Nordic countries.

As discussed in Chapter 2, both housing prices and household debts are higher in Norway than ever before, while at the same time interest rates are very low. The credit risk on residential mortgage exposures may therefore be higher than suggested by historical losses on such exposures. This implies that banks should have more capital behind their residential mortgage lending. Internal risk models under the IRB approach may not be well-suited to determining appropriate risk weights for residential mortgages under such economic conditions. As stated in the National Budget 2012, the Ministry is considering strengthening capital requirements for residential mortgages within the boundaries of the international regulatory framework. The Ministry will consider defining minimum risk weights for residential mortgage exposures, regardless of whether banks are using the standardised approach or the IRB approach to calculate risk weights.

3.2.2.3 Further on Norway’s international cooperation on capital requirements

There may be differences between countries and banks regarding the calculation of both the numerator (what is included in tier 1 capital) and the denominator (the risk-weighted assets) in tier 1 capital ratios. It is therefore often difficult to compare solvency across countries and banks. This presents challenges to both supervisory authorities and the banks themselves. Banks should therefore contribute to more transparent measures of solvency by providing better information about how they calculate their capital requirements and capital ratios. Banks are free to publish what their capital ratios would have been under different calculation methods.

The Nordic financial markets are closely interlinked, in part because several large Nordic financial institutions have extensive operations in several Nordic countries. For example, Swedish and Danish banks hold large market shares in Norway, including in the residential mortgage market. Therefore, the stability and competitiveness of the Nordic financial system would benefit if the approach to financial markets regulation were fairly similar across the Nordic countries. This can be achieved in various ways. For example, countries may agree that loans made to borrowers in a Nordic country by a Nordic bank will be subject to the risk weights which have been set in the country in which the borrower is resident.

A Nordic working group has been appointed at the finance ministry level to assess the implementation of Basel III/CRD IV in the Nordic countries. Norway is chairing the group. The mandate of the working group reads as follows:

“Capital requirements related to banks’ lending shall reflect risk. The current Basel II rules has proved to allow for major differences in the calculation of capital requirements, for instance for mortgages, depending on whether a bank uses the so-called standard method, or internal risk models. It has also become evident that there are differences among banks using internal risk models, both within and outside the Nordic region, and among banks in each country. It is generally large banks that use internal risk models. By using internal risk models, the calculation basis, the denominator in the capital ratio, may be reduced considerably. From a financial stability point of view, there are good reasons for reducing the variation in the calculation capital requirements arising from the use of internal risk models, cf. that all banks should hold more capital behind mortgage loans.

The working group shall consider various aspects of Basel III/CRD IV and the impending implementation of this legislation into national law, including possible cooperation between the Nordic countries on the implementation of the new national legislation. In its final report, the working group shall consider inter alia the following:

• Joint implementation of the CRD IV (Basel III) with respect to more stringent capital requirements, including countercyclical capital buffer, and liquidity requirements.

• Higher risk weights for banks using internal risk models for calculation of capital requirements on mortgage loans, including coordination of these weights on a Nordic basis. Coordination includes questions regarding host country regulation and coordination of the risk weights between the countries.

• Other related issues.

• Possible cooperation between the Nordic countries on the new rules.”

The work of the group is to be completed in time for consideration at a meeting of the Nordic finance ministers in June/July 2012, but the progress here will to some extent also depend on the legislative process in the EU.

As a result of integration in the Nordic region on the supply side of the credit market, the Ministry of Finance, Norges Bank and Finanstilsynet have concluded an agreement4 with the finance ministries, central banks and financial supervisory authorities of Denmark, Estonia, Finland, Iceland, Latvia, Lithuania and Sweden concerning cooperation to prevent, handle and resolve potential problems in banks operating in several of the countries. The cooperation agreement regulates the exchange of information and coordination, with the aim of ensuring efficient crisis management and reducing the risk that a crisis will spread. The agreement is a regional extension of the cooperation agreement between the authorities in the EEA Member States concerning coordination and cooperation in the management of cross-border financial crises. The EU Member States have concluded a similar cooperation agreement.5 The EEA/EFTA countries acceded to this agreement with effect from 10 June 2010. The objective of the EU cooperation agreement, like that of the agreement between the Nordic and Baltic countries, is to facilitate coordination and cooperation between different countries’ authorities which deal with cross-border financial crises.

3.2.2.4 Systemically important financial institutions

Some financial institutions may be so large, or perform tasks which are so important, that they have an especially large influence on the financial system as a whole. Such institutions are important to the functioning of the financial system and the economy, and should therefore be particularly resistant to disruptions. Because they are so important, they may also benefit from what can be called implicit government guarantees, in the sense that market participants believe that the government will, in certain circumstances, aid institutions experiencing difficulties. Such beliefs may be expressed in the prices (interest rates) institutions are offered in financial markets. This weakens market discipline to some degree, and may result in higher risk-taking, not least in the form of lower equity capital ratios, in systemically important financial institutions. In the international regulatory debate following the financial crisis, some have argued that systemically important institutions should be subject to additional capital requirements.

It is important to reduce the risk that the global financial system will again suffer the effects of problems in financial institutions which are of global systemic importance. The Basel Committee and the Financial Stability Board (FSB) have developed proposals for special requirements imposed on systemically important financial institutions, and particularly on globally systemically important financial institutions, of which they have provisionally identified 29. The FSB put forward its proposal at the G20 summit in Cannes in November 2011, where the proposal received the support of the G20 leaders.

The proposal of the Basel Committee states that globally systemically important institutions shall be subject to internationally harmonised loss-absorbency requirements in addition to the general Basel III capital requirements. Under the proposal, the institutions would be grouped according to their systemic importance, and be subject to an additional CET1 capital requirement ranging from 1 to 2.5 per cent of risk-weighted assets. According to the Basel Committee, this additional capital requirement should be introduced in tandem with the other new buffer requirements in the Basel III standards (the capital conservation buffer and the counter-cyclical buffer), i.e. from 2016, with full effect from 1 January 2019. The Basel Committee is also working on applying these requirements to institutions which are systemically important at the regional or national level. The European Commission has stated that it will await further follow-up by the Basel Committee. Recent Council presidency compromise proposals on the CRD IV framework do not include an additional capital requirement for systemically important institutions, but rather a systemic risk buffer requirement, cf. section 3.2.1.

