Prudential regulationi Relationship with the prudential regulator
Entities under supervision file various reports with the FSAN on which it may comment or raise questions. Communication between the FSAN and an entity under supervision will normally be in the form of written correspondence. The FSAN also has the power to give specific directives to an institution, but this is rarely done, as the supervised entities will normally follow the FSAN's guidance. The FSAN bases its supervision and monitoring of the market on global standards.
From time to time, the FSAN will conduct a physical inspection of a bank, normally with a couple of weeks' notice. The object of such inspection varies, but an evaluation of the bank's ability to monitor risks will normally be a main area of interest, as will money laundering routines. The FSAN divides risks into four categories: credit, market, liquidity and operational.
The instruments available to the FSAN are listed in Section II. The main purpose of the FSAN, according to its strategy document for the period from 2019 to 2022, are to promote and secure financial stability and a well-functioning market through six sub-goals:
- solid and liquid finance institutions;
- robust infrastructure;
- investor protection;
- consumer protection through good information and advice;
- efficient crisis management; and
- prevention of economic crime.
In its strategy, the FSAN has identified the following supervisory priorities:
- macroeconomic supervision;
- solvency supervision of financial institutions;
- supervision of the distribution of loans and trading of pension savings schemes, collective investment vehicles and other financial instruments;
- supervision of financial infrastructure, payment, trade and settlements systems; and
- supervision of compliance with the money laundering regulations.
The promulgation of the Financial Undertakings Act implies a modernisation and coordination of the corporate governance requirements of banks, which, inter alia, means that the Norwegian requirements are brought in line with international developments. As a result, certain previously required management structures, such as a committee of representatives and a control committee, are no longer required.
Commercial banks are organised either as public limited liability companies or, if established prior to 2016, as private limited liability companies, and are as such required to have a board of directors and a chief executive officer (CEO). Note, however, that a bank established as a subsidiary in a financial group may still be organised as a private limited liability company.
The general meeting is the highest body of both savings and commercial banks. The general meeting of a commercial bank is governed by the ordinary company laws. In savings banks, at least three-quarters of the members of the general meeting shall be persons who are not employed by the company. The details regarding the election of members to the general meeting in a savings bank shall be set out in the company's articles of association.
Banks with more than 200 employees might have a corporate assembly, if so agreed between the bank and a majority of the employees. The corporate assembly will have tasks such as to elect members of the board of directors and the chair of the board of directors, to supervise the board, the management and the bank's operations, and to decide in cases regarding major investments.
Banks must, as a main rule, have an audit committee, a compensation committee and a risk committee, all consisting of members of the board of directors. The purpose of the audit committee is to support and advise the board of directors with respect to, for example, internal control systems, risk management and auditing of the bank's financial statements. The compensation committee draws up proposals and issues recommendations to the board of directors regarding remuneration, and acts generally in an advisory capacity with respect to remuneration and other important personnel-related matters. The purpose of the risk committee is to support and advise the board in its role as supervisor and governing body of risk and risk control.
In addition, for banks with securities listed on a regulated market in Norway, the Norwegian Code of Practice for Corporate Governance will apply. The Code is based on the comply or explain principle, whereby companies must comply with the Code of Practice or explain why they have chosen an alternative approach.
Banks operating in Norway through a branch are not subject to the regime described above, but must nevertheless register a CEO or similar contact person with the Norwegian Business Register and the FSAN, and may also choose to have a Norwegian board of directors.
If a Norwegian branch or subsidiary of a foreign bank is subject to an internal group approval regime, the extent to which the branch or subsidiary may pass on customer information to other members of its company group will depend on the nature of the information. While Norwegian law does not contain an absolute prohibition against such arrangements, any information sharing will be subject to, inter alia, applicable banking confidentiality and data protection rules. Most foreign banks with a presence in Norway operate through a branch, which enables a more efficient flow of information between the branch and its head office. In addition, since banks are subject to strict rules with respect to risk control and capital requirements on a consolidated basis, there is a legitimate need for reporting. The law has been rather unclear on these questions, but the Financial Undertakings Act does explicitly allow for such sharing of information, as set out in Section IV.
