Optimal capital adequacy ratio for Norwegian banks

In this paper, we analyse the appropriate capital adequacy ratio for banks from a socio-economic perspective. More equity capital in banks can contribute to financial stability by reducing the risk of costly banking crises, but lending may become more expensive if banks are required finance their assets with more equity. When assessing optimal capital adequacy ratios, the economic costs of more expensive credit must therefore be weighed against the benefits of fewer and less costly banking crises. Our calculations take into account recent changes in bank capital regulation. The results indicate that Norwegian banks should have a Common Equity Tier 1 (CET1) ratio of between 12 and 19 percent. The current CET1 ratio of around 18 percent is in line with this. Our estimates are consistent with results from international studies, but estimates vary considerably with changes in uncertain assumptions. However, banks’ capital needs during the banking crisis in the beginning of the 1990s show that such estimates are not unreasonable.publishedVersio

Optimal kapitaldekning for norske banker

I dette memoet analyserer vi hvor høy kapitaldekning bankene bør ha i et samfunnsøkonomisk perspektiv. Mer egenkapital i bankene kan bidra til finansiell stabilitet ved å redusere risikoen for kostbare bankkriser, men utlån kan bli dyrere om bankene må finansiere seg med mer egenkapital. I vurderinger av optimal kapitaldekning må derfor samfunnsøkonomiske kostnader av dyrere utlån veies opp mot gevinsten av at det kan inntreffe færre og mindre kostbare bankkriser. Beregningene våre tar hensyn til de siste endringene i kapitalreguleringen av bankene. Resultatene tyder på at norske banker bør ha en ren kjernekapitaldekning på mellom 12 og 19 prosent. Dagens kapitalnivå på rundt 18 prosent er i tråd med dette. Våre anslag samsvarer med resultater fra internasjonale studier, men anslagene varierer betydelig ved endringer i usikre forutsetninger. Bankenes kapitalbehov under bankkrisen på begynnelsen av 1990-tallet viser imidlertid at slike anslag ikke er urimelige.publishedVersio

Essays in Macro-Finance

This thesis is motivated by the financial crisis of 2007 and 2008. The financial crises posed a challenge for economics - both in terms of understanding the events that were unfolding and in terms of understanding the effectiveness of the policies that were put in place as a response. Broadly speaking, the first two chapters of this thesis contributes to the existing literature with respect to the former, while the last three chapters contributes with respect to the latter

Effects of the IRB approach on bank lending to Norwegian enterprises

This paper analyses how the introduction of the IRB approach may have affected banks' lending to enterprises, lending margins and portfolio quality in Norway. Our results show that the IRB banks' lending margins decreased compared with the standardised approach banks following the introduction of the IRB approach. Growth in lending to the corporate market was also higher for the IRB banks than for the standardised approach banks during the first years after the introduction. However, this may be the result of factors other than the IRB approach. Our analyses do not indicate that the IRB approach has led to finer granularity in the pricing of corporate loans. We find some support for the hypothesis that the IRB approach may have improved the quality of banks' portfolios.publishedVersio

Downward nominal house price rigidity: Evidence from three centuries of data on housing transactions

By analyzing housing data from the period 1850 to 2019 in Norway, we find evidence of downward nominal house price rigidity. More specifically, we document that there is a marked fraction of repeat-sales housing transactions with a zero nominal price change and show that this fraction increases in housing market downturns. While the former result reveals a rigidity in nominal house prices, the latter suggests that the direction of it is predominantly downward.publishedVersio

Mortgage regulation and financial vulnerability at the household level

We evaluate the impact of mortgage regulation on credit volumes, household balance sheets and the reaction to adverse economic shocks. Using a comprehensive dataset of all housing transactions in Norway matched with buyers' balance sheet information from official tax records, we identify causal effects of mortgage loan-to-value (LTV) limits. Our results show that LTV-requirements have substantial effects on credit volumes, especially on the extensive margin. As a result, such requirements contribute to dampening aggregate credit growth. We find that affected households lower their debt uptake and face lower interest expenses, thereby reducing their vulnerability to adverse shocks. However, affected households also deplete liquid assets when purchasing a home, in order to meet the new requirement. This negative effect on liquid savings persists in the years following the house purchase, suggesting that the impact on financial vulnerability at the household level is in fact ambiguous. We illustrate this further by documenting that households affected by the regulation are more likely to sell their home when becoming unemployed compared to non-affected households.publishedVersio

Effects of the IRB approach on bank lending to Norwegian enterprises

This paper analyses how the introduction of the IRB approach may have affected banks' lending to enterprises, lending margins and portfolio quality in Norway. Our results show that the IRB banks' lending margins decreased compared with the standardised approach banks following the introduction of the IRB approach. Growth in lending to the corporate market was also higher for the IRB banks than for the standardised approach banks during the first years after the introduction. However, this may be the result of factors other than the IRB approach. Our analyses do not indicate that the IRB approach has led to finer granularity in the pricing of corporate loans. We find some support for the hypothesis that the IRB approach may have improved the quality of banks' portfolios

Effekter av IRB-metoden på bankenes utlån til norske foretak

I dette memoet analyserer vi hvordan innføringen av IRB-metoden kan ha påvirket bankenes utlån til foretak, utlånsmarginer og porteføljekvalitet i Norge. Våre resultater viser at IRB-bankene reduserte utlånsmarginene relativt til standardmetodebankene etter innføringen av IRB-metoden. De første årene etter innføringen vokste dessuten IRB-bankene mer enn standardmetodebankene i næringsmarkedet. Vi kan imidlertid ikke utelukke at dette skyldes andre forhold enn IRB-metoden. Analysene indikerer ikke at IRB-metoden har ført til mer finmasket prising av foretakslån. Vi finner noe støtte for at IRB-metoden kan ha bedret porteføljekvaliteten til bankene

The household effects of mortgage regulation

We evaluate the impact of mortgage regulation on child and parent household balance sheets, highlighting important trade-offs in terms of financial vulnerability. Using Norwegian tax data, we show that loan-to-value caps reduce house purchase probabilities, debt and interest expenses – thereby improving household solvency. Moreover, parents of first-time buyers also reduce their debt uptake, suggesting that concerns about regulatory arbitrage are unwarranted. However, the higher downpayment requirement also leads to a persistent deterioration of household liquidity. We show that this reduction in liquid buffers coincides with larger house sale propensities given unemployment, as households become more vulnerable to adverse income shocks

Mortgage regulation and financial vulnerability at the household level

We evaluate the impact of mortgage regulation on credit volumes, household balance sheets and the reaction to adverse economic shocks. Using a comprehensive dataset of all housing transactions in Norway matched with buyers' balance sheet information from official tax records, we identify causal effects of mortgage loan-to-value (LTV) limits. Our results show that LTV-requirements have substantial effects on credit volumes, especially on the extensive margin. As a result, such requirements contribute to dampening aggregate credit growth. We find that affected households lower their debt uptake and face lower interest expenses, thereby reducing their vulnerability to adverse shocks. However, affected households also deplete liquid assets when purchasing a home, in order to meet the new requirement. This negative effect on liquid savings persists in the years following the house purchase, suggesting that the impact on financial vulnerability at the household level is in fact ambiguous. We illustrate this further by documenting that households affected by the regulation are more likely to sell their home when becoming unemployed compared to non-affected households