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Browse Profiles > Norway > Core Principles for Effective Banking Supervision |
| Score | Rank | |
| Standards Compliance Index | 65.83 out of 100 | 7 |
| Business Indicator Index | 9.98 out of 12 | 22 |
Norway|
Core Principles for Effective Banking Supervision
According to the International Monetary Fund's (IMF) 2007 Article IV consultation report, the Norwegian financial sector is sound and well supervised and banks are well-capitalized and profitable. The Financial Supervisory Authority of Norway (FSAN) is responsible for banking supervision. The 2005 IMF Financial System Stability Assessment (FSSA) notes that Norway's banking supervisory framework has the required legal authority. It adds that the FSAN is a competent agency with a sound record of integrity of operations and the capacity to conduct effective bank supervision closely in line with European Union (EU) norms. The IMF's 2005 report further notes that Norway's prudential regulations are largely aligned with the Basel Core Principles (BCPs) for Effective Banking Supervision. Commenting in 2006 on the results of the FSSA, the FSAN mentions that Norway has a strong supervisory regime with a proper legal basis and clearly identifiable goals. The 2007 IMF Article IV report observes that Norway has implemented the recommendations of the 2005 FSSA pertaining to supervisory cooperation between the financial regulators, and cross border coordination and contingency planning. The 2007 report recommends that Norway improve the operational independence of the FSAN. This may not take place, however, because the FSAN is an administrative agency within the Ministry of Finance, which in turn is accountable to the legislature for the actions and decisions of the FSAN under Norway's parliamentary system. The IMF also adds that Norway is a part of the European Economic Area, and therefore falls into the European framework of cross border regulation and supervisory cooperation. General Overview According to the 2007 Article IV consultation report by the International Monetary Fund (IMF), the Norwegian financial sector is "sound and is well supervised" (p. 16), and banks are "well-capitalized and profitable" (p. 8); a sentiment also found in the 2005 IMF Financial System Stability Assessment (FSSA) report. The 2007 report however notes that although banks can withstand considerable interest rate fluctuations, they have been taking excessive risks with rapid credit growth and aggressive mortgage lending in a booming economy. The IMF warns that supervision needs to be tight.The Principles
According to the 2005 IMF FSSA, Norway has a clear legal framework for banking supervision, clearly defining the objectives and responsibilities of supervisors. Further, the FSAN is responsible for banking supervision, and shares the responsibility of financial stability with the NB and the MoF. The FSAN's 2007 report titled "Strategy 2006-2010" announces the FSAN's six intermediate goals, ultimately aimed at achieving financial stability and efficient markets. The first goal is to create and maintain "sound financial institutions and firms with a fit and proper management, and good internal control and risk management" (p. 12). The second goal is to maintain a robust infrastructure to ensure satisfactory settlements and payments. The third goal is to monitor household and corporate sector risks, as well as risks in the real estate and securities markets. Goal four is to create and maintain good communications with investors and financial market users and high-quality reporting by listed financial institutions. Fifth is to foster regulatory compliance within the financial community, particularly with regard to codes of conduce. Sixth is "to ensure that critical situations are handled with minimal harmful effects" (p. 14).
The 2005 IMF FSSA observes that Norway is compliant with this principle. The report commends the FSAN for its competence, operational integrity, and supervisory capacity, and notes that it enjoys operational independence with minimal external interference. The FSSA, however, advises Norway to enhance the FSAN's autonomy by clarifying its institutional relationship with the MoF, increasing the transparency of its budget and the appointment of its Board of Directors, training its employees, expanding its rule-making and licensing authority, and discouraging appeals to the MoF against its prudential decisions. The 2007 IMF Article IV report repeats the 2005 recommendation that Norway improve the operational independence of the FSAN, but acknowledges that this recommendation may not be implemented. The Norwegian authorities argue that the FSAN is an administrative agency within the MoF, which in turn is accountable to the legislature for the actions and decisions of the FSAN under Norway's parliamentary system. For this reason ministerial oversight is needed. However, the FSAN, in its 2007 report titled "Strategy 2006-2010" declares its intent to raise the issue of greater delegation of licensing authority from the MoF to itself, with a view to save time and resources.
The 2005 IMF FSSA observes that Norway was compliant with this principle. However, it recommends that Norway expand the licensing and rule-making authority delegated to the FSAN by the MoF and discourage appeals to the MoF against its prudential decisions.