The FSB proposal concerns what responsibility, expertise and tools national authorities should have to deal with problems in systemically important financial institutions, and contains special requirements detailing the crisis management plans and resolution plans which globally systemically important financial institutions should be required to have in place. The proposal also covers cooperation between different countries’ authorities regarding globally systemically important financial institutions engaged in cross-border activities. The part of the FSB proposal that relates to the handling of problems in systemically important financial institutions at the national level will probably be similar to the expected European Commission proposal for new EU rules, cf. the detailed discussion in section 3.3 below.

Sweden is one of the first countries to introduce rules aiming to address the challenges presented by nationally systemically important financial institutions. Swedish authorities have stated that new minimum capital requirements will be introduced for the four largest banks in Sweden from 2013. This will involve the full phasing-in of, and somewhat stricter capital requirements than, the Basel III standards. Under the Swedish system, the CET1 capital ratio requirement applicable to these four banks will be 10 per cent from 1 January 2013, and 12 per cent from 1 January 2015. However, this additional capital requirement will apply without the so-called Basel I floor described above.

In Norway, a small group of banks holds large market shares, and the largest bank is an important source of funding for smaller banks. In the Ministry’s view, there may be grounds for considering whether Norway should also introduce special requirements for nationally systemically important financial institutions. The Ministry will return to this question at a later stage.

3.2.3 Funding structure and liquidity requirements

Banks can both make money and provide an important service to savers and borrowers if they are able to convert liquid, short-term deposits into long-term loans. However, the level of risk an individual bank considers appropriate to assume for commercial reasons may be very different from the bank’s level of liquidity risk which is deemed appropriate on the basis of wider financial and economic stability considerations. As discussed in Chapter 2, banks and mortgage companies fund their activities through both retail deposits and borrowings in wholesale funding markets. In recent years, a larger proportion of the overall funding of Norwegian banks and mortgage companies has come from wholesale funding. As banks also lend large sums to one another, liquidity failure in one bank can quickly cause liquidity problems for other banks, and spread to the entire banking system.

Current Norwegian regulations set qualitative requirements for liquidity management, thus reducing the liquidity risk of banks and other financial institutions. In the Financial Markets Report 2010 and the National Budget 2012, the Ministry described how the Basel III standards and the expected CRD IV rules will impose stricter requirements for credit institutions’ liquidity management and funding structures. A liquidity ratio requirement, or LCR, requires banks to match net liquidity outflows during a 30-day period with a buffer of high-quality liquid assets. A net stable funding requirement, or NSFR, requires banks to maintain a sound funding structure over one year in a stress scenario in which assets to a certain extent have to be matched by sources of stable funding. The LCR is intended to improve the short-term resilience of banks’ liquidity risk profile, while the NSFR is intended to limit over-reliance on short-term wholesale funding and ensure a sustainable maturity structure of assets and liabilities.

Norwegian banks report quarterly to Finanstilsynet on the extent to which they meet the expected LCR and NSFR requirements, cf. Figure 3.2B. While all banks report on the LCR, only the 17 largest Norwegian banks report on the NSFR. The reporting reveals that more than half of the 17 largest Norwegian banks met the NSFR requirement at the end of 2011. Only one bank fully met the LCR as at the end of 2011. This was the only bank meeting both requirements.

The experiences from the international financial crisis call for the introduction of new, quantitative liquidity and funding structure requirements for banks. According to the European Commission’s CRD IV proposal, the introduction of such requirements in the form of the LCR and the NSFR lie some years in the future. The proposal’s provisions regarding when and on what basis the Commission is to propose quantitative minima do not explicitly allow for earlier implementation at the national level. It is therefore uncertain whether early implementation of such requirements will be consistent with the maximum harmonisation aspects of the proposal. The Ministry will nevertheless assess whether it is legally and practically possible to introduce such new liquidity and funding structure requirements earlier than envisaged in the phase-in schedule outlined in the European Commission’s CRD IV proposal.

Kilde: Finanstilsynet

3.3 Managing financial institutions in distress

Few financial institutions in Europe have been wound up as a result of the international financial crisis, even though some have required considerable aid to survive. One reason is that it is difficult to achieve an orderly winding-up of a financial institution, particularly during a turbulent period.

In previous reports to the Storting, the Ministry has discussed an expected proposal from the European Commission on an EU framework for crisis management in the financial sector. In a communication dated 20 October 2010, cf. COM (2010) 579, the Commission presented the principal elements of such a framework, in addition to a number of concrete proposals. The Commission distinguished between three types of instruments: (1) preparatory and preventative measures, (2) early supervisory intervention, and (3) resolution tools and powers.

The aim is to ensure that ailing institutions of any type and size, and in particular systemically important institutions, can be allowed to fail without risk to financial stability whilst avoiding costs to taxpayers. In the Commission’s view, the protection of public budgets requires the establishment of national funds in all EU Member States to support bank resolution.

In 2011, the European Commission carried out a public consultation on technical details of the outlined crisis management framework, but it has not yet put forward a legislative proposal. It was expected that the Commission would put forward a proposal on an EU framework for crisis management by the summer of 2012. It is now uncertain what the Commission will propose in this area, and even more uncertain what will finally be adopted by the EU.

The Norwegian system for managing financial institutions in distress is established by the Guarantee Schemes Act. According to the Act, a range of different measures can be implemented, depending on how advanced the financial institution’s difficulties are and what can be done to overcome them. If necessary, the Norwegian Banks’ Guarantee Fund may, for example, issue loans, provide guarantees and inject equity capital to ensure an orderly continuation or winding-up of the institution. These statutory provisions apply in addition to Finanstilsynet’s powers to intervene early when financial institutions experience difficulties.

