The Norwegian banking industry has developed in cycles over the past 200 years. From a minimal start, the number of banks increased rapidly until nearly each small municipality had at least one bank. During the recession in the late 1920s, many banks had to close but subsequently reopened. In the 1930s there were around 700 banks in Norway, of which 630 were savings banks. This lasted until around 1970 when a rapid consolidation started. Today, there are 105 savings banks and 23 commercial banks incorporated in Norway; this includes subsidiaries (but not branches) of foreign banks. Some 40 credit institutions have opened branches in Norway; however, only a few operate as full-service banks, and many specialise in equipment financing, typically automobiles. Some 320 credit institutions from EEA states have provided notification in respect of cross-border services; however, probably only a minority of these actually provide services in Norway on a regular basis.
The Norwegian banking industry is dominated by two large commercial banks (DNB Bank and Nordea) and two groups of independent savings banks (Eika Group and SpareBank 1 Group). Each savings bank operates independently, but both Eika Group and SpareBank 1 Group have certain joint operations and a common brand. Foreign banks, through branches or cross-border activities, are active, and hold a significant market share of business within the shipping, oil or offshore and mainland industries.
The five largest banks (excluding publicly owned banks) in the Norwegian market measured by balance sheet value are:
- a DNB Bank ASA;
- b Nordea Bank AB (publ), Norwegian branch;
- c Danske Bank, Norwegian branch;
- d Handelsbanken branch of Svenska Handelsbanken AB (publ); and
- e SpareBank 1 SR-Bank.
ii THE REGULATORY REGIME APPLICABLE TO BANKS
Norway is not a member of the EU, but through the EEA agreement, it is committed to implementing the relevant directives for the finance industry. This means that the free establishment rule applies for EEA institutions wishing to provide services in Norway, and for Norwegian institutions wishing to provide their services in the EEA.
The combination of accepting deposits and providing credit triggers a requirement for a banking licence under Norwegian law. The main regulation applicable to banks can be found in the Act on Financial Undertakings and Financial Groups 2016 (Financial Undertakings Act). The Financial Undertakings Act is an attempt to consolidate the main financial regulations, which were previously scattered in various pieces of legislation, into one comprehensive act (implementing, inter alia, the Capital Requirements Directive (CRD IV) and the Capital Requirements Regulation). The Act regulates the following financial undertakings:
- a credit institutions;
- b finance companies;
- c holding companies in financial groups;
- d payment institutions;
- e electronic money institutions; and
- f insurance and pension institutions (not with in this chapter).
Banks providing investment services or investment fund services are also subject to the Securities Trading Act 2007 (implementing, inter alia, the Markets in Financial Instruments Directive) or the Investment Fund Act 2011 (implementing, inter alia, the Undertakings for Collective Investments in Transferable Securities Directives). Further, Norway has implemented the third Anti-Money Laundering Directive through the enactment of the Anti-Money Laundering Act 2009, but the EFTA Court has in separate matters on 2 December 2013 and 16 November 2016 declared that Norway had failed to correctly implement the Directive. Furthermore, Norway received criticism when evaluated by the Financial Action Task Force standards in 2014. There is an ongoing legislative process on this matter in Norway, and the purpose is to bring the Norwegian legislation on anti-money laundering in accordance with international standards, and in particular the fourth Anti-Money Laundering Directive. In December 2016, a committee appointed by the Ministry of Finance (MoF) presented a proposal for the required updates of the Norwegian legislation. Finally, all financial undertakings are subject to the Financial Supervision Act 1956.
The main regulator is the Financial Supervisory Authority of Norway (FSAN). FSAN’s resources come from fees paid by the institutions it supervises. Its main purpose is to promote financial stability and a well-functioning market.
FSAN’s instruments are:
- a supervision and monitoring;
- b licensing;
- c regulatory development; and
- d information and communication.
ii Deposit taking
Norwegian financial undertakings that wish to take deposits from the public must have a licence as a bank. Non-banking Norwegian credit institutions may receive repayable funds (other than deposits) from the public by issue of bonds or other comparable securities. EEA credit institutions providing services in Norway based on their home state licence (passporting) may take deposits in Norway if their home state licence allows them to do so.
