OSLO, March 5 (Reuters) - Norway's financial regulator has called for more flexibility in government proposals to tighten mortgage and covered bond rules, to take account of banks' varying circumstances.
The Financial Services Authority agreed that tighter rules are needed to lower systemic risk but said they should be tailored to the balance sheet and lending portfolios of individual banks, it said in a statement late on Monday.
Norway, one of Europe's healthiest economies, wants to implement tough banking regulations to prevent a repeat of the country's banking collapse in the early 1990s, when the government had to rescue several top lenders.
Although the sector weathered the global financial crisis with relative ease, Norway's lucrative oil fortunes are fuelling a housing bubble and regulators fear a housing shock similar to Denmark's recent burst bubble.
The government asked the regulator last year to draft tougher rules and proposed to increase the risk weight on residential mortgages to 35 percent from around 10-15 percent and well above Sweden's proposed 15 percent.
The risk weight, based on the perceived risk of an asset, stipulates what percentage of loans must be backed by the minimum capital requirement.
Banks argued that such a sharp increase would curtail lending and create a competitive disadvantage because they would face much tougher rules than their overseas competition.
The regulator said the 35 percent risk weight would require banks to raise their core capital by a total of 10 billion crowns ($1.75 billion), equal to about half a year of the sector's profits.
It said a uniform 35 percent rule would actually mean an effective risk weight of between 35 and 58 percent for various banks because of differing probability of default and thus the effective value-weighted risk weight would end at 41 percent.
State controlled DNB, the country's top bank, said the regulator's comments still mean mortgage weights will rise, even if it did not provide complete clarity.
"It is obvious that the Norwegian mortgage weights are going up," it said on Tuesday. "The regulator said that the weights should be increased to reduce the pressure in the housing market, but it's not clear to what level."
The Finance Ministry said it would review the regulator's comments and use it to formulate its specific legislative proposal. ($1 = 5.7218 Norwegian krones) (Reporting by Balazs Koranyi, Camilla Knudsen and Terje Solsvik; editing by Stephen Nisbet)