As for remuneration policies and practices, new regulations were brought into effect as of January 2015 based on the CRD IV. In accordance with the Directive, it is not possible to award remuneration on more than 100 per cent of the basic salary. The CRD IV does, however, allow for remuneration of up to 200 per cent in some cases for EU Member States, and the MOF has implemented the same approach. The Norwegian remuneration rules are applicable regardless of the size, nature, scope or complexity of institutions. Accordingly, Norwegian regulations are in some ways stricter than those set out in the CRD IV and the European Banking Authority (EBA) guidelines, which includes, inter alia, the principle of proportionality.iii Regulatory capital and liquidity
Norwegian banks are subject to ongoing capital adequacy requirements, which implement EU directives based on the Basel III regime. Financial groups are considered on a consolidated basis. In line with the recommendations of the Basel Committee on Banking Supervision, the regulatory approach in the Financial Undertakings Act is divided into three pillars:
- Pillar I – calculation of minimum regulatory capital: banks shall at all times fulfil the own funds' requirements reflecting credit risk, operational risk and market risk. The current requirement is that a bank's own funds shall constitute at least 8 per cent of a calculation basis reflecting such risks. The Common Equity Tier 1 (CET1) capital ratio requirement is at least 4.5 per cent and the Additional Tier 1 capital ratio requirement is at least 6 per cent. Own funds can be in the form of core and supplementary capital. Core capital will typically consist of equity capital, while supplementary capital can be hybrid capital or subordinated loan capital. The capital requirements must be complied with at all times. Banks are obligated to document their fulfilment of the requirements by reporting quarterly to the FSAN;
- Pillar II – assessment of overall capital needs and individual supervisory review: banks must, inter alia, have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels. The FSAN reviews and evaluates these internal capital adequacy assessments and strategies, and it may take supervisory action if not satisfied with the result of an evaluation process; and
- Pillar III – disclosure of information: banks are required to disclose relevant information regarding their activities, risk profile and capital situation.
In addition to the minimum capital standards, Norway has adopted the following buffer standards:
- a capital conservation buffer of 2.5 percentage points in addition to the minimum CET1 capital ratio;
- a systemic risk buffer of 3 percentage points in addition to the minimum CET1 capital ratio and capital conservation buffer;
- if the financial undertaking is defined as systematically important, it has a buffer of 2 percentage points in addition to a minimum CET1 capital ratio, capital conservation buffer and systemic risk buffer; and
- a countercyclical capital buffer of 2 percentage points in addition to the CET1 capital ratio, capital conservation buffer, systemic risk buffer and, if applicable, the buffer for systematically important institutions. This buffer will increase to 2.5 percentage points from 31 December 2019.
If a financial undertaking does not meet the buffer standards, it is required to develop a plan on how to increase its CET1 capital ratio, and cannot pay dividends or make bonus payments without approval from the FSAN.
The capital requirements for banks and other financial institutions in Norway are described in detail in Chapter 14 of the Financial Undertakings Act (which implements the capital and liquidity rules in the CRD IV and the CRR). For credit risk and market risk, the calculation basis may be found using either risk weights specified in regulations, or in accordance with internal procedures. Operational risk may be calculated using one of three calculation methods: share of average income (basis method), share of income within each business area multiplied by a loss indicator determined by the MOF (template method) or internal measuring methods (foundation or advanced).
Contrary to EU law, the MOF has decided to maintain the 80 per cent Basel I floor for banks that calculate capital on the basis of internal models. However, the Minister of Finance has indicated that this floor will be removed when the CRD IV and the CRR are incorporated into the EEA agreement, which is expected during 2019.
Since July 2014, all Norwegian banks are required to report their liquidity coverage ratio and net stable funding ratio to the FSAN.
Local branches of banks incorporated outside Norway are not subject to this regime, but are primarily subject to the regime in the jurisdiction of the bank.iv Recovery and resolution
A Norwegian bank cannot be subject to ordinary insolvency proceedings (e.g., bankruptcy) in the same manner as a Norwegian company or private individual. Instead, banks experiencing financial difficulties will be subject to resolution pursuant to the rules of the Bank Recovery and Resolution Directive (BRRD) as implemented in Chapter 20 of the Financial Undertakings Act. The BRRD was implemented in Norway from 1 January 2019. The FSAN has not yet determined the minimum requirement for own funds and eligible liabilities (MREL) for individual Norwegian banks, but it is expected that this will happen during 2019. The FSAN has indicated that the banks will be granted a reasonable transitional period to fulfil the MREL. It is still unclear how the BRRD2 will affect Norwegian banks, but it is expected that Norway will adapt the legislation to the final text of BRRD2 when it is ready.
A notable feature of the Norwegian banking regulations is the generous deposit guarantee scheme, which currently covers deposits of up to 2 million kroner. In connection with the implementation of the BRRD and the Deposit Guarantee Scheme Directive, both in January 2019, the EU has exerted pressure to lower the deposit guarantee scheme coverage to the EU level of €100,000. Nevertheless, the Norwegian guarantee coverage level has been upheld, and the Parliament Standing Committee on Finance and Economic Affairs has requested the government to continue talks with the EU in order to maintain the Norwegian guarantee level. Hence, it is still uncertain whether the Norwegian guarantee coverage level will be lowered or not.