Even though the Norwegian crisis management framework already contains many of the elements that the European Commission has signalled that it will propose, there is room for improvement. As the Ministry has reported to the Storting previously, for example in the letter of 21 January 2011 from the Minister of Finance to the Standing Committee on Finance and Economic Affairs (concerning Private Member’s Motion 8:60 S, 2010–2011), the Ministry in June 2008 first raised the question of amendments to the Guarantee Schemes Act with Kredittilsynet (now Finanstilsynet). Then, the Ministry by letter of 23 June 2009 asked the Banking Law Commission to consider and draft a revision of the Guarantee Schemes Act and related regulations. As the work of the Banking Law Commission is proceeding parallel to the work of the EU on crisis management and on changes to the deposit guarantee scheme directive, the Banking Law Commission is required to adapt its proposals to developments in EU law. As stated in the National Budget 2012, the Ministry has also asked the Banking Law Commission to consider related proposals from the Norwegian Financial Crisis Commission.

In accordance with the provisions in the Guarantee Schemes Act, the target level of the Norwegian Banks’ Guarantee Fund implies a “ceiling” on the size of the Fund. The reason is that member banks are not obliged to pay fees to the Fund if the Fund is at or above its target level. The Ministry has concluded that there may now be good reasons for removing this “ceiling” on the size of the Norwegian Banks’ Guarantee Fund. This will allow the Fund to build up capital, so that it is better prepared to handle potential problems in larger banks, and problems affecting several banks at once. Other advantages of removing the “ceiling” are that banks will have to pay fees every year for the valuable deposit guarantee provided by the Fund, and that payment of fees will be smoother and more predictable for banks. Because the Fund’s capital has exceeded the Fund’s target level in some years, there have been several instances where member banks have not had to pay the annual fees, most recently in 2011 and 2012, cf. Box 2.3 in Chapter 2. The Ministry has issued a public consultation on a draft proposal to abolish the Guarantee Fund “ceiling”, cf. the Ministry’s consultation letter.

Changes to the European deposit guarantee scheme directive are currently under discussion in the EU, cf. section 3.4 below. The current target level of the Norwegian Banks’ Guarantee Fund is many times higher than the target levels being discussed in the EU (measured as a proportion of guaranteed deposits). The changes to the deposit guarantee scheme directive will nevertheless imply new rules for risk-based deposit guarantee fund fees, in addition to a number of other changes to the Norwegian system.

3.4 The deposit guarantee scheme

The Norwegian deposit guarantee scheme is an important part of Norway’s financial markets regulation, cf. also the discussion in Box 2.3 in Chapter 2. The scheme contributes, importantly, to consumer protection, and helps to ensure that customer deposits provide a good and stable funding source for banks. The scheme thus boosts confidence in the Norwegian banking system, and promotes financial stability. The international financial crisis in 2008 showed that the Norwegian scheme was one of few European schemes able to withstand a severe financial crisis. Norway was also the only EU/EEA country in the OECD area which did not introduce extraordinary government guarantee measures during the international financial crisis.

The Ministry has reported to the Storting regularly on the developments in the EU legislation governing deposit guarantee schemes, and on the extensive efforts of the Norwegian government and the Ministry to maintain the current coverage level (since 1996, NOK 2 million per depositor per bank), for depositors resident in Norway.

In 2009, the EU adopted changes to the deposit guarantee schemes directive (directive 94/19/EC), which among other things introduced full harmonisation of the coverage level at EUR 100,000 for national deposit guarantee schemes from 1 January 2011. When the European Commission in July 2010 put forward a proposal for a new, comprehensive directive on deposit guarantee schemes to replace the current directive, the Commission retained the coverage level fully harmonised at EUR 100,000. In addition, the Commission proposed, among other things, that schemes should be pre-funded, that banks should make risk-based contributions (fees) to schemes, and that bank account holders should be reimbursed within seven days. The Council and the European Parliament are currently discussing the Commission’s proposal.

While fully harmonising the deposit guarantee coverage level at EUR 100,000 constitutes a major improvement of most EU/EEA countries’ schemes, implementation of this coverage level in Norway would reduce the current coverage level by some 60 per cent.

In the “Soria Moria II Declaration”, i.e. the current political platform of the Norwegian Government, it is stated (on page 18) that “The Government shall defend the Deposit Guarantee Scheme for bank deposits in Norwegian banks”. In its Recommendation to the Storting on the Financial Markets Report 2010, a unanimous Standing Committee on Finance and Economic Affairs stated the following:

“Further, the Committee is of the strong opinion that the financial crisis has shown how important it is to have a good deposit guarantee scheme to protect bank deposits during turbulent periods. In the Committee’s view, the Norwegian deposit guarantee scheme has played a vital role in protecting the rights of depositors and stabilising deposit coverage in banks. In this way, the scheme probably helped to ensure that retail deposits, to a greater extent than otherwise, provided a stable funding source for Norwegian banks during the financial crisis. The Committee therefore gives its full support to the government’s efforts vis-à-vis the EU to ensure the continuation of the Norwegian deposit guarantee.”

In the National Budget 2012, the Ministry of Finance stated the following:

“Negotiations are currently underway between the European Parliament, the Council and the Commission, with the aim of agreeing a compromise. The Ministry of Finance is working very actively on this matter.”

The Ministry has worked extensively on this matter from day one, and reported to the Storting in, for example, the annual financial markets reports and the national budget reports, most recently in the National Budget 2012. The Ministry has, among other things, attended various meetings, exchanged extensive correspondence, and held many discussions with the European Commission and the finance ministers of EU Member States regarding the changes to the deposit guarantee scheme directive. At a plenary session on 16 February 2012, in response to a proposal from the ECON committee, the European Parliament adopted (by 506 votes to 44) a measure which supports Norway’s desire to retain the current coverage level of NOK 2 million per depositor per bank for depositors resident in Norway. The government and the Ministry are continuing to work actively on this matter.

3.5 New solvency requirements for insurance companies (Solvency II)

In April 2009, the EU Parliament adopted directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance, called the Solvency II directive.

Among other things, the Solvency II directive incorporated the consolidated life assurance directive and the three “generations” of non-life insurance directives. One of the objectives of the new directive is to ensure that European insurance companies are subject to requirements concerning technical provisions and solvency that better reflect the risks inherent in insurance companies. A difference between the Solvency II directive and previous EU insurance directives is that Solvency II is primarily a full harmonisation directive, meaning that Member States may neither introduce stricter nor less stringent requirements for companies than those commanded by the directive.

