Bank Union Feeds Swedish Capital Feud as Nordea Defies Borg

Nordea Bank AB (NDA) wants Swedish Finance Minister Anders Borg to drop his opposition to a single European bank supervisor as the Nordic country’s stricter capital rules pit Sweden’s banks against their government.

“The common rules and the common supervision should be for all, including those banks and countries outside the euro,” Nordea Chief Executive Officer Christian Clausen, who is also the president of the European Banking Federation, said in a Sept. 26 phone interview from Stockholm. “We support one banking supervisor that ensures that we implement the same rules in the same way in different countries.”

Sweden, whose lenders have assets that are about four times the size of the $550 billion economy, is navigating discord over a common banking union at home as well as abroad. Borg, whose government holds a 13.5 percent stake in Nordea, has railed against Europe’s latest proposal to make the European Central Bank the region’s top bank regulator, a model he says would undermine Sweden’s freedom to set more rigorous capital requirements than those targeted elsewhere in Europe.

“We’ve worked hard to raise capital coverage requirements on Swedish banks,” Borg said in an interview last week. “We’re not prepared, through the back door, to allow the French and others who were skeptical of this to undermine that deal and decide that it’s only the ECB that can decide capital coverage requirements.”

‘Ill-Managed’

Plans to work toward a European banking union that would also entail cross-border deposit guarantees have been met by a pledge from Borg that Swedish funds will never go toward covering losses in “ill-managed” banks elsewhere in Europe.

Borg, together with the Swedish central bank and the Financial Supervisory Authority, in November told Nordea, Svenska Handelsbanken AB (SHBA), Swedbank (SWEDA) AB and SEB AB to meet a 10 percent core Tier 1 capital ratio of risk-weighted assets by January. In 2015, that requirement will rise to 12 percent. That compares with the Basel Committee on Banking Supervision’s minimum of 7 percent, due to take effect by 2019. The European Banking Authority has a temporary target of 9 percent for some lenders.

Clausen said that setting divergent capital requirements only creates more financial risk. Higher capital standards are acceptable if all banks are required to meet them, he said.

Systemic Risk

“There is no simple answer to what the right capital ratio is, but if you have different levels you have the situation where some areas will go into recession before others,” Clausen said. “Those with low capital levels will be more vulnerable and will create economic disruptions to the stronger countries that have more capital. You could say that the weaker areas will be the systemic risk areas.”

European leaders presented their goal of having a single bank supervisor in June as a framework for providing financial assistance directly to euro-area banks. More detailed proposals unveiled on Sept. 12 include safeguards for the U.K. and the other nine nations that don’t use the euro to take their national interests into account.

The proposal has sparked debate on both the national level and within the banking industry, as lawmakers struggle to agree ahead of a Jan. 1 deadline for the supervisor to be in place. A phasing-in period of the system is due to be completed by Jan. 1, 2014, and all 27 EU members will need to sign off.

The model is designed to ensure governments aren’t dragged down by troubled lenders receiving state aid in a spiral of inter-dependency that has compounded the debt crisis.

Capital Ratios

At the end of last year, Swedbank and Handelsbanken were the two best-capitalized lenders in Europe under Basel II on a Swedish central bank ranking of 24 of the region’s largest banks, including Deutsche Bank AG (DBK), BNP Paribas SA (BNP), Barclays Plc (BARC), UBS AG and Banco Santander SA. SEB was No. 4 and Nordea No. 7.

Nordea, which is in part the product of a state-engineered merger after Sweden’s 1990s banking crisis, had the lowest core Tier 1 capital ratio last quarter of the country’s four biggest lenders, at 11.8 percent. Borg has also justified his insistence on stricter capital rules by citing more recent examples of financial risk.

Stockholm-based Swedbank and SEB suffered severe losses after expanding into an economic boom in the Baltic states that turned to bust in 2009. The experience underlines the need to ensure banking standards in Sweden aren’t eroded as euro-zone lenders buckle, according to Borg.

Incentives

The ECB “would automatically get a majority,” Borg said in last week’s interview. “This entire regulatory framework that we’ve built up in the last few years is based on that when different countries get into a conflict, different banks get into a conflict, there will be mediation. You can’t leave that to an institution where the ECB and the euro countries have an automatic majority.”

Spain in June asked for a 100 billion-euro bailout for its banks, as the nation awaits the results of stress tests indicating how much extra capital the lenders need. Recapitalizing Europe’s troubled banks is a key step in restoring confidence and easing the crisis, Clausen said.

“The whole situation with confidence for the banking sector is all about the banks being capitalized,” he said. “It’s all about capital -- if we capitalize the Spanish banks, then that worry will go away. Gradually when banks have been capitalized, and the whole system has been capitalized, the risk-premiums will disappear.”

More Palatable

Against the backdrop of continued banking turmoil in southern Europe, EU legislators are looking at ways to make a common banking framework more palatable.

Sven Giegold, a European parliament lawmaker leading the work on the plans to hand bank supervisory powers to the ECB said Sept. 26 that “above all, the system should be so attractive that everyone will want to join” and that “what we want to avoid is for member states to feel they have an incentive to stay out.”

Even if Nordea lobbies for Sweden to join, the country is unlikely to sign up for a banking union now, Clausen said.

“They will keep the door open to join at the right stage,” he said. “The political project in the long-term of course needs to include everything, not just euro-zone countries. This is not just about the euro; it’s about ensuring that banks working cross-border have the same regulation.”

To contact the reporters on this story: Niklas Magnusson in Hamburg at nmagnusson1@bloomberg.net Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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