Lending is a regulated activity, and a licence or a passport is needed. Norwegian financial undertakings without a banking licence may grant loans based on a licence as a non-banking credit institution or as a finance company, and will normally fund themselves in the bond market. Typical today are mortgage credit institutions operating in the ‘covered bond’ market. These are normally owned by banks or saving banks groups, and acquire loan portfolios from the banks.
Investment firms need a separate licence to provide loans in connection with their investment activities.
iv Foreign exchange
Spot foreign exchange trading can be carried out by banks, payment institutions, electronic money institutions and finance companies as well as by foreign passported credit institutions, payment institutions and electronic money institutions, all subject to having an appropriate licence to do so.
Dealings in foreign exchange derivatives can only be carried out by an institution with an investment firm licence.
v Payment services
The Payment Services Directive (PSD1) was fully implemented in Norwegian legislation in 2010. It is expected that PSD2 will be implemented in Norway, but the time frame for this is currently unclear. The MoF has asked the FSAN to produce a draft proposal in this respect by 1 April 2017.
vi Investment services
Licences to provide investment services may be granted to banks or limited liability companies.
Banks may obtain such licences in their own names or through their subsidiaries. Foreign passported firms may also provide investment services in Norway; see subsection viii, infra.
vii Legal structure of banks
There are two different legal structures of banks available: commercial banks and savings banks.
Commercial banks have to be organised either as public limited liability companies or private limited liability companies. Banks established after 1 January 2016 must, pursuant to the Financial Undertakings Act, be organised as public limited liability companies except for banks that are established as subsidiaries in a financial group, which may be organised as private limited liability companies.
Savings banks were originally organised as independent entities without external owners. Hence, their equity capital historically consisted mainly of retained profits from earlier years. Since 1987, savings banks have been entitled to bring in external equity by issuing equity instruments, called equity certificates. These differ from shares in that they do not give holders ownership to the bank’s entire equity capital. Moreover, holders have limited voting rights to a maximum of two-fifths in total in the bank’s highest body, the general meeting. Around 30 savings banks, including several of the largest ones, have issued such instruments.
All banks must have a total of share capital and other equity capital of at least €5 million.
viii Branches and cross-border services
Foreign banks established within the EEA may establish branches in Norway in accordance with the EU or EEA banking directives. The prime regulator of a foreign branch is its home state regulator, but branches of foreign banks are also to a certain extent regulated by Norwegian rules pursuant to, inter alia, the Financial Undertakings Act and supervised by FSAN pursuant to, inter alia, Regulation No. 1257 of 28 December 1993.
Foreign banks established within the EEA may also provide banking services in Norway on a cross-border basis pursuant to EU or EEA passporting rules. Foreign banks providing cross-border services into Norway are to a lesser degree regulated and supervised by FSAN.
Banks established outside the EEA must have a Norwegian licence to provide banking services in Norway through a branch. A licence to provide banking services on a cross-border basis is not available.
iii PRUDENTIAL REGULATION
i Relationship with the prudential regulator
Entities under supervision file various reports with FSAN on which it may comment or raise questions. The communication between FSAN and an entity under supervision will normally be in the form of written correspondence. FSAN also has the power to give specific directives to an institution, but this is rarely done, as the supervised entities will normally follow guidance from FSAN.
From time to time, FSAN will conduct a physical inspection of banks, normally with a couple of weeks’ notice. The focus of the inspections may vary from bank to bank, but an evaluation of the bank’s ability to monitor risks will normally be a main area of interest, as will money laundering routines. FSAN divides risks in four categories: credit, market, liquidity and operational risks.
The instruments available to FSAN are listed under Section II, supra. FSAN’s main purpose, according to its strategy document for the period 2015–2018, published early in 2016, are as follows. To promote and secure financial stability and a well-functioning market through five sub goals:
- a solid and liquid finance institutions;
- b robust infrastructure, securing satisfactory payments, trade and settlement systems;
- c investor protection;
- d consumer protection through good information and advice; and
- e efficient crisis management.
In its strategy, FSAN has identified the following supervisory priorities:
- a solvency supervision of banks and pension funds;
- b macroeconomic supervision;
- c supervision of infrastructure, payment, trade and settlements systems; and
- d supervision of advisory services and trading of pension savings schemes, collective investment vehicles and other financial instruments.
ii Management of banks
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. Previously required management structures such as a committee of representatives and a control committee have now been abandoned.