Solvency II is based on a three pillar approach, much like the Basel standards for capital requirements for credit institutions. Pillar I contains quantitative solvency requirements, including requirements relating to technical provisions, a solvency capital requirement (SCR) and a minimum capital requirement (MCR). If the solvency capital requirement is breached, the supervisory authority shall require that the company restore its solvency, while the company’s licence shall be withdrawn if the company fails to satisfy the minimum capital requirement (and the requirement is not met within a short period). Pillar II contains rules on, among other things, supervision and monitoring. Subject to certain limitations, these will allow individual capital requirements to be set based on individual insurance companies’ risks. The pillar II rules also permit the imposition of risk management and internal control requirements. Pillar III covers supervisory reporting and disclosure.

On 19 January 2011, the European Commission proposed a new directive, referred to as the Omnibus II directive proposal, regarding changes to, inter alia, the Solvency II directive. The Omnibus II directive will probably be adopted by the Council and the Parliament in the first half of 2012. Discussions to date indicate that the Commission’s proposal will be moderated in the final directive, and that the entry into force of key parts of the Solvency II framework will be postponed until 1 January 2014. The Omnibus II directive is likely to imply that the Solvency II implementation deadline will be 1 January 2013, and that Solvency II provisions concerning, for example, the approval of internal models for calculating the solvency capital requirement will enter into force in 2013. The most important provisions in the Solvency II framework will probably take effect on 1 January 2014.

The final form of the Solvency II framework as a whole will depend on the content of the European Commission’s level 2 implementing measures. The Commission is expected to adopt the Solvency II implementing measures in the form of a regulation. The regulation will apply directly as law in EU Member States, and it is planned that the regulation will enter into force simultaneously with the Solvency II directive itself. Transitional provisions will also apply in this area.

On 1 March 2012, the Storting approved the incorporation of the Solvency II directive into the EEA Agreement, cf. Recommendation 192 S (2011–2012) and Proposition 54 S (2011–2012).

On 31 May 2011, the Ministry issued a public consultation on the report NOU 2011: 8 on new financial legislation prepared by the Norwegian Banking Law Commission. The consultation was closed for comments on 30 September 2011. The report of the Banking Law Commission contained a draft of a new Financial Undertakings Act, which is to contain all Norwegian legislation relating to financial undertakings and financial groups. The draft law also contained draft rules to implement new EEA rules corresponding to the Solvency II framework. The consulted bodies largely supported the structure of the draft act proposed by the Banking Law Commission. Moreover, the Ministry on 24 October 2011 issued a public consultation on a memorandum from Finanstilsynet, also containing draft rules for the implementation of new EEA rules corresponding to the Solvency II rules, with a deadline for comments on 6 January 2012. As mentioned in the Ministry’s consultation letter of 24 October 2011, the Ministry envisages incorporating new EEA rules corresponding to the Solvency II framework into the new Financial Undertakings Act, which is to be based on the draft proposed by the Banking Law Commission in the NOU 2011: 8 report. The Ministry aims to submit a proposition to the Storting on the new Financial Undertakings Act in the autumn of 2012.

The new solvency rules under the Solvency II framework imply substantial regulatory changes for Norwegian insurance companies. Among other things, assets and liabilities must be valued at market value. For Norwegian life assurance companies, which currently discount assets and liabilities using a fixed calculation rate, this makes visible the companies’ challenges from very low market interest rates. These challenges are also influenced by various other factors, including the final wording of the EU’s Solvency II framework and the proposals on which the Banking Law Commission is working, cf. the discussion in Chapter 2.

In Norway, current solvency rules for insurance companies are in part based on the Solvency I directive, which mainly concerns the liability side of insurance company balance sheets. To ensure a more comprehensive regulation, Norwegian insurance companies are also subject to capital requirements for asset side risks, which is not common in other countries. Fundamentally, it is desirable to impose solvency rules that take risks on both sides of insurance company balance sheets into account.

As mentioned in Chapter 2 and above, the Norwegian Banking Law Commission is currently working on draft rules on new types of pension schemes. Such new schemes will ease the transition to Solvency II for Norwegian life insurance companies.

3.6 Securities markets

3.6.1 Investment services (MiFID review)

Over time, it has become increasingly common for banks and others to provide advice and offer securities and savings products to consumers and other non-professional investors. This has given non-professional investors easier access to the financial markets and various financial products.

On 20 October 2011, the European Commission proposed a revision of the current EU legislation governing securities markets. Under the proposal, the current Markets in Financial Instruments Directive (directive 2004/39/EC, abbreviated to MiFID) would be replaced by a new directive and a regulation. The proposal is currently being discussed in the Council and the Parliament.

In its proposal, the Commission has drawn up a requirement for all organised trade to take place on regulated trading platforms, and a range of other amendments intended to strengthen investor protection, including stricter requirements for investment advice. Moreover, the Commission sets out modifications to conduct of business requirements in order to grant additional protection to investors. The Commission’s proposal includes rules on the sale of packaged retail investment products (PRIPs), cf. also section 3.9.4 below.

The proposal implies strengthening of supervisory authorities’ powers. Among other things, it foresees stronger supervision of derivatives markets, and empower supervisors to intervene in certain circumstances, for example by imposing position limits. It will also become easier for supervisory authorities to sanction breaches. Other proposals include the following:

• Supervision will be improved through a tightening of the rules on reporting and consolidation of information about completed transactions, and through stricter requirements regarding who may lead or sit on the board of an investment firm.

• The scope of applicability of the rules will be expanded, as the definition of financial instruments in the proposal has been widened to include emissions quotas under directive 2003/87/EC.

The Commission’s proposal for a new regulation also include the following elements:

• Requirements for the publication of information on sale and purchase offers, sale prices, and the volumes and timing of trades, including other types of financial instruments than shares, such as bonds and derivatives. The rules will be identical for all trading systems.

• In accordance with decisions of the G20, it has been proposed that trading in standardised OTC derivates must occur in regulated markets or on other electronic trading platforms.

• Rules will be introduced to ensure competition between key counterparts in relation to the settlement of transactions involving financial instruments.

• National supervisory authorities and the European Securities and Markets Authority (ESMA) will be empowered to introduce bans on certain products or activities.

• Regulation of the provision of services within the EEA area by firms in third countries. Firms which intend to provide investment services to non-professional customers must establish a branch within the EEA.

