Bloomberg News - Swedish Banks Get No Mercy as EU Agenda Ignored: Nordic Credit

By Peter Levring & Johan Carlstrom 

Swedish Finance Minister Anders Borg

Andrew Harrer/Bloomberg

Swedish Finance Minister Anders Borg said he won’t cave to pressure from banks or the European Union to harmonize standards and insists capital ratios in the largest Nordic economy need to be higher than those elsewhere.

“We will push ahead with higher capital requirements,” Borg said in an interview in Stockholm. “We won’t take any risks regarding the Swedish economy; we have a large banking sector and highly indebted households, so we need to be sure what’s ahead.”

Some of Sweden’s biggest banks have argued the government’s approach is hurting their ability to lend. Without harmonized capital rules, banks will suffer competitive distortions, Nordea Bank AB Chief Executive Officer Christian Clausen has repeatedly warned. Clausen, who is also president of the European Banking Federation, said in February lenders need “one rule book.”

Yet Borg’s tougher stance is supported by debt markets, which have rewarded Sweden’s banks with some of Europe’s lowest funding costs and default risks.

Svenska Handelsbanken AB (SHBA), the EU’s best-capitalized major bank, boasts credit-default swaps on level with the government of Japan, at about 60 basis points, according to data compiled by Bloomberg. Its five-year swaps also trade about 17 basis points lower than similar contracts on JPMorgan Chase & Co., the biggest U.S. bank by assets.

Basel III

Sweden’s four biggest banks need to hold at least 10 percent core Tier 1 capital of their risk-weighted assets this year, and no less than 12 percent by 2015. That compares with Basel III’s 7 percent requirement by 2019 and a 9 percent minimum standard for some European banks.

“All of Europe will benefit from having a harmonized system and less discretion,” Nordea CEO Clausen said in an interview in Dublin last week. “One thing is regulation. The other is the market -- the market is putting more demand on banks for more capital.”

Sweden’s biggest banks already exceed the country’s capital requirements. Nordea reported a 13.2 percent core Tier 1 ratio of risk-weighted assets for the first quarter, under Basel II rules. AtSwedbank AB (SWEDA), the ratio was 17.3 percent while SEB AB had 15.3 percent, by that measure. Under Basel III regulation, Svenska Handelsbanken AB had a 17.5 percent ratio while Swedbank and SEB had 16.4 percent and 13.4 percent, respectively.

Financial Markets Minister Peter Norman, who oversees banks, argues harmonized capital rules make no sense because each country has its own financial risks to deal with.

Bank Concentration

“The bank concentration is so different across Europe,” he said in an interview. “It’s not reasonable that Swedish taxpayers be exposed to higher risk in a financial crisis than other taxpayers in Europe.”

Sweden’s government has backed the U.K. in its calls to give individual EU members the freedom to set their own capital rules. Sweden’s banking industry has combined assets that are more than four times the $500 billion economy.

Speaking in Stockholm in February, Chairman of the U.K.’s Financial Services Authority Adair Turner said setting individual standards is each country’s “right.” Nations that design their own rules will “get advantages from it in the longer term, rather than disadvantages,” he said.

Europe’s crisis has been exacerbated by the link between its under-capitalized banks and over-indebted governments. After three years of fiscal turmoil, only four of the euro area’s 17 member states will comply with the bloc’s 60 percent debt rule this year, according to European Commission estimates published May 3.

Cyprus Debt

Germany’s debt will reach 81.1 percent, while the euro area’s average will swell to 95.5 percent of GDP. Greece’s debt burden will be almost three times the bloc’s targeted limit, at 175.2 percent, the commission estimates. Cyprus will see its debt swell to 109.5 percent.

Commission data also show euro-zone governments have injected 1.7 trillion euros ($2.2 trillion) into their banking systems since 2008 as the fates of nations depended on the survival of their financial industries.

To avoid such costs, some of Sweden’s most influential economists have argued in favor of requiring banks to hold 20 percent capital relative to their risk-weighted assets. Assar Lindbeck, a research fellow at the Research Institute of Industrial Economics and one of the main architects behind Sweden’s budget surplus rule, said in an interview last month existing capital requirements should be “raised substantially.”

According to Norman, Sweden’s banks are lobbying against stricter rules in vain.

“There are no doubts that we will be able to have higher capital requirements than other countries,” he said.