Europe’s Banks Urged to Cut Down All Capital-Heavy Units

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The president of the European Banking Federation is urging lenders in the region to reinvent themselves and discard the areas of their business that place too large a capital burden on their balance sheets.

“Banks need to be more efficient, that’s very simple,” EBF President Christian Clausen said in an interview in Stockholm last week. “Everything that can be done will be done in terms of moving business.”

Job losses in the financial industry were close to their highest in four years at the end of January, with European banks leading the cuts, according to data compiled by Bloomberg. UBS AG said in October it will eliminate 10,000 jobs over three years as Switzerland’s biggest bank adjusts to stricter capital rules. Barclays Plc, based in London, and Germany’s No. 2 lender, Commerzbank AG, are also terminating thousands of positions to stay competitive in the new regulatory environment.

Even banks in Scandinavia, which emerged from the debt crisis largely unscathed, are cutting jobs. Clausen, who is also the chief executive officer of Nordea Bank AB, the Nordic region’s largest lender, said Jan. 30 management has cut back 8 percent of its staff as it targets reducing headcount by at least one tenth. Denmark’s biggest bank, Danske Bank A/S, is decreasing its workforce by 3,000, it said last year.

‘Less Capital’

“The most important thing is capital-light products, where we will serve customers using less capital,” Clausen said.

The EBF, based in Brussels, is an umbrella organization for Europe’s bankers groups. Its 31 members include the Swiss Bankers Association in Basel and the British Bankers’ Association in London.

Stockholm-based Nordea, which has lagged behind its Swedish rivals Svenska Handelsbanken AB and Swedbank AB in boosting capital buffers, said it managed to increase profit last quarter even as demand for banking services was “constrained” by a tough economic climate. Nordea’s net income rose 7 percent to 840 million euros ($1.13 billion) in the fourth quarter from a year earlier, it said Jan. 30.

Clausen said the traditional branch network structure that banks once used is unlikely to survive the current regulatory overhaul.

“We are closing branches,” he said. “The old big branch that did everything we are getting rid of, so instead we have advice branches for our relationship customers and service branches for when you just want to do a banking service.”

Branch Closures

Of the 770 Nordic branches Nordea had at the end of last year, 65 percent were in so-called “focused formats,” which specialized in either advisory or service functions. In Sweden, Nordea closed 17 branches that still had manual cash handling last quarter. The bank plans to complete similar steps at its units in the Baltic countries and Poland by the end of the year.

Shares in Nordea gained as much as 1.1 percent today and traded 0.9 percent higher as of 11:58 a.m. in Stockholm at 71.2 kronor. The 40-member Bloomberg index of European financial stocks slipped 0.4 percent.

The capital requirements set by the Basel Committee on Banking Supervision are forcing banks to realign or lose money. Capital-heavy services such as corporate lending are being cut back while alternatives such as debt underwriting are taking its place.

UBS has said its job cuts reflect a retreat from capital-intensive trading businesses as the bank instead focuses on wealth management services.

‘Quite Different’

The industry’s response is one that regulators had targeted, Axel Weber, UBS chairman and former European Central Bank Governing Council member, said at the World Economic Forum in Davos, Switzerland, last month. Banks face a “quite different” future from the business model they followed before the crisis, he said.

Clausen at the EBF urged national regulators to ensure bank rules are harmonized across borders. In Sweden, where Nordea is based, Finance Minister Anders Borg has ensured lenders face stricter rules than those set elsewhere.

Nordea, which is the product of a state-engineered merger following Sweden’s 1990s banking crisis, is 13.5 percent owned by the state. The Swedish government has defended its stricter regulatory approach arguing the measures are needed to protect taxpayers from potential bank industry losses.

‘Not Harmonized’

Nordea and Sweden’s three other major lenders, Handelsbanken, Swedbank and SEB AB, must meet a minimum core Tier 1 capital ratio of 10 percent of risk-weighted assets this year. The requirement rises to 12 percent in 2015. All four already comply with the 2015 rules. Basel sets a 7 percent minimum requirement, effective from 2019.

“We are creating a structure which is not harmonized, where competition is not as efficient, where all sort of taxes and fees and regulations are different,” Clausen said.

“This is not according to the thinking behind the one market and all the efficiency and competition we want to create, so I think it is pretty important,” he said.