The current MiFID directive has been incorporated into the EEA Agreement, and EEA rules corresponding to the MiFID directive have been implemented in Norwegian legislation. The Ministry expects the new directive and the regulation to be included in the EEA Agreement and implemented in Norwegian legislation.

3.6.2 Short selling and credit default swaps

As the Ministry has discussed in previous financial market reports to the Storting, sale of financial instruments which the seller does not own – short selling – was subject to temporary limitations in several countries during the international financial crisis. In Norway, the rules on short selling were tightened in 2010, cf. Proposition 84 L (2009–2010) and Recommendation 247 L (2009–2010).

The EU has adopted a regulation on short selling and certain aspects of credit default swaps, cf. Regulation (EU) No. 236/2012 of the European Parliament and of the Council of 14 March 2012. The regulation imposes, among other things, notification and disclosure requirements for short positions above certain thresholds, for both shares and EU sovereign bonds. The requirements apply to short positions achieved by the use of derivatives and credit default swaps (CDS), and through short selling. In exceptional situations, national supervisory authorities are empowered to impose restrictions on short selling and credit default swap transactions, subject to coordination by the European Securities and Markets Authority (ESMA). In certain circumstances, ESMA may also implement temporary measures, such as restrictions on short selling. Moreover, the regulation requires that short selling must be covered, i.e. that the seller has borrowed the securities, or arranged that they can be borrowed, before the short sale. This reduces the risk of settlement failure.

The regulation on short selling and certain aspects of credit default swaps will enter into force in the EU on 1 November 2012.

Several of the provisions in the adopted regulation are already found in the Norwegian Securities Trading Act as a result of legislative amendments made in 2010. Nevertheless, it seems likely that new EEA rules corresponding to the changes in EU legislation in this area will necessitate amendment of the Securities Trading Act to ensure that the regulation can apply in Norway.

3.7 The new EU supervisory system

On 1 January 2011, the EU established a new European supervisory system intended to strengthen supervision of the entire European financial sector and to improve the basis for financial stability. The new supervisory system adopts a two-track approach. While the European Systemic Risk Board (ESRB) is responsible for monitoring systemic risk in the European financial market as a whole, three supervisory authorities conduct supervision at the micro level, in the banking, insurance and pension and securities markets. The new supervisory system is discussed in greater detail in Chapter 3 of the Financial Markets Report 2010.

It is envisaged that the EEA/EFTA countries (Iceland, Liechtenstein and Norway) will be allowed to participate in the ESRB on an ad hoc basis. The participation will be limited to discussion of topics of special relevance to the EEA/EFTA states. It is further envisaged that the EEA/EFTA countries will have permanent observers in place in the three micro-level supervisory authorities. In practice, this system will continue the current participation of the EEA/EFTA countries in the predecessors of the three new supervisory authorities, and is in this regard acceptable to Norway. Participation on an ad hoc basis will not fully meet Norway’s need to exercise influence and exchange information. At the micro level, it will be problematic for Norway that the three supervisory authorities have been granted authority to make decisions in specific areas which bind both national supervisory authorities and institutions. The delegation of such supranational authority to an EU body other than the European Commission is a fairly new development. Overall, this design presents a challenge to the EEA/EFTA countries and to the structure of the EEA Agreement. According to its constitution, Norway cannot subject Norwegian legal persons to the authority of a supranational body of which Norway is not a member.

Along with Iceland and Liechtenstein, the Norwegian authorities are now negotiating with the EU to ensure that account is taken of the constitutional challenges and delimitations involved in incorporating the supervisory schemes into the EEA Agreement.

3.8 Macroprudential supervision of the financial system

3.8.1 Introduction

There is broad international consensus that regulation of the financial markets and financial institutions needs to be strengthened, and that regulations need to be made less pro-cyclical. In addition, more and more emphasis is being given to macroprudential supervision, in addition to “microregulation” of markets and institutions. In short, macroprudential supervision involves supervision and regulation of the risk associated with the financial system as a whole (systemic risk). See the further discussion of the terms “macroprudential supervision” and “systemic risk” in Box 2.7 and section 2.4.6 in Chapter 2.

As stated in section 3.2.2, the Basel III standards and the CRD IV framework will require the introduction of a counter-cyclical capital buffer, i.e. an additional common equity tier 1 capital requirement, which will vary through economic cycles. In September 2011, the Ministry of Finance appointed a working group comprising members from Norges Bank, Finanstilsynet and the Ministry itself to report on macroprudential supervision in Norway, and particularly on questions linked to a counter-cyclical capital buffer. The group also considered a proposal by Finanstilsynet concerning a statutory power to adopt regulations on prudent lending practices.

The working group delivered its report to the Ministry on 27 January 2012. The Ministry then issued a public consultation on the report, which was closed for comments on 9 March 2012.

3.8.2 The working group’s report

3.8.2.1 Proposals on policy tools

The group discussed the term “macroprudential supervision”, and sought to distinguish between macroprudential supervision and microregulation. In the report, the group discussed various policy tools in the context of macroprudential supervision, including requirements relating to banks’ lending practices (loan-to-income and loan-to-value limits), risk weights for the calculation of capital requirements for residential mortgage exposures, quantitative liquidity requirements, additional capital requirements for systemically important banks, etc. Some of these tools are in use today, while the use of others is permitted by current legislation. The group did not propose changes to the institutional framework for, or use of, tools which are already permitted by current legislation.

As stated, Finanstilsynet has proposed to the Ministry that the Ministry should be granted statutory authority to adopt regulations on prudent lending practices. The Ministry asked the working group to consider this proposal. In the report, the group proposed a wider statutory authority than originally outlined by Finanstilsynet. The reason for this is that measures may be needed to prevent the build-up of systemic risk in the financial system in general, not limited to banks’ lending practices. According to the group’s proposal, the Ministry of Finance would be authorised to set specific requirements for financial undertakings on the grounds of financial stability considerations. The group proposed that the statutory authority was to be included in the new act on financial undertakings and financial groups.