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 CEO. Note, however, that banks established as a subsidiary in a financial group may still be organised as private limited liability companies.
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 in the company. The details regarding election of members to the general meeting in a savings bank shall be set out in the articles of association of the company.
Banks with more than 200 employees might have a corporate assembly, if agreed upon between the bank and 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, 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 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.2 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 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 such 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, infra.
As for remuneration policies and practices, new regulations were set in 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. CRD IV does, however, open up the possibility in some cases for Member States to allow for remuneration up to 200 per cent, and the Norwegian MoF has implemented this approach. The Norwegian remuneration rules are applicable regardless of the size, nature, scope or complexity of the institution. Accordingly, the Norwegian regulations are in some ways stricter than those set out in CRD IV and the European Banking Authority guidelines, where, inter alia, the principle of proportionality is included.
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:
- a Pillar I – calculation of minimum regulatory capital: banks shall at all times fulfil own funds’ requirements reflecting credit risk, operational risk and market risk. The current requirement is that own funds shall constitute at least 8 per cent of a calculation basis reflecting such risks. The common equity tier 1 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 to FSAN on a quarterly basis;
- b 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. FSAN reviews and evaluates such internal capital adequacy assessments and strategies, and may take supervisory action if it is not satisfied with the result of such an evaluation process; and
- c Pillar III – disclosure of information: banks are required to disclose relevant information on their activities, risk profile and capital situation.
In addition to the minimum capital standards, Norway has adopted the following buffer standards:
- a a capital conservation buffer of 2.5 percentage points in addition to the minimum common equity tier 1 capital ratio;
- b a systemic risk buffer of 3 percentage points in addition to the minimum common equity tier 1 capital ratio and capital conservation buffer;
- c if the financial undertaking is defined as systematically important it has an additional buffer of 2 percentage points in addition to a minimum common equity tier 1 capital ratio, capital conservation buffer and systemic risk buffer; and
- d a countercyclical capital buffer of 1.5 percentage points in addition to the common equity tier 1 capital ratio, capital conservation buffer, systemic risk buffer and, if applicable, the buffer for systematically important institutions. This buffer will increase to 2 percentage points from 31 December 2017.
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 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 CRD IV and the Capital Requirements Regulation (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 with a loss indicator determined by the MoF (template method) or internal measuring methods (foundation or advanced).
The MoF has decided to maintain the 80 per cent Basel I ‘floor’ for banks that calculate capital on the basis of internal models.
Pursuant to a letter issued by FSAN in December 2013, all Norwegian banks are required to report their liquidity coverage ratio and net stable funding ratio to 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, a special regime of proceedings applies to banks experiencing financial difficulties. These rules are set out in Chapter 21 of the Financial Undertakings Act. According to Section 21-7, a bank must inform FSAN of a situation in which liquidity or solidity problems may arise. Thus, the duty to inform may arise prior to the possible financial issues becoming reality. FSAN could thereafter initiate several measures, including decreasing the bank’s subordinated capital.
In the event of illiquidity, insufficient funds or failure to satisfy capital requirements, FSAN shall immediately notify the MoF. The MoF may decide that the bank should be placed under public administration, provided that the bank is unable to meet its liabilities as they fall due and that a sufficient financial basis for continued, satisfactory operation cannot be secured.
If this occurs to a parent in a financial group, the MoF may decide that all or parts of the group should be placed under public administration.
The administration board is composed of a minimum of three members, and as a general rule the chair will be a lawyer. Its object is, as soon as possible, to make arrangements rendering it possible for the bank to continue operating, or, alternatively, merge with another enterprise. If the two alternatives are not feasible, the bank must be liquidated.
If the administration board finds that there is a basis to operate further, it will propose a release of the bank from the administration proceedings, which may also involve reducing the creditors’ claims. The final decision in this respect is made by the MoF. If it is unlikely, however, that the bank can be released from administration after one year from the date on which the administration became effective, then the bank must be liquidated, and its assets divided among the creditors according to ordinary Norwegian insolvency principles regulated by the Insolvency Act 1984 and the Creditors’ Recovery Act 1984, respectively.
