OSLO Oct 13 Norway's banks will have to assume bigger lending losses on residential mortgages from next year, the finance ministry ruled on Sunday, in a move that could force banks to increase capital buffers even further.
From January 1, banks will have to use a Loss Given Default (LGD) rate of 20 percent instead of the current 10 percent in their calculations on mortgages, and maintain capital buffers accordingly, the ministry said in a statement.
Norway escaped the global financial crisis relatively unharmed thanks to massive oil wealth, but regulators have imposed strict capital rules on banks and more measures are planned, eating into profits and making banking more expensive.
Norwegian households are among the most indebted in the world and the IMF estimates that house prices are 40 percent overvalued, raising the prospect of dramatic property price falls during periods of turbulence.
The financial markets regulator is also examining the internal modelling used by banks and expects that risk weights, the assumed risk on mortgages, will be raised, the ministry added.
"This is the strictest of the four options they originally said they considered," said Jan Erik Faane, a spokesman for Finance Norway, an industry lobby group.
"Coming on top of the raised core capital demands and the recently introduced counter-cyclical buffers, this means Norway is moving faster and raising demands higher than the EU.
"Banks must build even more equity, which means either reduced lending, raising money from the owners or earning more money though cost cuts" Faane said.
The ministry said that for the top banks the actual change will be limited because Basel I capital rules already require elevated capital levels. The big change would be for foreign banks operating through branches.
Norway's regulators have already increased minimum capital requirements and will ask banks from next year to build a so-called counter-cyclical buffer, built up during periods of market prosperity.
Banks have already been forced to increase mortgage rates sharply this year, despite steady central bank rates, and house prices are now stagnating.
Norway's top banks include DNB, Nordea, Handelsbanken and Danske Bank. (Editing by Andrew Roche)