3.8.2.2 Institutional organisation of the counter-cyclical capital buffer requirement

High credit growth often results in imbalances in the economy and increases the risk of bubbles in, for example, the housing market. In short, a counter-cyclical capital buffer involves raising banks’ minimum tier 1 capital requirement when credit growth is high. Under the European Commission’s CRD IV proposal, this requirement would also affect foreign banks’ operations in Norway. Under the CRD IV proposal, the level of the buffer would normally be set based on deviations from the long-term trend of the credit-to-GDP ratio. The aim is both to strengthen the banks and to dampen high credit growth.

The CRD IV proposal envisages that the authorities will set the counter-cyclical capital buffer requirement quarterly. As a general rule, the requirement should lie between 0 and 2.5 per cent of risk-weighted assets. Changes should be permitted in steps of at least 0.25 percentage points. In special cases, the buffer requirement could also be set higher than 2.5 per cent. Under the expected EU rules, requirements of up to 2.5 per cent will also apply to foreign branches in the host country setting the requirement. Both decisions concerning the level of the requirement and the basis for the decisions are to be made public.

The group discussed four different models for organising the setting of the counter-cyclical buffer requirement in Norway. The four models can be summarised as follows:

1. The existing division of responsibilities is continued: some decisions are taken by Finanstilsynet, some by Norges Bank and some by the Ministry of Finance. The Ministry makes its decisions based on advice and input from Norges Bank and Finanstilsynet.

2. Norges Bank is given formal responsibility for advising Finanstilsynet on the counter-cyclical buffer. Finanstilsynet must either follow the advice or explain why it chooses not to do so. Both the advice and the explanation must be made public.

3. Norges Bank develops a decision-making basis and makes decisions concerning the counter-cyclical buffer.

4. A special committee is appointed and given responsibility for making decisions relating to the counter-cyclical buffer. Such a committee may be composed of representatives from Norges Bank, Finanstilsynet and the Ministry, possibly with the addition of independent members.

The majority of the working group’s members favoured the model in which Norges Bank is given responsibility both for developing a basis for making decisions relating to the counter-cyclical buffer and for making the decisions, cf. model 3 above. The reasons given by the majority for this view included that the expected EU legislation will provide for a fairly clear organisational framework (the same authority should be responsible for the decision-making basis and the decision), that the task will be difficult and resource-intensive, and that Norges Bank already has the resources to prepare macroeconomic evaluations.

The minority of the group’s members favoured a model in which the Ministry of Finance set the counter-cyclical capital buffer requirement based on recommendations from Norges Bank and Finanstilsynet, cf. model 1 above. In the minority’s view, the need to ensure coordination of the counter-cyclical buffer requirement with capital requirements in general requires that the decision be taken by the Ministry of Finance or Finanstilsynet.

3.8.3 Consultation

All who have commented on the topic have supported the proposal that Norges Bank should develop a basis for the counter-cyclical capital buffer requirement decision. Finanstilsynet took the view that it, along with Norges Bank, should assess the need to introduce and remove a counter-cyclical buffer requirement.

Norges Bank, the Norwegian Confederation of Trade Unions (LO) and the Confederation of Norwegian Enterprise (NHO) supported the majority proposal that the authority to make the counter-cyclical capital buffer requirement decision should also be delegated to Norges Bank. Norges Bank pointed out that such delegation of authority would require a clear delimited framework and sufficient independence in Norges Bank’s use of the policy tool, to avoid the development of a practice that may sow doubt about Norges Bank’s independence in monetary policy issues.

Finance Norway (FNO), the Association of Norwegian Finance Houses and the Norwegian Society of Financial Analysts took the view that Finanstilsynet should make the counter-cyclical capital buffer requirement decision based on Norges Bank’s advice. Finanstilsynet was primarily of the opinion that the Ministry of Finance should make the counter-cyclical capital buffer requirement decision, or alternatively that the authority to make the decision should be delegated to Finanstilsynet.

3.8.4 The Ministry’s follow-up

The Ministry of Finance is of the opinion that the counter-cyclical capital buffer requirement is needed. Such a requirement would make banks more resilient during economic downturns.

The Ministry envisages giving Norges Bank primary responsibility for developing the basis for the counter-cyclical capital buffer requirement decision. It is important that Finanstilsynet and Norges Bank cooperate and exchange relevant information during the development of the decision-making basis.

In Norway, roles and responsibilities are divided between the Ministry of Finance, Norges Bank and Finanstilsynet. The Ministry of Finance has overall responsibility for financial stability, and sets capital requirements for financial institutions. A counter-cyclical buffer requirement will be a new and important tool in the Norwegian regulatory framework. Authority to set the counter-cyclical buffer requirement will lie with the Ministry of Finance until some experience with this new tool is gained.

In addition, the Ministry endorses the working group’s proposal on the establishment of a statutory power for the Ministry to set specific requirements for financial undertakings on the grounds of financial stability considerations. The Ministry aims to incorporate and further discuss this statutory authority in the proposal for the new act on financial undertakings and financial groups, cf. the draft act presented by the Banking Law Commission in its report NOU 2011: 8. As mentioned above, the Ministry aims to submit a proposition to the Storting on the new act in the autumn of 2012.

Finally, the Ministry endorses the working group’s unanimous recommendation not to change the institutional framework for, or use of, policy tools already permitted for use by current legislation.

3.9 Consumer protection

3.9.1 Introduction

Norwegian authorities have given great emphasis to the interests of consumers when formulating financial markets legislation. One important task of the authorities in the consumer context is to contribute to solvent financial institutions. This is important not only for the economy as a whole, but also for individual consumers with claims in the financial market in the form of bank deposits, insurance claims, pension savings, fund investments or other investments in securities.

3.9.2 Follow-up of the Financial Crisis Commission’s proposals to strengthen consumer protection

In its report NOU 2011: 1, the Norwegian Financial Crisis Commission made several proposals regarding strengthened consumer protection in financial markets, cf. the discussion of this issue in the National Budget 2012. Among other things, the Commission proposed that Finanstilsynet’s responsibility for protecting consumers’ rights in financial markets should be stated explicitly in the Norwegian Financial Supervision Act.6

Finanstilsynet conducts supervision to ensure that financial institutions comply with laws and regulations. Finanstilsynet has a clear mandate to engage in consumer protection and to provide consumers with information. This follows directly from section 3 of the Financial Supervision Act, and implicitly from the fact that the Storting approves Finanstilsynet’s budgets. The mandate is also found in the annual allocation letter to Finanstilsynet from the Ministry of Finance. Under section 3 of the Financial Supervision Act, Finanstilsynet is required, among other things, to “ensure that the institutions it supervises function in an appropriate and confidence-inspiring manner in accordance with laws and regulations issued pursuant to law, and in accordance with the reason for the establishment of the institution, its purpose and its statutes.”

