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Swedish Policy Makers Rush to Stamp Out Bank Liquidity Concerns

Swedish policy makers rushed to ease concerns the nation’s banking industry was at danger from a loss of international funding after shares plunged yesterday.

Riksbank Deputy Governor Lars Nyberg said in an interview today that the banks have “no difficulties obtaining their international funding,” while Finance Minister Anders Borg said at a press briefing that lenders “are better capitalized than before” and have “greater stability.”

Shares of Stockholm-based Nordea Bank AB, the largest Nordic lender, plunged 7.4 percent yesterday as financial stocks across the region slumped. Lars Frisell, chief economist at the country’s financial regulator, said earlier this week that lenders need to do more to shore up funding to prepare for the next potential crisis in bank lending markets.

Swedish banks, whose combined assets are four times the size of the largest Nordic economy, continued to slide today. Nordea declined 3.1 percent at 3:01 p.m. in Stockholm, after earlier trading down as much as 5.2 percent.

“Comments from Sweden’s FSA yesterday would normally be ignored and to some degree are also expected by regulators, but unfortunately found an open door which the Riksbank is now rushing to shut by reassuring markets on Swedish bank funding,” Nick Anderson, an analyst at Berenberg Bank in London, said in an e-mail today.

Interbank High

The three-month Stockholm interbank lending rate reached 2.59 percent on Aug. 17, the highest since December 2008. It was at 2.58 percent today. The rate rose to more than 5 percent in 2008 as the market froze following the collapse of Lehman Brothers Holding Inc.

The share declines don’t reflect the banks’ capital buffers or the healthy economic environment in which they operate, according to analysts and officials. While cautioning lenders to prepare for a possible deepening of the crisis, Frisell said Swedish banks are in a “good condition” and less dependent on short-term dollar funding than they were before the collapse of Lehman Brothers.

Borg said that pressure on Swedish banks is caused by the situation in other parts of Europe. There’s no “primary risk” in the Swedish financial system, such as the difficulties the industry had with loan losses in the Baltics during the financial crisis, he said.

Borg and other policy makers such as central bank Governor Stefan Ingves have argued that the largest Nordic economy should take a global lead in tightening capital requirements as regulators across the world look for ways to prevent a re-run of the worst financial crisis since the Great Depression.

Over Reaction

The sell-off was an over-reaction and “Swedish banks would be the ones that fail last” in the event of a second liquidity crisis in Europe, Nyberg said. “Investors have access to money and they will lend it to banks that look really good in countries that look really good. Sweden looks very good in that context,” Nyberg said.

Sweden’s biggest lenders, which also include Swedbank AB, Svenska Handelsbanken AB and SEB AB, all passed the European Banking Authority’s stress test on July 15 with a core Tier 1 capital ratio, a key measure of financial strength, of at least 8.6 percent under an adverse scenario. The minimum requirement is a ratio of 5 percent.

Swedbank, the biggest lender in the Baltics, recouped 324 million kronor in bad-loan provisions in the second quarter, following impairments of 963 million kronor a year earlier amid an economic recovery in the Baltic region. The bank in 2009 posted a full-year loss as the Baltic states of Estonia, Latvia and Lithuania suffered the European Union’s worst recessions.

Still Functioning

“We share the view of the Riksbank,” Thomas Backteman, a spokesman at Swedbank AB, said today by phone. “The funding market is still functioning and we’re continuing to utilize our funding strategy as planned.”

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, 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.

“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 in an Aug. 17 interview. “It’s not that serious at the moment but it feels like it could very easily become that way and that everything will freeze.”

Credit default swaps on Nordea jumped 10 basis points yesterday to 133.5, while Sweden’s benchmark OMX Index of stocks slumped 6.7 percent.

The move may be unwarranted, analysts said.

“We can see a number of reasons why funding costs should continue to be available at reasonable prices,” Henrik Schmidt and Alice Timperley, analysts at Morgan Stanley in London, wrote in a note today. The Nordic banks have “very high” capital ratios, the macroeconomic situation remains “relatively benign” and Sweden, Norway and Denmark are not in the euro area, they wrote.

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