Sweden Teaches Bank Crisis Prevention to Top Basel Rules

Sweden Teaches Bank Crisis Prevention in Basel-Eclipsing Lesson
The headquarters of the Swedish Financial Supervisory Authority (FSA) stand in Stockholm. Photographer: Casper Hedberg/Bloomberg

Sweden, home to Europe’s safest banks, says the key to avoiding the next financial crisis is to ignore calls for harmonized capital rules and apply individual regulatory standards to match national risks.

The Financial Supervisory Authority in Stockholm, which requires Swedish lenders to adopt more rigorous capital rules than those set by the Basel Committee on Banking Supervision, says industry demands to target uniform requirements don’t take into account the lessons of the most recent financial crisis.

“It would be silly, and negative, to have exactly the same rules in all countries,” FSA Director General Martin Andersson said in an interview. “While we should have minimum levels in all countries, different nations should be able to go above those minimum levels -- otherwise we delete the experience we have made in the past few years that we sometimes have to do more to remove imbalances in individual countries.”

Banks in Sweden -- a AAA rated nation struggling to contain record household debt -- face a different set of risks than their peers elsewhere in Europe. Rules guiding the industry need to reflect that, Andersson said. It’s a viewpoint that has won support from the financial regulator in the U.K., home to Europe’s biggest banking hub.

Individual Rights

“Individual countries have the right, and should have the right, to impose higher levels,” Adair Turner, chairman of the U.K.’s Financial Services Authority, told reporters in Stockholm yesterday. “They will get advantages from it in the longer term, rather than disadvantages.”

The bigger a country’s banking system, the greater the potential risk it poses to the economy and the more urgent the need for national standards, he said.

The stance puts the two regulators at odds with Christian Clausen, the president of the European Banking Federation and chief executive officer of Nordea Bank AB, who argues cross-border regulatory differences create competitive disadvantages.

Banks across Europe need to operate according to “one rule book,” Clausen said in a Feb. 12 interview.

Nordea, Scandinavia’s largest bank, Swedbank AB, Svenska Handelsbanken AB and SEB AB must set aside at least 10 percent core Tier 1 capital of their risk-weighted assets this year. The requirement rises to 12 percent in 2015. The Basel Committee, which is chaired by Swedish central bank Governor Stefan Ingves, sets a 7 percent minimum, effective from 2019.

Dwarfing GDP

Sweden’s biggest banks, whose combined assets are four times the country’s gross domestic product, already have capital buffers that exceed national rules, an achievement rewarded by investors. Swedbank shares have gained 20 percent this year. The smallest share increase of the four was at Handelsbanken, whose stock rose 15 percent in the period. The 40-member Bloomberg index of European financial companies advanced 8 percent.

Credit-default swaps suggest Handelsbanken is Europe’s safest major bank, and five-year contracts on its senior notes trade below similar derivatives on debt sold by the government of Belgium.

Clausen said this month he expects Europe’s banks eventually to converge around a single set of standards that probably will be closer to Sweden’s than Basel’s.

According to Andersson at the FSA, the assumption ignores the divergent economic environments that banks operate in.

Diverging Economies

Sweden’s $500 billion economy will grow 1.2 percent this year, the central bank estimates. That compares with a 0.3 percent contraction in the 17-member euro area, according to the European Central Bank. The ECB has tried to counter the economic decline by cutting its main interest rate to a record-low 0.75 percent, a level that’s become an anchor for borrowing costs across much of Europe.

And as the euro area grapples with austerity and recession, Swedish households have seen their property prices soar about 25 percent since 2006. Private debt burdens in the largest Nordic economy rose to a record 173 percent of disposable incomes last year, the central bank estimates.

In an effort to restore balance, Andersson last year proposed tripling the risk weights Swedish banks apply to their mortgage assets to 15 percent. His agency, which has capped lending at 85 percent of a property’s value since October 2010, would consider further measures to cool Sweden’s credit growth, he said.

‘Most Indebted’

“Swedish households today are among the most indebted in Europe and we cannot have household lending that spirals out of control,” Andersson said. “If that would happen, we can utilize the two tools we do have again, or look at other alternatives.”

Signs of overheating are even more pronounced in neighboring Norway. Property prices there rose an annual 8.5 percent last month, and have surged almost 30 percent since 2008.

The bank regulator in Norway, where household debt burdens are more than twice disposable incomes, responded in December by proposing that risk weights on mortgage assets be tripled to 35 percent. The country’s biggest bank, DNB ASA, says the measure is unnecessary and will put it at a regulatory disadvantage.

A gray zone remains how foreign banks operating in countries with stricter rules should be treated, Andersson said.

“If we are worried about debt growth in certain sectors in Sweden and regulate that, then it’s not exactly ideal if foreign banks can enter Sweden and use other rules,” he said. “That’s one thing we need to achieve with the new rules.”

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