This provision means that Finanstilsynet, as part of its supervisory activities, must seek to ensure the achievement of the objectives of the various statutory provisions which are intended to protect consumers, for example the provisions of the Financial Contracts Act and the Insurance Contracts Act. In a letter to Finanstilsynet of 30 July 2010, the Ministry of Finance emphasised the need for stricter supervision of consumer-related issues. Among other things, the Ministry wrote the following:

“In view of the complexity of today’s financial markets, and given the continuous marketing of new financial products, it is even more important than before that Finanstilsynet has a strong focus on consumer-related issues, and that it conducts effective supervision in this area, including by ensuring that financial institutions provide relevant and comprehensible information about the different financial products.”

On 27 March 2012, as part of the Ministry’s follow-up of the Financial Crisis Commission’s proposals, the Ministry invited comments on a draft statutory amendment which will ensure that Finanstilsynet’s responsibility for promoting financial stability and protecting consumers’ rights in financial markets is laid down explicitly in the Financial Supervision Act.

The Ministry is following up on another proposal by the Norwegian Financial Crisis Commission by strengthening banks’ disclosure duties vis-à-vis borrowers when mortgages are transferred to mortgage companies and the right of set-off lapses. It is important that bank customers are told clearly that they have no right of set-off against their bank when the mortgage is held by a mortgage company, regardless of whether the customer has already taken up or is considering taking up such a mortgage loan. The Ministry has asked Finanstilsynet to implement measures to strengthen the disclosure duty in such cases, and to prepare drafts of any necessary regulatory amendments.

As mentioned above, the Ministry aims to submit a proposition to the Storting on the new act in the autumn of 2012.

The Ministry also envisages the implementation of two other proposals by the Norwegian Financial Crisis Commission in connection with the Ministry’s proposal for the new act on financial undertakings and financial groups, cf. the draft act presented by the Banking Law Commission in its report NOU 2011: 8. The draft prepared by the Banking Law Commission already contains the proposal that financial institutions, in their marketing, should not be permitted to use names or terms which obscure the identity of the institution with which the customer will in fact establish a relationship. The second proposal of the Financial Crisis Commission states that financial institutions which do not comply with decisions of Finansklagenemnda (the Norwegian complaints board for insurance matters, banking, finance and securities funds), must cover the costs incurred by consumers in subsequent legal proceedings. The Ministry intends to work further on this proposal in connection with the new act on financial undertakings and other relevant processes relating to rules for complaints boards. The Ministry of Finance views the proposal favourably, and plan to follow up on it.

3.9.3 Finansportalen

Finansportalen is a public, internet-based information portal which collates and compares information about financial services for consumers, established on the initiative of the Ministry of Children, Equality and Social Inclusion and the Ministry of Finance. The portal provides an overview of banking, investment and insurance services. It enables consumers to monitor the market and compare prices and services. Finansportalen also offers a simple system for switching banks, and a solution which makes it easy to compare offers from different providers of non-life insurance products. The Ministry of Finance aims to adopt a regulation which will require non-life insurance companies to join Finansportalen’s comparison service for non-life insurance products.

3.9.4 Savings products

In recent years, many consumers have been given investment advice which has not been beneficial to them. One of the reasons for this may be the use of sales-based remuneration by investment firms. Previously, there could be different interpretations of the legality of sales-based remuneration. In a letter of 25 June 2010 to Finanstilsynet, however, the Ministry of Finance stated that remunerating investment advisers based directly on the customer’s investments (sales-based remuneration), is not in line with the conflict-of-interest provisions in the Securities Trading Act. Finanstilsynet has followed up on the Ministry’s interpretation of the law. Nevertheless, a survey conducted by the Norwegian Consumer Council indicates that consumers have often been given advice which has not been beneficial to them. On 28 February 2012, the Ministry of Finance therefore sent a letter to Finanstilsynet in which Finanstilsynet was explicitly requested to ensure that investment advisers do not give advice which boosts their own or their firm’s income at the expense of consumer interests.

The EU is working on a common regulatory framework for advice on and the distribution of so-called packaged retail investment products (PRIPs), cf. also section 3.6.1 above. The aim is to establish harmonised rules. Today, different types of products are regulated differently depending, for example, on the design of a given product and what sector offers it. It is envisaged that the new regulations will largely build on principles and provisions found in existing EU legislation, for example MiFID and the Insurance Mediation Directive in relation to good business practice requirements and the UCITS directive (on securities funds) in relation to information requirements.

Changes to the UCITS framework have also been adopted in the EU. The changes include the requirement of a new, standardised information document (key investor information document) which is intended to give investors a better decision-making basis before investing in securities funds, including by providing more comprehensible and “investor-friendly” information about risk. This requirement has been incorporated into Norwegian legislation.

3.9.5 Debt register

It has been claimed that a debt register could produce better credit ratings and prevent private individuals from ending up in debt spirals. An inter-ministerial working group has been appointed to consider different models, both private and public, for registering consumer debts of private persons. The working group will submit a report during the first half of 2012.

3.10 Auditing and accounting

3.10.1 Changes to the Audit Directive

On 30 November 2011, the European Commission proposed changes to the Audit Directive. The proposed changes are extensive, particularly as regards audits of public-interest entities (banks, insurance companies, listed companies, etc.). However, the proposal is less wide-reaching than the industry expected. Under the proposal, many of the changes will be implemented by regulation, meaning that there will be little room for national discretion.

The proposal states that public-interest entities must implement mandatory replacement of their audit company after a maximum period of six years, and that they may not switch back to the same audit company until at least four years have passed. The maximum period for which the same audit company may be used can be extended to nine years if the entity is audited by two or more audit companies simultaneously (“joint audits”). Firms are encouraged to use joint audits, but this will not be mandatory.

To avoid conflicts of interest, the proposal provides that audit companies may not offer other services than auditing (advisory services, etc.) to audit clients. Audit companies classed as “pure audit” may offer only audit services. Other activities must be separated from the audit activities by means of a separate company or similar entity, which may only have limited links with the audit company.

