There is a close relationship between
the central government and the municipal sector in Norway. This
relationship is characterised by strict central government
control, regulation and oversight of the municipal sector. All
municipal budgets must be approved by the central government and
municipalities are not allowed to budget for an operating deficit.
Borrowings may only finance primary municipal investments and
guarantees for third parties are not allowed.
The level of supervision that the local government sector is
subjected to is set out in the Local Government Act of 25 September
1992, Section 55, whereby municipalities are prohibited from going
bankrupt. They are subject to extensive oversight by the central
government. Given the close links and strict supervision of the
municipal sector by the central government, it is difficult, if not
impossible, for a municipality to become insolvent. The Ministry of
Local Government states that, "If a municipality were to run into
serious financial difficulties, the Central Government would
consider it to be its responsibility to help that municipality and
transfer payments could be mobilized on a timely basis". The
statement highlights the strong implicit central government support
backing the Norwegian municipal sector.
Norwegian local governments receive a substantial part of their
income from the central government, directly and indirectly though
the local taxation system.
Rating agencies have confirmed the strength of the Norwegian
local government sector and the level of central government
oversight. In June 2005, Standard and Poor's concluded that the
sector is "One of the strongest local government sectors of any
country rated by Standard & Poor's". A further stamp of
approval came from Moody's in September 2005 when they stated in a
report that "Norwegian local governments are among the most
regulated and supervised systems in Europe".
With the introduction of the Bank of International Settlement
(BIS)'s new capital requirement regulations from January
2007, the Norwegian Ministry of Finance has left its risk weighting
criteria with regard to local governments unchanged. Only entities
carrying an explicit and unconditional sovereign guarantee are 0%
BIS weighted in Norway, unlike other North European countries. This
reflects the conservative nature of the Ministry's approach to
risk. Local governments are therefore assigned a 20% risk
weighting and as such KBN is also 20% risk weighted,
corresponding to its ownership structure and its asset base of
solely local government risk.