(Adds analyst, detail on risk weights, background)
By Victoria Klesty and Terje Solsvik
OSLO, March 22 (Reuters) - Norway took action on Friday to strengthen its banking system by proposing that banks meet tough new core capital requirements earlier than in most other European countries, a move likely to constrain credit growth and cool an overheated housing market.
The non-EU member, one of Europe’s healthiest economies, wants to implement tighter banking regulations to prevent a repeat of a banking collapse in the early 1990s that forced the government to rescue several big lenders.
Norwegian households are among the most indebted in the world, with a debt-to-income ratio of around 200 percent, and the Financial Services Authority, which regulates banks, this month requested approval for wide-ranging requirements on lenders to hold more capital.
Although the sector has weathered the global financial crisis with relative ease, Norway’s oil fortunes are helping fuel a housing bubble and regulators fear the kind of housing market shock seen recently in Denmark.
The government proposed banks have core capital - a measure of a bank’s financial health - of 10 percent of total assets, up from the current 9 percent, from July 1, 2014. That would rise to 11 percent from July 2015 and 12 percent from July 2016.
Those deadlines are earlier and the capital requirements tougher than in other European countries. New international capital rules devised to strengthen banks after the financial crisis require full compliance by the end of 2018.
The Finance Ministry presented four alternative methods for banks to calculate “risk weights”, a key to determining how much capital they must hold, and set a May 31 deadline for public hearings that would form the basis for the final rules.
Norway also proposed that its banks hold extra capital cushions, known as countercyclical capital buffers, of between zero and 2.5 percent of core capital.
“The targets are well within reach over the next three years - perhaps even earlier,” Finance Minister Sigbjoern Johnsen told a press conference. He said reserves had to be built in good times.
The new core capital rules were slightly stricter than expected, said Nils Christian Oeyen, analyst at SpareBank 1 Markets, although proposals regarding risk weights of household mortgages were more lenient than he anticipated.
The ministry’s mortgage-related proposals vary between using a floor on risk weights, a minimum requirement on one of the parameters used in the calculation, and a “multiplier” model.
“The capital requirements are very dependent on which risk weight you use,” Oeyen said. “The proposal (for capital requirements) is 1 or 2 percentage points stricter than expected but the full implementation date is 2016, so you have three years for large banks to comply.”
“I think that should be manageable... Obviously, the new capital requirements will be a big constraint on credit growth for the next three years without new equity issues,” he said.
Norway’s biggest bank, DNB, raised its lending rates on March 8, citing the government plans to toughen capital rules.
DNB had already reduced dividends to lift its capital levels. It reported a Tier 1 capital ratio of 10.7 percent at the end of 2012, up from 8.5 percent a year earlier and above the 9 percent regulatory minimum.
DNB, in which the Norwegian state has a controlling stake, was not available to comment.
The government is wary of the effects of rising mortgage costs in an election year, with Prime Minister Jens Stoltenberg’s centre-left coalition trailing the right-wing opposition in polls ahead of September’s vote for parliament. (Editing by Tom Pfeiffer)