The concept of the ‘living will’ has not been a familiar one in Norwegian law. As a general rule, Norwegian banks currently have no requirement to create recovery or resolution plans in advance of experiencing financial difficulties. This is expected to change with the future implementation of the Bank Recovery and Resolution Directive (BRRD) in Norway. The implementation raises issues regarding supranational authority that have not yet been clarified (see Section VIII, infra). FSAN has, however, demanded that all banks that are defined as systemically important and other large banks deliver recovery and resolution plans to FSAN for assessment. As at the time of writing, DNB ASA, Nordea Bank AB (publ), Norwegian branch and Kommunalbanken AS are defined as systemically important. It is common for Norwegian banks to raise ‘hybrid capital’ in the form of subordinated debt to satisfy equity requirements. The Financial Undertakings Act gives the authorities power to require a mandatory write-down of such debt (but currently no conversion to equity) upon the occurrence of certain triggers associated with a bank’s failure or expected failures. This power, which is normally backed up by the terms of the debt, is not generally regarded as fully satisfactory in relation to CRD IV and CRR, and will be tightened in connection with the full implementation of CRD IV and CRR in Norway. The bail-in rules of the BRRD have not yet been implemented in Norway.
With the expected implementation of the BRRD, the current Norwegian rules in this area will need to be amended. One issue that has been discussed by the Norwegian MoF and the EU is the size of the deposit guarantee, which is currently 2 million Norwegian kroner per depositor per bank. No final decision has been made, but it is likely that the amount will have to be reduced to the EU level after a transitional period.
Although the BRRD has not yet been included in the EEA Agreement, the government has asked the Norwegian Banking Law Commission to consider and propose amendments to Norwegian law to align it with the BRRD. On 26 October 2016, the Norwegian Banking Law Commission delivered its report regarding deposit guarantee (DGSD) and crisis management (BRRD), and BRRD is scheduled to be implemented sometime in 2017 or 2018.
iv CONDUCT OF BUSINESS
The Finance Agreements Act 1999 (which implements the Consumer Credit Directive) imposes certain conduct of business obligations upon banks, especially when dealing with consumers. In short, the Act provides that banks have a general duty to properly inform their clients, often in writing, and to make sure that the client has understood the information it has received. The Act also sets certain limits with respect to what kind of material and procedural provisions that can be included in a financial agreement (e.g., a loan agreement). A great number of the Act’s provisions can be derogated from in the bank’s dealings with business customers, but the Act is mandatory with respect to dealings with consumers.
Pursuant to Section 4 of the Finance Agreements Act, trade organisations for banks, insurance companies and other financial institutions in Norway have, together with the Norwegian Consumer Ombudsman, established a mediation board for consumer complaints with respect to banks and banking products. However, the mediation board’s resolutions are non-binding on the parties.
Norwegian banking confidentiality rules are set out in the Financial Undertakings Act Sections 16-2, 9-6 and 9-7. The main rule is that, in the absence of a statutory exception, any non-public information concerning the bank or its customers that the bank’s officers, employees or anyone who carries out an assignment for the bank, such as external auditors and lawyers, gain knowledge about in their position within the bank, is subject to a duty of confidentiality. The confidentiality obligation is directed both at the individual and the bank itself. In principle, the obligation extends to internal disclosure within the bank, but exceptions are available with respect to internal disclosure on a need-to-know basis.
Several exceptions apply to this main rule. Disclosure can be made without regard to the confidentiality obligation if:
- a the customer consents to disclosure;
- b disclosure is needed to fulfil requirements for reporting, control and internal governing within a banking group;
- c to a certain extent, for the purpose of establishing a central client register in a banking group;
- d the disclosure is made to another finance institution pursuant to specific rules in the Financial Undertakings Act;
- e the disclosure is required pursuant to the Money Laundering Act 2009 or similar regulations;
- f the disclosure is requested by the police or prosecuting authorities;
- g the disclosure is made in a civil or criminal court proceeding pursuant to a decision by the court; or
- h the disclosure is made to certain other authorities such as tax authorities, competition authorities, FSAN or the Norwegian stock exchange, and in accordance with specific regulations.
The list is not exhaustive, and illustrates that the ‘main rule’ of absolute confidentiality is subject to quite a few exceptions. A breach of the confidentiality obligation is a criminal offence punishable with fines or, if considered a serious offence, imprisonment for up to three months.
