OSLO: Norway will disregard a recommendation by its central bank and, for now, give its financial industry some freedom to decide how to meet liquidity rules for krone liabilities.
The supply of kroner is probably too small for stricter requirements to be feasible without causing market distortions, according to Tore Vamraak, state secretary to the Finance Ministry in Oslo.
“A general minimum requirement in kroner may lead to reduced liquidity in the market as banks ‘lock up’ a larger portfolio of outstanding bonds,” Vamraak said in an e-mailed response to questions regarding a Nov. 25 ministry statement. By allowing the banks to fulfill the liquidity coverage ratio requirement with bonds denominated in other currencies, “they obtain a more diversified and liquid buffer,” he said.
Norway’s biggest banks, led by by DNB ASA, hold only a small portion of their liquidity buffers in kroner. The central bank wants the minimum requirement to be set at 60 percent of liquid assets denominated in kroner, which it says is a threshold that takes into account the limited volume of Norway’s currency.
But setting the requirement too high risks creating instability rather than relieving it, according to the Finance Ministry.
The Financial Supervisory Authority may impose requirements on a case by case basis, Vamraak said. But setting a general minimum rule risks leading to unintended consequences. Those could include incentives to issue more covered bonds; it may also lead to an “increased contagion risk between banks as they buy each other’s bonds,” he said, citing concerns raised by the regulator.