According to the 2005 IMF FSSA, Norway has a clear legal framework for banking supervision, defining the objectives and responsibilities of supervisors.
There is insufficient information publicly available regarding Norway's compliance with this principle.
Per the 2006 NB annual report, the three supervisory agencies, the NB, the FSAN, and the MoF, cooperate on the issues of financial stability and crisis management on a formal basis through bi-annual tripartite meetings introduced in 2006. This structure implements one of the key recommendations of the 2005 FSSA. Nonetheless, there is insufficient information publicly available regarding Norway's compliance with this principle.
According to the 2005 IMF FSSA, "permissible activities of financial institutions are well established" (p. 27).
According to the 2005 IMF FSSA, "prudential standards for evaluating applications to license establishments...are adequate" (p. 27). Further, the MoF licenses entities with the FSAN's recommendations. The 2005 IMF Report on the Observance of Standards and Codes (ROSC) on Financial Action Task Force (FATF) Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) in Norway adds that, before granting a license to a financial institution, the MoF and the FSAN conduct checks on "fit-and-proper" requirements as well as criminal checks of the directors and managers.
According to the 2005 IMF FSSA, "rules for changes in ownership and investments are adequate" (p. 27).
According to the 2005 IMF FSSA, "rules for changes in ownership and investments are adequate" (p. 27).
The 2005 IMF FSSA observes that prudential requirements for financial institutions in Norway "to a large extent are in line with the Core Principles and established best practices" (p. 27). The report also notes that capital adequacy ratios are reported on both a solo and consolidated basis. Further, the overall CAR of Norwegian banks was 12 percent as of 2005, comfortably above the 8 percent minimum requirement of the Basel Accord. However, there is little information publicly available directly addressing Norway's compliance with this Principle.
The 2005 IMF FSSA observes that prudential requirements for financial institutions in Norway "to a large extent are in line with the Core Principles and established best practices" (p. 27). Further, the requirements on lending policies of institutions are continually assessed. The 2006 NB annual report informs that the FSAN uses the credit risk model developed by the NB - SEBRA - to supervise the loan portfolios of financial institutions. However, there is insufficient information publicly available to ascertain Norway's compliance with this principle.
The 2007 IMF Article IV report finds that loan losses and non-performing loans are low in Norway, and the banks also have adequate reserves to withstand considerable interest rate fluctuations. The report also commends the FSAN on monitoring these developments closely, and encourages it to continue ensuring good quality of assets and the adequacy of loan loss provisions and reserves in banks, especially since the Norwegian banks were adopting aggressive lending practices. In this respect, the FSAN publishes the Financial Stability Report semi-annually, detailing and assessing the banks' condition and future outlook. The 2005 IMF FSSA also observes that prudential requirements for financial institutions in Norway "to a large extent are in line with the Core Principles and established best practices" (p. 27). It, however, recommends that Norway provide the FSAN the express power to increase loan loss provisions to deal with bank weaknesses. There is little further information publicly available to ascertain Norway's compliance with this principle.
The 2005 IMF FSSA observes that prudential requirements for financial institutions in Norway "to a large extent are in line with the Core Principles and established best practices" (p. 27), and that concentration of exposure and risk management systems of institutions are also monitored. The 2006 FSAN annual report mentions that Norway has revised its regulations on large exposures as of January 1, 2007 to be in line with Basel II requirements; and that the EU Commission has also begun revision of its directives on large exposures and plans to complete it by 2008. Further the 2007 FSAN report "The Financial Market in Norway 2006: Risk Outlook" mentions that the Committee of European Banking Supervisors has been delegated the responsibility of looking into concentration risk, and is likely to take two or three years to complete the process. However, there is insufficient information publicly available to ascertain Norway's compliance with this principle.
The 2005 IMF FSSA observes that prudential requirements for financial institutions in Norway "to a large extent are in line with the Core Principles and established best practices" (p. 27). However, the FSSA notes that rules regarding connected lending need to be strengthened and clarified, to ensure that insiders got loans on business-as-usual terms. The definition of connected lending is recommended by the FSSA to include "business exposures with persons related to members of governing bodies by marriage or kinship, and to business exposures with companies in which such persons are members of the board or management" (p. 29). However, there is little further information publicly available as to Norway's compliance with this principle.
