The Financial Supervisory Authority of Norway can’t see any need for Norwegian banks to participate in EU‘s stress tests. Neither does Committee of European Banking Supervisors (CEBS) who is conducting the test on behalf of the EU administration.
“We don’t see any national need for Norwegian banks to participate in this test.”
Bjørn Skogstad Aamo
While seven Nordic banks are among the 91 tested, there is no Norwegian on the list. Director of the Financial Supervisory Authority of Norway, Bjørn Skogstad Aamo, thinks that’s okay, and don’t see any need for stress testing Norwegian banks.
“We don’t see any national need for Norwegian banks to participate in this test. The CEBS came to the same conclusion, and that is not surprising,” Mr. Skogstad Aamo says to the Norwegian website DN.no.
The Financial Authority of Norway, however, have been in contact with the European Committee of European Banking Supervisors (CEBS) with an inquiry about Norwegian banks was to be include in the stress tests.
CEBS dis not find this necessary, according to the Norwegian director.
The Smoke And The Mirrors
There are mainly two reasons why the Norwegian banks was excluded from the EU stress test, says Mr. Skogstad Aamo.
“One reason was that the effects of the crisis in Europe will be modest for Norwegian banks,” he says.
“Only DnB NOR has operations in other countries, and it is limited. If DnB NOR had significantly larger market shares or businesses in other countries, the EU would have seen a need for Norway to be included,”says Mr. Skogstad Aamo.
Financial supervisory director emphasizes that they’ve been in contact with DnB NOR and that Norway’s largest bank in no way would object to go through the European stress test.
“The second reason was that Norwegian banks have an extremely low exposure to the so-called PIIGS-countries. Only one percent of the balance of the Norwegian banks are loans or securities to these countries, while other countries’ banks have up to 10 and 20 times as much exposure,” the supervisory director says.
According to the Financial Supervisory Authority of Norway, the EU believes that Norwegian banks are stable even if the PIIGS-countries default on its debt.
“It wouldn’t had any consequences for Norwegian banks,” Mr. Skogstad Aamo says.
One might wonder if the Norwegian supervisory director is speaking against better knowledge, or if he really doesn’t have clue to what’s going on in his own back yard.
Unfortunately, earlier statement from the Norwegian Financial Authority suggest the last alternative is closest to the truth.
In May 2007 I made a phone call to the Norwegian Financial Authority. after I had conversations with several international experts, like Paul Wilmott and Espen Gaarder Haug, who both expressed deep concerns about the situation that was beginning to unfold in the credit derivative market.
Speaking with the director of market supervision, Mr. Eirik Bunæs, I was told that the Financial Authority could not see any immediate danger in either the international or the national financial markets.
“But we’re keeping our eyes on things,” Mr. Bunæs said.
After Lehman Brother went bankrupt about a year later, Norway’s Financial Authority sided with the Central Bank of Norway and the Finance Ministry in a joint statement, saying the Norwegian banks was rock solid and that the crisis would not have any fundamental effect on the Norwegian economy.
Two weeks later the Norwegian government was forced to come up with a NOK 350 billion bailout package to the Norwegian banks – mainly to save DnB NOR, (who used the occasion to make the biggest illegal insider trade in Norwegian financial history).
In this context, it’s only fair to mention that both the CEO of DnB NOR, Rune Bjerke and the director of the Financial Supervisory Authority of Norway, Bjørn Skogstad Aamo, is members of the same political party as the Norwegian prime minister, Jens Stoltenberg.
The Little Nice Bank of Norway
Okay, back to the point in case: The only bank in Norway that could have been subject to the EU stress test is DnB NOR, as the director rightfully points out.
But according to Mr. Skogstad Aamo, the banks operations outside Norway is “limited.”
The fact is that DnB NOR make about 20% of its income abroad, and is one of the largest players in the international offshore market.
Looking at the international organization chart, DnB NOR don’t seem very “limited” to me:
In addition, DnB NOR is among the largest bank holding companies operating in the Baltic region, side by side with the Swedish banks; SEB, Handelsbanken and Swedbank who all are being tested by the CEBS.
So, what makes DnB NOR that much safer?
The Extremely Low Exposure
According to the director of The Financial Supervisory Authority of Norway, Norwegian banks have an extremely low exposure to the so-called PIGS-countries, compared with other European countries’ banks.
That may be right.
But Norwegian life insurance companies have a significant exposure, with 4% of their total assets (NOK 12 billion) invested in Portugal, Italy, Ireland, Greece and Spain.
Norway’s biggest life insurer is Vital Forsikring – owned by DnB NOR.
My guess is; with about 80% of the market share among Norwegian private citizens, and a state ownership of 34%, DnB NOR can’t be allowed to fail anything.
If the bank fails, most of Norway’s financial system is at risk of breaking down – a systemic risk = that means “too-big-to-fail”…
Two Tests – Two Results
Director Skogstad Aamo stress that Norwegian banks are being stress tested on regular basis by the Central Bank of Norway.
And the test are probably tougher than what the banks in Europe are exposed to at the moment, Mr. Skogstad Aamo believes.
“In the stress test conducted in May, Norges Bank assumed a very negative economic progress for the Norwegian economy, where GDP was set seven percentage points lower than the main estimates. The test showed that even then, they would all manage the capital requirements,” the Finance Authority Director says.
(In comparison; some news reports claims that the worst case scenario in the EU’s test is a 3% lower than estimated GDP).
But here’s the really interesting part:
The Norwegian Central Bank also did a stress test in December last year, but with a completely different – and probably far more realistic – worst case scenario.
In the December test was the worst case scenario a total freeze in the credit markets, and a withdrawal of deposits of 5%.
120 out of a total of 149 Norwegian banks would not be able to survive more than one month, the test showed.
This also goes to show how important the matter of method will be when EU reveals parts of the test, Friday afternoon.
By the way; the Norwegian Financial Authority Director also hopes that the financial markets soon will regain confidence, according to DN.no.
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