The Norwegian Financial Supervisory Authority published an on-site inspection report on SpareBank 1 Nord-Norge’s use of the internal ratings-based (IRB) approach for credit risk capital requirements. The report highlights shortcomings in the bank’s application and validation of its probability of default (PD) and loss given default (LGD) models, and indicates that conservative adjustments to regulatory estimates may be needed, particularly for the retail portfolio. The inspection reviewed how the IRB system is used in risk management, controls, credit granting and model validation. The supervisor questioned whether reductions in measured corporate risk weights necessarily reflected lower underlying risk, citing significant model uncertainty and strong growth in the corporate portfolio. It also challenged the bank’s approach to the maturity parameter, stressing that refinancing risk is relevant for revolving facilities and loans that are typically renewed, and noted that if the parameter used in risk-weight calculations does not reflect actual risk this may need to be addressed through Pillar 2 capital. On governance and use, the authority required that regulatory-approved PD and LGD values are clearly presented in credit decision documentation, including when non-regulatory tools such as the “Eiendom utleie” simulation model are used. On validation, the report raised concerns that testing based on benign historical data and high deviation thresholds may not detect underestimation of PD and LGD. It concluded that validation results do not support that current corporate PD and LGD models are sufficiently calibrated, and for the retail portfolio it stated that observed weaknesses support more conservative assumptions, including for default rates in stress and potentially using the LGD reference model. The authority also required internal guidelines and routines to govern the use and validation of residential property valuation estimates applied in mortgage LGD modelling, and said it will follow up the maturity parameter in a separate supervisory case from the second half of 2025 and other issues through ongoing supervision and forthcoming model-change applications.
Norwegian Finanstilsynet 2025-08-14
Norwegian Financial Supervisory Authority finds weaknesses in SpareBank 1 Nord-Norge’s IRB model calibration and validation
The Norwegian Financial Supervisory Authority's report on SpareBank 1 Nord-Norge's internal ratings-based approach for credit risk capital requirements identifies deficiencies in probability of default and loss given default models. It suggests conservative adjustments, especially for the retail portfolio, and raises concerns over corporate risk weights, maturity parameters, and governance. The authority mandates clearer presentation of regulatory-approved values in credit decisions and plans further supervision.