In Negative-Rate World, Swedish Banks' Big Risk Becomes a Boon

  • Market funding eases need for deposits to fund balance sheet
  • Banks now discouraging deposits from institutional clients

Sweden is discovering market funding isn’t perhaps all that bad for its banks after all.

For years, the country’s central bank and financial supervisor have railed against lenders’ dependence on markets -- rather than deposits -- because of the risk that investors might flee, leaving banks in a lurch. Now, Sweden is finding the markets may be a better funding source than savers as central bank rates go deeper into negative territory.

Market funding “contributes to liquidity risk in the banking sector,” Uldis Cerps, executive director for banking at the Stockholm-based Financial Supervisory Authority, told Bloomberg. But, “it simultaneously reduces the need to fund balance sheet with deposits.”

Sweden’s Riksbank last week cut rates to a record low minus 0.50 percent in a bid to spur inflation and keep the krona in check. Central Bank Governor Stefan Ingves brushed aside concerns about the impact on banks, saying “profit levels are very, very good.”

Swedish banks, which have AA credit ratings and big capital buffers, also have good access to wholesale funding. That’s resulted in “low funding costs compared to other banks,” the Riksbank said in November. And helping offset the impact of negative rates, as greater dependence on market funding means less dependence on deposits.

Deposits “have shown to be difficult to re-price or charge negative rates,” Cerps said.

In neighboring Denmark, banks have had to contend with negative rates for more than 3 1/2 years. So far, they’ve upheld a pledge not to pass on the cost to retail customers but at a cost. Danske Bank A/S estimates narrowing deposit margins cost it more than $302 million last year.

The recognition in Sweden that marking funding has an upside, that it’s not just a major risk to financial stability, is yet another twist in the strange world that’s taking shape as central banks’ use of subzero rates to jolt economies to life becomes more widespread and rates sink lower.

Another: Banks have the power to shrink deposits and, short of charging retail clients, they’re using it.

Sweden banks generally are able to control pricing because the industry is “concentrated,” Cerps said. That “has implications for the pricing power of banks and possibility to adjust margins to current market circumstances.”

Svenska Handelsbanken AB, Sweden’s second largest lender by assets, has adjusted its prices for institutional clients to discourage them from depositing money with the Stockholm bank. Partly as a result, the bank’s been able to reduceby half the cash and liquid assets it keeps with central banks.

“If you don’t need it, it would be a little bit funny to pay for it,” Chief Executive Officer Frank Vang-Jensen said.

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