Borg Tells Swedish Banks to Gird for Buffer Rule Topping 12%

Swedish Finance Minister Anders Borg said Sweden’s banks need to prepare for even stricter capital rules than those due to be enforced from 2015.

A requirement that Sweden’s four largest banks hold at least 12 percent core Tier 1 capital of their risk-weighted assets by 2015 may be too lax, Borg said today in Stockholm. The government, led by Prime Minister Fredrik Reinfeldt, should look into tightening bank regulation further over the next five to 10 years, he said.

“We’re about to raise capital requirements; we won’t back down,” Borg said. “There are possibly reasons” to look into “taking a few further steps on capital requirements,” he said.

Sweden is defending its right to impose some of Europe’s harshest capital standards to shield taxpayers. Borg has rejected bank industry pleas to adhere to more harmonized capital rules, arguing nations with oversized financial industries face a higher risk of losses. Sweden’s four biggest banks, including Nordea Bank AB, have assets that are more than four times the size of the $500 billion economy.

The government will ensure that steps toward tightening bank requirements further will protect the economy from a decline in lending, Borg said.

Risk Weights

Borg also said there are “probably good reasons” for the financial regulator to revisit its initial plan to triple risk weights on banks’ mortgage assets to 15 percent, signaling a higher level may be necessary. The central bank has proposed 20 percent as a safer level, Borg said.

Shares in Sweden’s four biggest banks traded down. Swedbank AB lost 1.4 percent, while Nordea and SEB AB both lost 0.6 percent as of 12:50 p.m. in Stockholm. Svenska Handelsbanken AB dropped 0.5 percent. The lenders lost more than Sweden’s benchmark OMXS30 Index, which slipped 0.3 percent.

Some of Sweden’s biggest banks have argued the government’s approach is hurting their ability to lend. Without harmonized capital rules, banks will suffer competitive distortions, Nordea Chief Executive Officer Christian Clausen has repeatedly warned. Clausen, who is also president of the European Banking Federation, said in February lenders need “one rule book.”

Sweden’s four biggest banks need to hold at least 10 percent core Tier 1 capital of their risk-weighted assets this year, and no less than 12 percent by 2015. That compares with Basel III’s 7 percent requirement by 2019 and a 9 percent minimum standard for some European banks.

Sweden’s biggest banks already exceed the country’s capital requirements. Nordea reported a 13.2 percent core Tier 1 ratio of risk-weighted assets for the first quarter, under Basel II rules. At Swedbank AB, the ratio was 17.3 percent while SEB AB had 15.3 percent, by that measure. Under Basel III regulation, Svenska Handelsbanken AB had a 17.5 percent ratio while Swedbank and SEB had 16.4 percent and 13.4 percent, respectively.

‘Raised Substantially’

Some of Sweden’s most influential economists have argued in favor of requiring banks to hold 20 percent capital relative to their risk-weighted assets. Assar Lindbeck, a research fellow at the Research Institute of Industrial Economics and one of the main architects behind Sweden’s budget surplus rule, said in an interview last month existing capital requirements should be “raised substantially.”

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