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Swedish Banks Gird for Foreign Funding Cap After Borg Threat

Swedish Finance Minister Anders Borg said he will try to limit bank borrowing in foreign currencies in his latest proposal to curb the threat of losses posed to taxpayers by the financial industry.

“It’s a risk that the banks are dependent on foreign exchange funding,” Borg told reporters at a conference in Stockholm today. The government is looking into various options to prevent banks’ over-reliance on currency markets, including “introducing a fee or levy to make it more costly for the banks to expose Sweden to that kind of risk,” he said.

Sweden has already pushed through higher capital requirements than those set elsewhere, and plans to prevent banks under-stating mortgage-asset risks by enforcing stricter risk weights. Borg has committed to Sweden’s more rigorous standards after the nation’s banks expanded into the Baltics at the height of the former Soviet states’ property boom. The government argues Sweden’s banks, which have assets about four times the size of the $500 billion economy, need to be restrained to protect taxpayers.

“This is a sector that will be regulated tougher and tougher and tougher every year going forward and they may as well prepare for that,” Borg said. “If you’re in the banking business then you should envision a period of five to 20 years when the regulatory framework simply will be made stricter.”

Deposit Funding

Nordea Bank AB, the largest Nordic lender, Svenska Handelsbanken AB, Swedbank AB and SEB AB boast some of Europe’s highest capital ratios, helping to give them cheaper access to market funding. The lenders have largely avoided taking on assets tainted by Europe’s debt crisis and credit default swaps show they’re among the world’s safest lenders.

“We have strong, stable banks in Sweden, we want them to continue that way, and we do have a good dialogue with the banks,” Martin Andersson, director general of the Swedish Financial Supervisory Authority, said at the same conference. “We see that the banks are better financed than in Europe overall and that they have better liquidity buffers. That’s good as we’re entering 2013 -- a year that could be pretty messy.”

Foreign Funding

Credit default swaps, which show the cost of insuring against an issuer’s failure to repay debt, traded at 81.76 on Handelsbanken yesterday and 89.53 for Nordea. Swaps on SEB were 113.26 while Swedbank’s stood at 120.25. That compares with 162.79 for BNP Paribas SA, 121.71 for Deutsche Bank AG and 160.23 for Barclays Bank Plc, according to data available on Bloomberg.

“If one looks at all the short funding in the Swedish financial system today, then 90 percent of all short funding is in foreign exchange,” Mattias Persson, head of the financial stability department at the Riksbank, said at the same event. “There are advantages and there are disadvantages with that.”

Of the total securities issued by Swedish banks as of the end of October, including certificates and bonds, 78 percent were in foreign currencies, according to data from Statistics Sweden. Sweden’s banks had 2.06 trillion kronor of outstanding securities at the end of that month. Of securities with maturities of one year or less, 93 percent were in foreign currencies while 64 percent of securities with maturities of more than 2 years were in foreign currencies, the data showed.

Of Handelsbanken’s total liabilities due to credit institutions of 227.2 billion kronor as of Sept. 30, some 85 percent were in foreign currencies such as euros, Norwegian and Danish kroner, British pounds and U.S. dollars and the rest in Swedish kronor, according to its third-quarter report.

Consumer Debt

Swedish banks short-term market funding is mainly in foreign currencies such as U.S. dollars, meaning that the banks’ liquidity buffers are also largely funded in foreign currencies, according to a Riksbank report on June 1. Some 80 percent of the banks’ liquidity buffers are in foreign currencies, it showed.

Sweden’s central bank has warned against rising consumer debt levels, which have grown to about 170 percent of disposable incomes. Household debt by that measure mustn’t exceed 200 percent, Governor Stefan Ingves said this month. The bank predicts the level will remain largely unchanged at about 170 percent through 2015, after having risen from 90 percent in 1996, provided the central bank doesn’t cut rates further.

Borg, who has previously lashed out against Sweden’s banks for not cutting mortgage rates in tandem with central bank cuts and warned banks not too hand out surplus cash to shareholders, today said Sweden must cut household debt levels and control property prices to safeguard financial stability. He also said Sweden should target annual household borrowing growth of no more than 4 percent and that Sweden “needs to make the banks return to more deposit-based financing.”

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