The 2005 IMF FSSA observes that prudential requirements for financial institutions in Norway "to a large extent are in line with the Core Principles and established best practices" (p. 27). The FSSA notes that the FSAN needed enhanced authority to address country risk management requirements through guidelines especially addressing country- and transfer-risk specific capital reserves in institutions. However, there is insufficient information publicly available to ascribe a compliance level to Norway with regard to this principle.
The 2005 IMF FSSA observes that prudential requirements for financial institutions in Norway "to a large extent are in line with the Core Principles and established best practices" (p. 27), and Norwegian risk management systems were regularly reviewed. The FSSA, however, advises the FSAN to issue risk evaluation guidelines with the larger objective of establishing an up-to-date banking supervision manual. The 2006 NB annual report adds that it monitors and assesses the various risks taken by banks, including market risk, on a dynamic basis, and that it finds that banks have low market risk since they are not exposed to equities and fixed income investments. In this respect, the 2007 FSAN report "The Financial Market in Norway 2006: Risk Outlook" discloses that FSAN will proactively monitor and enforce pillar 2 (Internal Capital Adequacy Assessment Process - ICAAP) capital requirement of Basel II by making "an overall assessment of risk exposure, capitalization and the quality of management and control, with particular focus on factors that render the individual bank vulnerable to the effects of a cyclical turnaround" (p. 51). The report further mentions FSAN Circular No. 21/2006, which provides detailed guidelines for assessing capital needs based on banks' risk. However, there is insufficient information publicly available to ascertain Norway's compliance with this principle.
The 2005 IMF FSSA observes that prudential requirements for financial institutions in Norway "to a large extent are in line with the Core Principles and established best practices" (p. 27), and Norwegian risk management systems were regularly reviewed. However, the FSSA recommends that Norway develop risk evaluation guidelines as part of a comprehensive bank supervision manual. In this context, the FSSA acknowledges that the FSAN has launched a project enabling a more risk based supervisory approach in Norway. The 2006 NB annual report informs that risk based liquidity management has replaced the quantitative liquidity requirement of 6 percent since 2001, and the MoF has also directed the FSAN to draft regulation dealing with the criteria for liquidity risk management. However, there is insufficient information publicly available on which to base Norway's compliance with this principle.
The 2005 IMF ROSC on AML/CFT attests that the FSAN requires all financial institutions reporting to it to have in place internal control and internal audit functions, and has adequate powers to monitor their internal control policies and practices. However, there is insufficient information publicly available regarding Norway's compliance with this principle.
The 2006 FSAN annual report states that it supervises institutional compliance with the Norwegian Money Laundering Act and prioritizes supervision in line with the FATF recommendations. The FSAN report titled "Strategy 2006-2010" attests that the FSAN supervisory rules with regard to AML/CFT are aligned with the EU requirements as well as international best practices. The 2005 IMF ROSC on AML/CFT observes that customer identification in financial institutions is not comprehensive, and "although Norway has implemented basic customer identification obligations, it has not implemented full customer due diligence requirements" (p. 4). However, there is insufficient information publicly available as to Norway's compliance with this principle.
The 2006 FSAN annual report states that the FSAN's supervision utilizes both off-site monitoring and on-site inspections, the latter building on the data collected from reports of regulated institutions, and using the risk based supervisory methodology. The FSAN further mentions that its risk based supervision is aligned with international standards, and inspects, among other things, liquidity, capital adequacy and large exposures. The 2005 IMF FSSA adds that FSAN supervision comprises both on-site and off-site monitoring in an integrated approach, and that information available to the FSAN for effective supervision is "adequate and timely" (p. 27). Nevertheless, per the FSSA, the on-site supervisory methodology could be formally spelled out in a more updated on-site inspection manual. The FSSA acknowledges that the FSAN has launched a project enabling a more risk based supervisory approach in Norway. However, there is little further information publicly available to determine Norway's compliance with this principle.
There is insufficient information publicly available regarding Norway's compliance with Principle 17.
According to the 2004 FSAN annual report, the FSAN reviewed the annual reports of financial institutions on their compliance with established laws and regulations in 2004 and found no significant deficiencies therein. Apart from this, there is insufficient information publicly available regarding Norway's compliance with Principle 18.
