egulation and Payment Systems (IMF Country Report 05/200)



© 2005 International Monetary Fund
June 2005

IMF Country Report No. 05/
200



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



This Financial System Stability Assessment on Norway was prepared by a staff team of the
International Monetary Fund and the World Bank as background documentation for the periodic
consultation with the member country. It is based on the information available at the time it was
completed on May 12, 2005. The views expressed in this document are those of the staff team and do
not necessarily reflect the views of the government of Norway or the Executive Board of the IMF.

The policy of publication of staff reports and other documents by the IMF allows for the deletion of
market-sensitive information.


To assist the IMF in evaluating the publication policy, reader comments are invited and may be
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publicationpolicy@imf.org
.



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International Monetary Fund
Washington, D.C.

INTERNATIONAL MONETARY FUND

NORWAY

Financial System Stability Assessment

Prepared by the Monetary and Financial Systems and European Departments

Approved by Michael Deppler and Stefan Ingves

May 12, 2005

This Financial System Stability Assessment (FSSA) is based on work undertaken during the Financial Sector
Assessment Program (FSAP) for Norway, which included visits to Oslo in October 2004 and January-February
2005. The findings were further discussed with the Norwegian authorities during the Article IV consultation
mission in March 2005. The team comprised Mark Swinburne (mission chief), Thordur Olafsson (deputy mission
chief), Ritu Basu, Nigel Davies, Jan Woltjer, and Virginia La Torre, all IMF/MFD; Etibar Jafarov (IMF/EUR);
Peter Pfund (formerly Swiss Federal Office of Private Insurance), Saul J. Carpio (U.S. OCC); and Jacob Hostrup
Andersen (Danish FSA). The main findings are as follows:
Norways financial system appears sound and well managed. Short-term vulnerabilities appear low
overall, given improved macroeconomic conditions and historically low interest rates, coupled with
generally prudent and transparent policies. Beyond the short term, however, rising household debt
levels are the most important potential risk factor and will need to be watched closely.
Although global equity price movements have helped them rebuild their balance sheets over the last
couple of years, life insurance companies and pension funds remain susceptible to market risks. This
sector continues to face longer-term challenges from the combination of low interest rates and a
historical reliance on guaranteed-return products.
Stronger risk management measures to reduce liquidity pressures are needed in the securities
settlement system and also the retail payments system. Continued monitoring of contagion risks of
other sorts is also needed.
Overall, supervision of financial institutions in Norway is active, effective, and closely in line with EU
norms. Nevertheless, it would be desirable to further strengthen the de jure operational autonomy of
the supervisory agency in a few respects, and there are a few areas where further specification of
requirements or guidelines should be completed. Crisis management arrangements are generally well
developed, but more work is needed regionally in relation to cross-border conglomerates, and locally
in respect of the largest individual bank. In time, reviews of deposit insurance arrangements, and state
ownership in the largest bank, would be desirable.
The main authors of this report are Messrs Swinburne and Olafsson, and Ms. Basu, with contributions from other
team members.

FSAPs are designed to assess the stability of the financial system as a whole and not that of individual
institutions. They have been developed to help countries identify and remedy weaknesses in their financial sector
structure, thereby enhancing their resilience to macroeconomic shocks and cross-border contagion. FSAPs do not
cover risks that are specific to individual institutions such as asset quality, operational or legal risks, or fraud.

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Contents Pages

Glossary.................................................................................................................................................. 3
Executive Summary ............................................................................................................................... 4
I. Potential Sources of Risk .................................................................................................................... 7
A. Macroeconomic Environment .............................................................................................. 7
B. Major Counterparties .......................................................................................................... 10
II. Strengths and Vulnerabilities........................................................................................................... 13
A. Institutions .......................................................................................................................... 13
Banks.......................................................................................................................... 13
Insurance and Pensions .............................................................................................. 14
Stress Testing ............................................................................................................ 15
B. Markets and Systemic Liquidity Arrangements ................................................................. 17
C. Infrastructure....................................................................................................................... 18
Payments and Securities Settlement Systems............................................................. 18
Corporate Governance, Accounting and Auditing ..................................................... 19
D. Strategic Risks and Structural Issues.................................................................................. 20
Pensions reform and capital market development...................................................... 20
Competition, entry, and state ownership .................................................................... 20
III. The Financial Stability Policy Framework..................................................................................... 21
Regulation and Supervision........................................................................................ 22
Safety Nets, Financial Conglomerates, and Crisis Management................................ 23
Annex: Observance of Financial Sector Standards and Codes Summary Assessments................... 25

Basel Core Principles for Effective Banking Supervision.......................................................25

IAIS Insurance Core Principles................................................................................................30

Payment and Securities Settlements Systems: CPSS Core Principles....................................34

for Systemically Important Payment Systems (CPSIPS)

Appendix: Methodological Aspects of Stress Testing in the Norway FSAP........................................39

Statistical Appendix .............................................................................................................................42

Text Table
1. All Banks: Peer Comparison, Bankscope 2003................................................................................ 14

Figures
1. Key Features Of The Financial System.............................................................................................. 8
2. Household Debt and Corporate Balance Sheets ............................................................................... 11
3. House Price Trends .......................................................................................................................... 12
Boxes
1. Main Recommendations of the FSAP ................................................................................................ 6
2. Summary of Stress Testing Results...................................................................................................16
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G
LOSSARY

BCP(s)
Basel Core Principles for Effective Banking Supervision
BIS

Bank for International Settlements
CLS
Continuous
Linked
Settlement
CPSIPS
CPSS Core Principles for Systemically Important Payments Systems
CPSS
Committee on Payment and Settlement Systems
DB / DC
Defined benefit / defined contribution pension schemes
DNB-NOR
Largest bank in Norway (merger of Den Norske Bank and Gjensidge NOR
in
2003)
EEA
European Economic Area
FSAN
Financial Supervisory Authority of Norway (KreditTilsynet)
FX
Foreign
exchange
GPF
Government
Petroleum
Fund
ICP(s)
International Association of