The main funding sources for Norwegian banks are deposits from customers and the bond market (both domestically and internationally). A number of Norwegian banks have also established Euro medium-term note programmes.
Another funding source is the raising of regulatory capital (see Section III.iii, supra). Banks also fund themselves through credit lines with domestic or foreign third-party banks.
An increasingly important source for funding is the covered bond market. The Norwegian covered bonds legislation allows banks to set up specialised mortgage credit institutions, which in turn issue covered bonds to investors. The bonds are backed by a pool of specific types of mortgages (usually residential) or public sector loans acquired by the issuing mortgage credit institutions. The mortgage credit institution must be licensed as such, but does not necessarily have to be affiliated with the bank from which it has acquired the mortgages. At the end of 2016, covered bond comprised approximately 20 per cent of the aggregate long-term funding for Norwegian banks.
As of 31 December 2016, customer deposits amounted to 43 per cent of the funding of the banks. The percentage has also increased during periods of financial instability, likely due to the Norwegian deposit guarantee scheme, which secures up to 2 million kroner per customer in each bank (expected to be reduced to €100,000 in 2019).
Only the largest Norwegian banks have access to the international capital markets, and Norway’s largest bank, DNB Bank ASA, is an important source of funding for smaller banks. Norges Bank (the Norwegian central bank) offers certain funding to banks on a secured basis, and also acts as ‘lender of last resort’.
vi CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS
i Control regime
The shares of a commercial bank and equity certificates of a savings bank are freely transferable, unless the bank’s articles of association state otherwise. There are no limitations under Norwegian law on the rights of non-residents or foreign owners to hold and vote for a commercial bank’s shares or a savings bank’s equity certificates. The Financial Undertakings Act does, however, contain non-discriminatory ownership control rules. Pursuant to these rules, an acquisition of ownership in a bank that represents 10 per cent or more of the sum of the capital or the votes, or that otherwise gives the right to exercise significant influence on the management of the bank and its business, requires prior authorisation from FSAN and the MoF. The same rules apply to holding companies of banks.
Ownership by closely committed persons is consolidated, and convertible loans are deemed to be included in a person’s holding.
Whether authorisation shall be granted is regulated in the Financial Undertakings Act and pertinent regulations, the main consideration being whether the acquirer is deemed ‘fit and proper’ to exercise such influence over the financial undertaking as the qualified holding will enable. Additionally, the MoF must make an assessment as to whether the acquisition is sound in light of the financial undertaking’s current and future business. The application will contain, inter alia, information about the following:
- a current and proposed holding of shares;
- b the acquirer’s other business and available financial resources;
- c ownership in other financial undertakings; and
- d the purpose of the acquisition. If the financial undertaking in question will become a subsidiary, a plan for the organisation and activities of the group must be submitted.
An application for authorisation shall be decided within 60 business days after FSAN has received the application from the MoF for assessment, but this may be prolonged if the Ministry or FSAN deem that additional information is necessary or desirable in connection with the fit and proper assessment.
The above applies not only to acquisitions resulting in a qualified holding, but also to acquisitions increasing an (already) qualified holding to a total holding of more than 20, 30 or 50 per cent, as the case may be.
Banks and other financial undertakings are subject to limitations on their ability to grant security over their assets. As a main rule, FSAN’s permission is necessary for a bank to grant security over assets representing more than 10 per cent of its core capital. Exceptions apply to security granted over real estate, as well as security transactions entered into in accordance with market practice and on standard arm’s-length terms.
In relation to an acquisition of a commercial bank, the bank will be restricted under Norwegian corporate law from providing capital or security in support of the acquisition. However, pursuant to a legislative proposal published in February 2016, such restrictions may soon be considerably relaxed.
ii Transfers of banking business
Transfers of customers’ deposits would as a starting point require the consent of each customer in accordance with ordinary rules relating to the transfer of debtor positions. Even if consent is given, it is at present technically impossible to transfer a customer’s unique bank account from one bank to another. This is due to the fact that Norwegian bank account numbers are assigned systematically, and serve a special identification function: for instance, the first four digits of a Norwegian bank account number are used to identify the bank with which the account is registered. In other words, the bank account number ‘belongs’ to the bank and not to the customer. It has been proposed to enact legislation that would enable customers to retain their account number when changing banks, but this has yet to be resolved.
