Norwegian Financial Supervisory Authority identifies credit risk and IRB shortcomings at SpareBank 1 Østlandet

The Norwegian Financial Supervisory Authority has published an inspection report identifying weaknesses in SpareBank 1 Østlandet’s corporate lending controls, expected credit loss estimates and internal ratings based system. Many reviewed loans departed from the bank’s credit policy or sector guidance, while case quality and documentation varied. The authority also found practices that could understate loss given default and regulatory capital requirements. The bank should strengthen scrutiny and reporting of policy deviations, improve credit assessments and reinforce controls over smaller cases. Its stage 1 and stage 2 loss allowances involve significant measurement uncertainty, particularly because of limited data, and its expected loss guidelines should better address estimation uncertainty and model overrides. The authority also found limited collateral realization data, indications that commercial property collateral values are overstated and a material risk that loss given default estimates for the corporate portfolio are too low. Further IRB deficiencies included incorrectly classifying some corporate exposures as retail, setting the size parameter too low and insufficient alignment between credit decisions and IRB scoring. The bank also incorrectly applied the small and medium sized enterprise supporting factor to some customers in large groups or investment funds and must correct any resulting capital requirement understatement. The board broadly agreed with the findings and is implementing measures, including procedures to use correct consolidated data and correct identified errors.