Swedish Banks Must Gird for Next Credit Crisis, Frisell Says

Financial Supervisory Authority Chief Economist Lars Frisell
Swedish Financial Supervisory Authority Chief Economist Lars Frisell. Source: Swedish Financial Supervisory Authority via Bloomberg

Swedish banks must do more to prepare for a deterioration in Europe’s debt crisis that could freeze interbank markets and cut off funding, said Lars Frisell, chief economist at the country’s financial regulator.

“It won’t take much for the interbank market to collapse,” Frisell, who is also a member of the Basel Committee for Banking Supervision, said yesterday in an interview in Stockholm. “It’s not that serious at the moment but it feels like it could very easily become that way and that everything will freeze.”

Swedish policy makers have been pressing for the nation’s lenders to seek more permanent, longer-term funding after the financial crisis in 2008. Following the collapse of Lehman Brothers Holdings Inc., Sweden’s central bank provided liquidity peaking at $30 billion because the country’s banks weren’t able to borrow in the U.S. currency to repay short-term loans.

While Swedish banks’ liquidity situation has improved since 2008, they still need to “do more” to raise the maturity of their financing, primarily the dollar funding, Frisell said. The banks have also said that their funding has become shorter in maturity because of reluctance from U.S. investors to lend long-term, he said.

The three-month Stockholm interbank lending rate reached 2.59 percent yesterday, the highest since December 2008. The rate rose to more than 5 percent in 2008 as the market froze following the Lehman collapse.

Banking Drop

European bank stocks, including Swedish lenders such as Nordea Bank AB, the largest in the Nordic region, have tumbled this month on concern over potential losses from the sovereign debt crisis. Sweden’s biggest lenders, which also include SEB AB, Svenska Handelsbanken AB and Swedbank AB, passed European Union stress test released earlier this year.

Nordea fell 3.5 percent at 11:13 a.m. local time, while SEB tumbled 5 percent, Swedbank retreated 4.3 percent and Handelsbanken, the country’s second-largest lender, slipped 3.3 percent, all underperforming the Bloomberg Europe Banks and Financial Services Index, which was down 3 percent.

The leaders of France and Germany on Aug. 16 also renewed calls for a tax on financial transactions. German Chancellor Angela Merkel and French President Nicolas Sarkozy also rejected selling euro bonds and expanding the region’s bailout fund, while backing a plan being drawn up for national balanced-budget amendments and more economic integration in the region.

Nordea is down 19 percent this year, SEB has lost 29 percent, Handelsbanken 17 percent and Swedbank 2 percent.

Balance Sheets

Finance Minister Anders Borg has also pushed for more stringent capital requirements than those recommended by the Basel Committee. Policy makers argue Sweden needs tighter rules because its banking industry is about four times the size of the country’s gross domestic product.

The four biggest banks had combined balance sheets of 11.3 trillion kronor last year and profit before tax of 70 billion kronor, Riksbank Deputy Governor Lars Nyberg said in a speech on May 17. Their foreign currency borrowing has risen to about 1.5 trillion kronor from 200 billion kronor in 1998, making them vulnerable to a liquidity crisis,

One solution would be to “tax what we think imposes costs on society,” Frisell said. “We have the capital requirements for the banks so we can also charge an extra tax on short debts.”

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