Norway goes macroprudential

The RBA has stated its position on macroprudential controls thusly:

We  also must, of course, heed the lesson that, whatever the framework, the  practice of financial supervision matters a great deal. Speaking of supervisory tools, these days it  is, of course, considered correct to mention that there are other means of ‘leaning against the wind’ of financial cycles, in  the form of the grandly-labelled  ‘macroprudential  tools’. Such measures used to be more plainly  labelled ‘regulation’.

…We  need, however, to approach such measures with our eyes open. Macroprudential tools will have their  place. But if the problem is fundamentally  one of interest rates being too low for a protracted period, history suggests  that the efforts of regulators to constrain balance-sheet growth will ultimately not work. If  the incentive to borrow is powerful and persistent enough, people will find a way  to do it, even if that means the associated activity migrating beyond the  regulatory perimeter. So in the new-found, or perhaps re-learned, enthusiasm for  such tools, let us be realists.

MB has of course been arguing that macroprudential tools could serve Australia very well in its current circumstances, enabling the lowering of interest rates to a level that would materially effect the dollar and preventing a borrowing binge in the process.

Sweden is adopting this very approach its similar situation.  Canada already has such  controls (though has other problems). China has used them to good effect in past year and is about to do so again. And now Norway joins the forward thinking central banks. From Bloomie:

Norway’s financial regulator is throwing its weight behind a government proposal to force banks to assign higher loss probabilities to mortgage assets as the nation looks for ways to cool its overheated property market.

The Financial Supervisory Authority in Oslo will add stricter risk-weight recommendations to a raft of measures, including curbs on covered bond issuance, all designed to prevent a repeat of the 1990s crisis that sent Norway’s real estate prices plunging 40 percent and left households with unsustainable debt loads.

“The FSA shares the ministry’s concern for household indebtedness and soaring house prices,” Morten Baltzersen, who heads the watchdog, said yesterday in a telephone interview. “We agree with the ministry that the risk weights on house loans need to be increased.”

The Finance Ministry in December proposed tripling risk weights to 35 percent, more than double the recommendation in neighboring Sweden, after Norwegian house prices and private debt burdens soared to records. The FSA’s response signals banks should start adjusting to the stricter requirements, now that the measures have won both government and regulatory backing.

House prices in Western Europe’s biggest oil exporter have doubled since 2002, and rose an annual 8.5 percent last month, according to the Norwegian Association of Real Estate Agents. At the same time, household debt will swell to more than 200 percent of disposable incomes this year, the central bank estimates. In the years leading up to the 1990s bubble, the debt ratio reached about 150 percent.

As central banks in the U.S., Japan and the euro area keep interest rates at unprecedented lows to aid growth, some of the world’s richest countries like Norway, Switzerland and Sweden are battling overheated housing markets fueled by cheap money. Norway’s central bank has kept its main rate at 1.5 percent since March last year as policy makers try to balance an overheated housing market against keeping krone gains in check.

Low interest rates have contributed to imbalances in the housing market that the FSA says can’t go unfettered any longer. Banks’ internal risk models have also failed to capture the threat of losses that the development has caused, according to the regulator.

…The FSA this week also endorsed the ministry’s plan to limit banks’ use of covered bonds to finance mortgages. The regulator said it evaluated “qualitative” rules on shifting loans to covered bonds and that oversight is best done on a bank-by-bank basis.

Norwegian banks’ reliance on offshore funding is another source of concern, Baltzersen said. At the end of October, about 77 percent of bank funding stemmed from foreign sources, amounting to 1.08 trillion kroner, Statistics Norway data show.

Banks “are to a large extent reliant on wholesale market funding in foreign markets. The experience from the last years’ turmoil in international money and capital markets underlines the importance of making the market funding more robust,” Baltzersen said. While “the market funding has become more resilient, Norwegian banks should continue their efforts to make their market funding even less vulnerable.”

Sounds familiar.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Norway should also look at ending mortgage interest deductibility. From the IMF:

    “One structural factor behind high mortgage debt in Norway is the very favorable tax treatment provided to owner-occupied housing: mortgage interest is tax-deductible, the tax on imputed rent was abolished in 2005, and effective rates of property taxation are amongst the lowest in the OECD. Gradually reducing the implicit tax subsidy for owner-occupied housing-perhaps by introducing a fixed nominal cap on the amount of a mortgage that is eligible for interest deduction and by bringing property tax valuations closer to market valuations-could free resources for productivity-enhancing tax cuts, improve progressivity, and bolster financial stability by reducing risks associated with excessive mortgage debt.”

