March 27 (Bloomberg) -- Sweden’s bank regulator said there’s no fixed rule on how to deal with capital shortfalls should they be found in euro-area subsidiaries of its lenders by the European Central Bank’s Asset Quality Review.
“We would expect that the findings from the investigation would be shared continuously and then of course we would jointly decide what’s the most appropriate action,” Uldis Cerps, executive director of the Swedish Financial Supervisory Authority, said in an interview. “There’s no mechanical rule on how to deal with that.”
As the ECB probes the health of lenders across the 18-nation euro area, foreign units of banks from countries like Sweden that don’t use the single currency are being pulled in. That raises the question of how regulators will cooperate to disclose results in an orderly way, in view of national laws that could urge action sooner than the ECB intends.
“The normal process in supervisory cooperation is to always share supervisory findings and to jointly discuss actions to findings,” Cerps said. “There’s nothing that prevents us from taking action earlier if necessary.”
The ECB’s Asset Quality Review, which examines the accounts and practices of 128 lenders across the currency bloc, should yield preliminary results in July, as auditors adjust reported capital ratios for what they’ve found. While the Frankfurt-based ECB plans to release results only in October after a stress test has been completed, national regulators may still be forced to step in sooner if capital gaps are found.
An ECB spokeswoman said on March 25 that the central bank is drawing up a plan on how to communicate with lenders during the assessment.
Cerps said he doesn’t expect holes to be found at the subsidiaries of Swedish banks operating in the euro area. Swedbank AB has operations in Estonia and Latvia, while SEB AB does business in Germany, Estonia and Latvia.
Sweden’s four biggest banks increased their dividends for 2013 after building up capital buffers that made them the best capitalized in Europe.
“We don’t expect large capital shortfalls given all the stress-testing we have done and our knowledge of the bank portfolios,” Cerps said. Supervisors from Estonia and Latvia, countries with significant economic ties to Sweden, echoed the sentiment, saying they don’t expect their lenders to fare badly in the ECB tests.
“Latvian banks are holding a high level of capital” and “can manage” the ECB tests, Kristaps Zakulis, chairman of Latvia’s Financial and Capital Market Commission, said in an interview.
Estonia’s chief regulator, Kilvar Kessler, said his country’s biggest banks should also have no trouble in passing the ECB’s review. “There likely won’t be any need to use backstops by asking for new capital injections or restructuring banks,” he said.
Cerps added that supervisors do not necessarily need to inform lenders of the results of such reviews if there’s no need to act immediately.
“There’s nothing unusual in supervisors being in possession of sensitive information which is not being shared with banks during the investigation,” he said. “We would, in the case of big capital shortfalls, have a dialog with the respective home or host supervisor and jointly decide what is the most appropriate action.”
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