With respect to loans, Section 45 of the Finance Agreements Act provides that banks may transfer loans without the borrower’s explicit consent only to other finance undertakings (as defined in the Financial Undertakings Act). Transfers of loans from banks to non-financial undertakings require borrower consent. Until 2015, Norwegian financial legislation contained special securitisation rules that allowed for the transfer of loans from a financial institution to a non-financial institution without active consent from the borrower in connection with a securitisation transaction. However, these rules were abolished when the Financial Undertakings Act came into effect on 1 January 2016.
The new Financial Undertakings Act also contains a new provision regarding the transfer of ‘substantial’ portfolios of loans or other receivables by banks and other financial undertakings. If the portfolio to be transferred is deemed to be ‘substantial’ in light of the involved companies’ business, consent from the MoF is required to effect the transfer. The provision was only introduced in 2016, and the exact scope of its application is yet to be clarified.
If a bank’s business is transferred by way of a merger or demerger in accordance with applicable Norwegian company legislation, customer consent will not be necessary with respect to loans or deposits that, as a result of the merger, have been transferred to a new legal entity. The acquiring party in a merger or demerger is considered to automatically assume all rights, obligations and liabilities of the acquired party without the need for customer consent. However, mergers and demergers of banks must be applied for and are subject to the consent of the Norwegian regulator.
vii THE YEAR IN REVIEW
Norwegian banks’ results and return on equity declined in 2016 compared to 2015, mainly as a result of increased losses in the offshore oil and gas sector. The total losses for Norwegian banks amounted to 0.36 per cent of all loans, twice as high as in 2015. The banks’ net interest rate has been stable in relation to total assets despite lower lending rates because of the lower cost of funding. The increased use of the covered bonds market has added to this trend.
Some banks have held back on lending to companies, and the bond issue market has not yet recovered from its decline after the fall in oil prices from the summer of 2014. Together, these two elements have resulted in an increase in the number of restructurings, in particular in the offshore and shipping sectors.
The consumer loan market had a strong 2016, with a total growth of 7.2 per cent. The main bulk of the growth came from mortgages, where demand has been driven by low interest rates and rising real estate prices, in particular in major cities. In an attempt to stagger increasing housing prices, the MoF introduced new and stricter requirements for mortgage lending at the end of the year. It is, however, too soon to tell if these measures have had any effect.
No major changes took place in the Norwegian banking market in 2016. In early 2017, Nordea completed its corporate reorganisation in the Nordic countries and is now operating in Norway through a branch of the Swedish bank.
The new Financial Undertakings Act came into force on 1 January 2016, and was supplemented by secondary regulations on 1 January 2017. The new legislation does not deviate from previous legislation by any large degree, partially due to Norway’s obligations to implement the various relevant EU directives and regulations for the financial markets.
Again in 2016, Parliament passed legislation that allows Norway to implement EEA-relevant financial market legislation in a more swift and efficient way. At the same time, the EEA Agreement was amended to ensure the effective implementation and supervision of relevant legislation in all EEA jurisdictions.
viii OUTLOOK and CONCLUSIONS
In 2017, we expect to see a number of more detailed regulations in connection with the Financial Undertakings Act, mostly related to the implementation of various EEA relevant directives and regulations, and most notably the Bank Recovery and Resolution Directive and the Deposit Schemes Guarantee Directive. While these directives will require certain amendments to current Norwegian banking law, we do not expect any radical changes to the current legislative environment for banking activities in Norway.
Over the next few years, the new equity and liquidity requirements introduced by CRD IV and appurtenant legislation will continue to have an impact on the activities of Norwegian banks. Some hybrid instruments may have to be refinanced or renegotiated to qualify, and banks continue to use a substantial part of their profits to strengthen equity.
The amendment of Norwegian law and the EEA Agreement is expected to result in less ‘gold plating’ and special Norwegian rules for banks and other financial market participants in the future. Norwegian authorities will need to pay increased attention to EEA-relevant financial markets legislation coming out of the EU, and will have less freedom to implement bespoke domestic solutions.
The fall in the price of oil has had, and will continue to have, a negative impact on the Norwegian economy. Unless prices increase and market activity recovers, we may see more business failures and increased unemployment going forward, which again may cause an increase in bank losses.