Per the 2005 IMF FSSA, the FSAN has the requisite authority to conduct comprehensive off-site monitoring buttressed by integrated on-site supervision. However, its on-site supervisory methodology could be formally spelled out in a more updated on-site inspection manual. The FSSA acknowledges that the FSAN has launched a project enabling a more risk based supervisory approach in Norway. The 2006 FSAN annual report states that the FSAN's supervision uses both off-site monitoring and on-site inspections, the latter building on the data collected from reports of regulated institutions and using the risk based supervisory methodology. The FSAN further mentions that its risk based supervision is aligned with international standards, and inspects, among other things, liquidity, capital adequacy and large exposures. In its 2007 report titled "Strategy 2006-2010", the FSAN declares its intent to continue giving due importance to the statutory auditor to ensure independent judgment of financial disclosures and asset management of supervised institutions in accordance with the law. However, there is little further information publicly available to ascertain Norway's compliance with this principle.
The 2005 IMF FSSA mentions a project that has been launched to enable risk based supervision of financial conglomerates. In this context, the FSSA advises the FSAN to "continue to keep the adequacy of resources under review" (p. 27). There is little further information publicly available to determine Norway's compliance with this principle.
There is insufficient information publicly available as to Norway's compliance with this principle. However, the 2006 FSAN annual report mentions that all listed banks and financial companies are required to apply international financial reporting standards (IFRS) to their financial reporting processes, starting January 1, 2007. Further, the FSAN has a financial reporting oversight division called the Section for Financial Reporting Supervision at the Accounting and Auditing Supervision Department, which is assisted in its oversight role by the IFRS Expert Committee appointed by the MoF. Norway, per the 2006 FSAN annual report, has also drafted new financial reporting regulations for banks and an "EEA-wide common reporting framework (COREP)" (p. 15) is in the works.
There is insufficient information publicly available as to Norway's compliance with this principle. The 2005 IMF ROSC on AML/CFT observes that the FSAN has adequate powers to monitor internal control practices of reporting institutions, and its power is backed by "a broad range of administrative sanctions for non-compliance, from letters requesting corrective action, orders through to fines or de-licensing" (p. 5). The 2005 FSSA also notes that Norway has the requisite framework to respond to institutions in distress situations. The FSSA states that the Financial Supervision Act authorizes the FSAN to issue orders pertaining to increasing capital reserves and restricting lending. The FSSA recommends that these orders be expanded to include "orders to force financial institutions to arrange good risk management practices, restrict activities of financial institutions in unsatisfactory condition and empower the FSAN with the authority to set adequate individual loan loss provisions and reserves" (p. 27). It also suggests that additional legally binding corrective actions should be formalized, and that corrective action to be taken against erring officials should be clarified.
The 2005 IMF FSSA finds the regulatory framework for globally consolidated supervision over internationally active financial groups to be adequate (p. 28). Further, "coordination and exchange of information with foreign supervisors to cover foreign operations by Norwegian banks... is adequate" (p. 28).
There is insufficient information publicly available as to Norway's compliance with this principle. Per the 2007 Article IV report by the IMF, the 2005 FSSA had recommended that Norway establish close cooperation with other Nordic (comprising Denmark, Finland, Iceland, Norway, and Sweden) supervisors for cross border crisis management; and that as of 2007, Norway has made progress in that area, and has continued work in improving cooperation. Another 2007 IMF publication adds that Norway is a part of the European framework of cross-border supervision. In addition, it has signed memoranda of understanding (MoUs) with other Nordic-Baltic countries: (Denmark, Finland, Iceland, Norway, and Sweden (the five Nordics), and Estonia, Latvia, and Lithuania (the three Baltics) for supervisory cooperation and information sharing. However, the arrangements lack legal sanction, and the legal framework does not address the full range of supervisory challenges entailed by monitoring large cross-border banking groups. The supervisory arrangements have also not been tested in distress situations. The 2007 IMF Article IV report informs that a cross-border crisis simulation exercise has been planned for the fall of 2007. The 2007 FSAN report titled "Strategy 2006-2010" informs the FSAN intent to continue cooperating with international supervisory authorities.