  2. This sounds very familiar

    ” Norway’s central bank has kept its main rate at 1.5 percent since March last year as policy makers try to balance an overheated housing market against keeping krone gains in check.”

    and appears to have been a failure and now they are thinking about MP to allow them to continue to pursue the same failed low interest rate policies.

    What a super role model for Oz.

    Normalising interest rates and managing the exchange rate would be a better option.

  3. ‘Normalising interest rates and managing the exchange rate would be a better option.’

    Yup!!! Nothing can be worse than what we are now doing.

    • A Tobin tax on hot money flows is a good start. I’d like to see some form of punitive taxation on all offshore borrowing by Australian mortgage lenders though.

      • As others have observed, any form of additional “taxes” or levies placed on banks would simply be passed through to the customers. An utter waste of time and effort, with numerous likely adverse consequences.

  4. Norway is in a pinch – a booming economy (relatively speaking) causing “lots” of immigrants from mainly eastern European nations and other scandinavian countries as well as internal migration, mainly from young people going to uni or looking for work.

    Most of them end up in Oslo (capital), Stavanger (oil and offshore capital), Bergen and Trondheim. Oslo in particular has trouble housing them as there are very strict urban growth boundaries to the north and partially east. The south is limited but the ocean and the west has traditionally had very expensive property. It’s possible to commute but like the heat in Australia the cold in Norway causes havoc for public transport…

    The urban growth boundaries are in place because the city is mostly surrounded by national parks…

    We are now building up to try to handle the population growth. The situation is not that different from one of the SMH articles in the links section yesterday, parents are stepping in to guarantee loans for their kids as it’s the only way they can afford to buy anything. Even small 50sqm apartments can now cost $600,000 (or more) and there is already a 15% LVR restriction in place. Rents are also very high, you can expect to pay around $3000 per month for a 2 bedroom 60-70sqm apartment in Oslo which makes it almost impossible for young people to save up for a 15% deposit…

    Because of high entry prices, builders have tried using creative pricing mechanisms where the purchase price is lower but instead charging very high body corporate rates (can be over $2,000 per month). They simply move some of the debt onto the body corporate and all buyers have to pay their share of that until it is paid off. If you sell such an apartment This of course doesn’t help at all but it does look cheaper at first glance

    I left Norway in 2003 for Melbourne and whenever I think of moving back I give up because of the ridiculous housing situation.

    • “left Norway in 2003 for Melbourne and whenever I think of moving back I give up because of the ridiculous housing situation.”

      strange relief, to know that there is a place somewhere with more ridiculous housing situation than Melbourne.

      By the way, I left Athens for Melbourne in 2005 and I actually thought houses in Australia are cheap for what people are making. In Greece to get a house your whole family literally had to chip in, plus your wife’s family, and that would be an apartment, only rich people can afford houses. RE in Greece peaked in 2008 and is 40% down since then and dropping like a log, which did noone any good given 30% unemployment and massive drops in salaries in the same period.

  5. “…in the form of the grandly-labelled ‘macroprudential tools’.”

    One can immediately sense the thinly-veiled, lofty ridicule implicit in the RBA’s description. Clearly they have no intention of doing anything re MP tools.

    “If the incentive to borrow is powerful and persistent enough, people will find a way to do it, even if that means the associated activity migrating beyond the regulatory perimeter.”

    What we should all be asking is, WHO creates the incentive to borrow? And WHY?

    Do we somehow innately, naturally yearn to borrow 100’s of thousands in order to buy ridiculously expensive houses? Or, do outside influences use myriad means to convince us that doing so is a good idea, “The Australian Dream”, a “wise investment”, that “you can afford… and look, we’ll show you how”?

    Also, it’s not just about supposed incentives to borrow. Is there an incentive to lend? Of course there is! The interest on the >$1 Trillion in housing loans is the banking system’s core means of profit-making, to provide CEO’s with multi-million dollar annual bonuses.

    The RBA is quite right in one sense. As history has well-demonstrated, the banks would indeed find ways of “migrating beyond the regulatory perimeter”. That is the nature of the beast. It needs to be killed off, and replaced. Anything else is an exercise in futility.