Under the proposal, responsibility for coordinating the supervision of the audit industry is assigned to the European Securities and Markets Authority (ESMA). It has also been proposed that a common licensing scheme should be introduced for auditors operating in the EU (a “European passport for the audit profession”), to ensure a common audit services market in the EU. Requirements have also been proposed which state that all auditors and audit companies conducting mandatory audits must follow international auditing standards.

3.10.2 New accounting directive

On 25 October 2011, the European Commission proposed a consolidated accounting directive to replace the Annual Accounts Directive (the fourth company directive) and the Consolidated Accounts Directive (the seventh company directive). The proposal for a new accounting directive supplements a proposal for simpler accounting rules for micro-enterprises which is currently being discussed by the European Council and the EU Parliament. A final decision is expected in 2012.

Among other things, the European Commission has proposed simplifications of the note requirements applicable to small enterprises, and an increase in the small-enterprise threshold values. The European Commission proposal also involves full harmonisation of the threshold values for small, medium-sized and large enterprises. Under the proposal, a small enterprise is defined as an entity with a balance sheet total of up to EUR 5 million (up from EUR 4.4 million), turnover of up to EUR 10 million (up from EUR 8.8 million), and an average number of employees of up to 50 (the same as before).

An enterprise with a balance sheet total of up to EUR 20 million, turnover of up to EUR 40 million and an average number of employees of up to 250 is defined as a medium-sized enterprise. Enterprises which are larger than this are defined as large enterprises.

The threshold values for small enterprises are higher in the proposal than in current Norwegian legislation. The Norwegian Accounting Act does not distinguish between medium-sized and large enterprises, except that public limited companies and companies listed on stock exchanges are distinguished; see section 1-5 of the Accounting Act. The difference between medium-sized and large enterprises will probably have to be included in the Norwegian Accounting Act if the proposed directive is adopted by the EU and included in the EEA Agreement.

Under the current Accounting Directive, national authorities may simplify the accounting rules for small enterprises. Under the new proposal, national authorities shall simplify national legislation. The proposal may mean that some of the note requirements currently applicable to small Norwegian enterprises will fall away.

Further, the proposal envisages that small enterprises will not have a duty to produce group accounts, something which is already enshrined in Norwegian law. The proposal upholds the exemption for small enterprises from the requirement to prepare a cash flow statement. It will still be up to each Member State to decide whether small enterprises have to prepare annual reports, as is currently required in Norway.

Another proposed change is that the Member States must follow the “substance over form” principle, which has been voluntary until now. The principle states that accounts must show the financial realities within the enterprise, not the legal form of, for example, transactions. Norway has already incorporated this principle into its accounting legislation. It has also been proposed that an “essentiality principle” be included as a fundamental accounting principle. This states that only essential information should be included in the accounts, as overly detailed accounts can be just as misleading as accounts containing insufficient information.

3.11 Follow-up of proposals by the Financial Crisis Commission

3.11.1 Introduction

In its report NOU 2011: 1, the Norwegian Financial Crisis Commission made proposals relating to many areas of financial markets regulation. The Ministry’s assessment and follow-up of the Commission’s proposals is discussed in the National Budget 2012. Further follow-up of the proposals concerning capital and liquidity requirements, macroprudential supervision, deposit guarantee schemes, crisis resolution and consumer protection is discussed in the relevant sections above. The Financial Crisis Commission’s proposals relating to pensions and life insurance have been sent to the Banking Law Commission, and the Ministry will communicate its position on these proposals in connection with the Banking Law Commission’s report on this area.

3.11.2 Financial activities tax

The Financial Crisis Commission’s proposal on a so-called activity tax on financial institutions’ profits and wage payments, intended to tax the added value created in the financial sector, is discussed in section 4.2.4 of Chapter 4 of Proposition 1 LS (2011–2012) to the Storting. The Ministry is currently assessing possible activity tax models in more detail, and will return to the issue.

3.11.3 Financial stability fee

The Ministry has considered whether it may be appropriate to introduce a financial stability fee in Norway, and whether such a fee could help to achieve the objective examined by the Financial Crisis Commission, cf. also the Standing Committee on Finance and Economic Affairs’ Recommendation 439 S (2010–2011) and the Ministry’s Financial Markets Report 2010. The Ministry has proceeded on the basis that the purpose of any financial stability fee would be to promote financial stability and reduce the likelihood that government support measures will be needed in the finance sector. Much of the financial markets legislation and many financial markets supervisory activities already have a similar objective. Moreover, the fee proposed by the Commission is similar in form to fees introduced in other countries, for example to finance measures in response to finance sector problems.

Following an overall assessment, the Ministry has concluded that the proposed financial stability fee should not be pursued further at this time. The Ministry has attached particular weight to the consideration that changes in important parts of the financial markets legislation are underway, and that it is too early to conclude on whether the regulatory framework should be supplemented by new policy tools. In addition, as mentioned in section 3.3 above, the Ministry is currently conducting a consultation on a draft proposal to abolish the “ceiling” on the size of the Norwegian Banks’ Guarantee Fund. A larger Fund will be better equipped to handle potential problems in larger banks, and problems affecting several banks at once.

3.11.4 Nibor interest rates

The Norwegian Financial Crisis Commission discussed the Nibor (Norwegian Interbank Offered Rate) interest rates in its report NOU 2011:1. Among other things, the Commission pointed out the need for greater transparency in, and clearer rules for, the setting of these interest rates. In its consultation comments, Finance Norway (FNO) informed the Ministry that FNO would formalise the setting of the Nibor rates in new regulations taking effect on 1 August 2011. In a letter of 5 October 2011, the Ministry asked Norges Bank for its views on the regulations adopted by FNO, and whether further measures should be implemented.

In its reply to the Ministry of 12 January 2012, Norges Bank pointed out that the Nibor interest rates are important reference rates in the derivatives market, and for the setting of banks’ lending rates, and that the banks in the Nibor panel should have “clear guidelines for identifying and dealing with potential conflicts of interest”. By letter dated 14 February 2012, the Ministry asked Finanstilsynet to consider introducing guidelines as suggested by Norges Bank.