The 2005 IMF FSSA finds that "coordination and exchange of information with foreign supervisors to cover...operations in Norway by foreign financial groups is adequate" (p. 28). However, the 2007 IMF IV report, notes that the supervisory power of the FSAN is limited by the fact that it cannot monitor the capital reserves of branches of foreign banks. Another 2007 report by the IMF on financial Integration in the Nordic-Baltic Region indicates that EU directives, chiefly the Financial Conglomerates directive and the banking and capital requirements directives, establish a unified cross-sectoral supervisor and spell out its role and powers with regard to cross-border supervisory issues. Further, MoUs between countries' supervisors facilitate information-sharing. The Nordic-Baltic supervisors have additional MoUs establishing supervisory colleges to foster unified supervision and risk assessment. In this context, a few financial conglomerates came together with the aim of being incorporated as Societas Europaea (SE, or a pan-European company); however, its legal structure is still in a nascent phase. Despite the above information, there is little actual information addressing the overall compliance of Norway's practices with this principle. |
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Sources of Assessment Financial Supervisory Authority of Norway, "The Financial Market in Norway 2005: Risk Outlook," Oslo: Kredittilsynet, February 2006. Available from Financial Supervisory Authority of Norway website. Accessed on November 12, 2007. (FSAN 2006) International Monetary Fund, "Norway: 2005 Article IV Consultation--Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Norway," Country Report No. 05/196, Washington D.C.: IMF, June 2005. Available from International Monetary Fund website. Accessed on November 12, 2007. (IMF 2005a) International Monetary Fund, "Norway: Financial System Stability Assessment, including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision, Insurance Regulation, and Payment Systems," Country Report No. 05/200, Washington D.C.: IMF, June 2005. Available from International Monetary Fund website. Accessed on November 12, 2007. (IMF 2005b) International Monetary Fund, "Norway: 2007 Article IV Consultation - Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Norway," Country Report No. 07/196, Washington D.C.: IMF, June 2007. Available from International Monetary Fund website. Accessed on November 2, 2007. (IMF 2007a) International Monetary Fund, "Financial Integration in the Nordic-Baltic Region: Challenges for Financial Policies," October 2007. Available from International Monetary Fund website. Accessed on November 2, 2007. (IMF 2007b) Relevant Organizations Financial Supervisory Authority of Norway - Kredittilsynet (FSAN) Ministry of Finance - Finansdepartementet (MoF) Norges Bank (NB) Relevant Legislation/Regulation Act on Financing Activity and Financial Institutions No. 40, 1988 (Last amended in 2004) Act Relating to Norges Bank and the Monetary System No. 28, 1985 (Last amended in 2005) Act on Commercial Banks in Norway No. 2, 1961 (Last amended in 2004) Act on Savings Banks No. 1, 1961 (Last amended in 2004) European Union Directive relating to the taking up and pursuit of the business of credit institutions No. 2006/48/EC, 2006 European Union Directive on the capital adequacy of investment firms and credit institutions No. 2006/49/EC, 2006 Regulation on Minimum Standards of Capital Adequacy for Financial Institutions and Investment Firms No. 875, 1990 Regulations on Responsibility for Internal Control and on Documentation and Confirmation of Internal Control, 2001 Supplementary Sources Financial Supervisory Authority of Norway, "Annual Report 2004,"Oslo: Kredittilsynet, 2004. Available from Financial Supervisory Authority of Norway website. Accessed on November 12, 2007. (FSAN 2004) Financial Supervisory Authority of Norway, "The Financial Market in Norway 2006: Risk Outlook," Oslo: Kredittilsynet, February 2007. Available from Financial Supervisory Authority of Norway website. Accessed on November 12, 2007. (FSAN 2007a) Financial Supervisory Authority of Norway, "Strategy 2006 - 2010," Oslo: Kredittilsynet, May 2007. Available from Financial Supervisory Authority of Norway website. Accessed on November 12, 2007. (FSAN 2007b) Financial Supervisory Authority of Norway, "Annual Report 2006," Oslo: Kredittilsynet, July 2007. Available from Financial Supervisory Authority of Norway website. Accessed on November 7, 2007. (FSAN 2007c) Financial Supervisory Authority of Norway website. Last updated on November 8, 2007. Accessed on November 16, 2007. (FSAN website) Institute of International Bankers, "Global Survey 2007 - Regulatory and Market Developments: Banking, Securities, Insurance Covering 36 Countries and the EU," October 2007. Available from Institute of International Bankers website. Accessed on November 28, 2007. (IIB 2007) International Monetary Fund, "Norway: Report on the Observance of Standards and Codes - FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism," Country Report No. 05/423, Washington D.C.: IMF, December 2005. Available from International Monetary Fund website. Accessed on November 2, 2007. (IMF 2005c) Norges Bank, "Annual Report 2006," Oslo: Norges Bank, 2007. Available from Norges Bank website. Accessed on November 2, 2007. (NB 2007) |