Norwegian Financial Supervisory Authority finds deficiencies in Sparebanken Øst’s retail credit assessments and corporate default risk modelling

The Norwegian Financial Supervisory Authority has published an inspection report on Sparebanken Øst following an on-site review of internal governance, retail lending and compliance with the Lending Regulation, the handling of mortgage borrowers in arrears and foreclosure, and complaint management. The report concludes that the bank must improve the precision of its retail credit case processing, strengthen controls to avoid underestimating customers’ expenses, tighten follow-up of arrears and enforcement routines, and document the rationale for loans granted with deviations under the flexibility quota. It also identifies a risk that the bank’s probability of default model may underestimate default risk for corporate lending. In retail lending, the review found cases where income information, including rental income, was recorded on the wrong borrower and instances where income used in affordability assessments exceeded both tax data and recent income averages, potentially affecting whether cases should be treated as deviations under the Lending Regulation. Expense estimation was flagged as a weakness, including use of standardised assumptions that may understate costs and limitations in how SIFO-based living expenses are parameterised, alongside the earlier level of add-ons above the SIFO budget prior to an increase implemented from February 2025. The report also points to insufficiently accessible and complete documentation of credit decisions, including missing justification for deviations and inadequate referencing to internal criteria when using the flexibility quota. For arrears and foreclosure, sampling indicated delays versus internal targets for personal customer contact, limited documentation of efforts to identify causes of payment problems, weak evidence of referrals to public support schemes, and previously missing written routines for overseeing outsourced debt collection activities. Complaint-handling controls were also criticised, including the lack of a clear complaint definition and weaknesses in registering and reporting complaints, with several cases handled by the Norwegian Financial Services Complaints Board not recorded as complaints. Governance observations included limited documentation of board deliberations in minutes and a need for more forward-looking risk reporting, while group oversight of financial agents lacked documented routines at the time of the inspection and the bank subsequently terminated its own financial agent relationship. Finanstilsynet asks the bank to provide the minutes from the board meeting where the inspection report is discussed and to share the report with both external and internal auditors.