Sweden’s financial regulator said banks under pressure from the government and central bank to curb short-term foreign currency funding have little room to adjust their financing given the economy they operate in.
“From our supervisory perspective, we understand the structural logic for having a reliance on market funding,” Uldis Cerps, head of banking at the Swedish Financial Supervisory Authority in Stockholm, said in an interview at the agency’s headquarters on Aug. 20.
Finance Minister Anders Borg has repeatedly told banks in the largest Nordic economy to wean themselves off short-term wholesale funding, particularly in currencies other than kronor, after a market freeze in 2008 left lenders reliant on central bank liquidity. The Riksbank has even suggested charging banks to help cover the cost of holding reserves needed to hedge banks’ currency risks.
Yet Cerps at the FSA says the sheer size of Sweden’s export sector -- half the nation’s gross domestic product comes from sales abroad -- creates a demand for dollars and euros that banks need to service. Swedes also prefer investing in funds and stocks to putting their cash in deposit accounts, limiting banks’ access to household savings for their funding needs.
“There is not sufficient deposit funding given the savings pattern of Swedish households,” Cerps said. “In addition to that Swedish banks are serving their customers, who are big international export-oriented companies, and that means that there is not sufficient domestic deposit savings in order to meet all those needs, so they are in need of foreign market funding.”
Sweden’s banks rely on deposits for about half their funding needs and get the rest from capital markets, according to the financial regulator. By comparison, banks in the euro area are more than 90 percent deposit funded, on average. About half of Swedish banks’ market funding is in foreign currencies, the central bank estimates.
Shares in Nordea Bank AB, Scandinavia’s biggest lender, rose 0.6 percent to 92.30 euro as of 11:21 a.m. in Stockholm, the highest in three weeks.
Though the FSA understands the structural reasons behind Swedish bank funding patterns, it’s not blind to the risks posed by relying on markets that in the past have disappeared overnight.
“We are very closely following banks’ market funding,” Cerps said.
Back in March, Borg said the government was preparing steps to force banks to cut their reliance on non-krona funding once stricter capital rules were in place. The regulator in May presented a new package of capital requirements that will add to some of the world’s strictest reserve rules.
The government will “eventually have to return to the liquidity requirements and the banks must expect that the order we have today with market financing via currencies won’t remain,” Borg told reporters in Stockholm on March 28.
The four party coalition that Borg is part of is poised to lose elections next month, according to polls. The Social Democrat-led opposition has signaled it plans to keep pressure on banks and their capital levels if elected into office.
Cerps said regulatory efforts such as implementing a liquidity coverage ratio earlier than required under the Basel framework, a planned net stable funding ratio and stricter capital requirements will help Swedish banks manage their funding risks.
“Our regulatory efforts have focused primarily on banks having enough resilience to deal with unexpected shocks,” Cerps said. “First of all, of course, we need to make sure that the banks are perceived as strong in terms of their capital strength to minimize the risks stemming from sudden changes in the behavior of debt investors.”
Other measures, such as the finalization of a net stable funding requirement for banks, will “hopefully further reduce the risk,” said Cerps.
Sweden’s banks have retained earnings and cut costs to meet stricter capital requirements. These include adding systemic risk buffers, higher mortgage risk weights and a counter-cyclical buffer. Together, these measures have raised capital standards so that Nordea’s minimum requirement is 14 percent. Swedbank AB, Sweden’s biggest mortgage bank, must meet a 19 percent minimum buffer.
Sweden’s liquidity coverage ratio rule, enforced two years before a 2015 Basel deadline, requires banks to have a large enough buffer of highly liquid assets to cover cash outflows for 30 days in a stressed scenario. Sweden’s four big banks all meet that requirement, FSA data show.
As a result, they enjoy lower borrowing costs than many of their European peers. Swedbank said in its second-quarter report that “low risk further reduced our funding costs during the quarter.”
All of the measures taken in Sweden “will make banks more resilient and less vulnerable to sudden funding market shocks,” Cerps said. “Of course we’ll have to assess those measures going forward as we do with all measures taken to see if they are still adequate.”
While market funding has been identified as a risk by the regulator and the government, Swedish households’ record indebtedness remains a bigger worry for policy makers.
To help curb debt growth, the FSA is looking into an amortization requirement for mortgage holders. It’s also assessing whether to limit household debt burdens relative to incomes and restrict the use of floating mortgage rates, Cerps said. Lowering the existing mortgage cap is another option, he said.
“If you want to further address the issue of household indebtedness then you probably have to look at all types of measures that are directly aimed at households,” he said.