Europe’s Single Bank Rule Book Falls Apart as North Races Ahead

The goal of a single rule book for Europe’s banks is splintering even before it’s implemented as northern countries move ahead with tougher requirements to ward off the next boom-to-bust cycle.

Sweden’s too-big-to-fail banks, which already face stricter capital rules than their competitors elsewhere, may be told to hold even larger reserves, Financial Markets Minister Peter Norman said yesterday. In Denmark, Business Minister Henrik Sass Larsen said he can’t wait for southern Europe to regulate its systemically important financial institutions. He backs the swift passage of national capital laws to curb bank risks.

“Getting Sifi regulations in place in a number of southern European countries probably will take time,” Larsen said in an e-mailed reply to questions. “We must signal we are in control of things and thereby strengthen the market’s and customers’ confidence in them.”

As Europe struggles to stimulate growth without stoking a new credit bubble, the specter of swelling private debt is prompting regulators from Sweden to the Netherlands to curb borrowing. The measures go beyond new capital rules approved earlier this year by the European Union and set to become law by Jan. 1.

In addition to steps advanced by Sweden and Denmark, the Netherlands proposed last week that its banks face a leverage ratio -- a measure of capital against total assets -- of at least 4 percent. The Basel Committee on Banking Supervision recommends a 3 percent threshold. Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of 17 euro finance chiefs, recommended governments be allowed to impose tougher ratios unilaterally if a common framework can’t be agreed upon.

Held Hostage

According to Larsen, countries can’t risk holding themselves and their financial systems’ integrity hostage to developments in regions still struggling under a sovereign debt crisis. Recommendations by a Danish government-backed Sifi committee for as much as 5 percent additional capital “are balanced,” he said. Europe has yet to complete its too-big-to-fail bank proposal.

The Danish Sifi-committee’s “recommendations aren’t any tougher than the demands made in the countries that we compare ourselves against, such as Sweden, Norway, the Netherlands, the U.K. and Austria,” Larsen said.

Private Debt

While Sweden and Denmark both have public debt burdens that are less than half the euro-zone average, private borrowing in the two countries has soared to all-time highs. Record-low interest rates in Denmark have underpinned private debt at 310 percent of disposable incomes, the highest level in the world, according to the Organization for Economic Cooperation and Development. Swedes owe their banks almost twice their disposable incomes, the central bank estimates, while official data show borrowing is again accelerating.

Swedish Finance Minister Anders Borg has said the financial regulator needs to look into raising risk weights on banks’ mortgage assets as he suggested levels may still be too low after being tripled this year.

“Tougher rules for banks are needed for financial stability,” Norman said yesterday. Both Denmark’s and Sweden’s financial industries have assets that are four times their economies.

The rift over bank regulation mirrors a similar division among central bankers after the euro area surfaced from its longest recession on record. Bank of Austria Governor Ewald Nowotny, who sits on the European Central Bank’s governing council, said this month he doesn’t see “many arguments now for a rate cut,” while Central Bank of Cyprus Governor Panicos Demetriades said in an Aug. 24 interview in Jackson Hole, Wyoming, that policy makers can’t rule out another cut from the ECB’s record low of 0.5 percent.

No Return

Cyprus’ economy shrank 4.3 percent in the first quarter, compared with 0.2 percent growth in Austria.

Banks in Denmark, which in 2011 became the first European Union nation to force losses on senior bondholders as part of its resolution program, are urging lawmakers to follow regulatory steps in the rest of Europe.

Christian Clausen, chief executive officer of Stockholm-based Nordea Bank AB and president of the European Banking Federation, has repeatedly argued bank requirements need to be harmonized across Europe to be effective.

Still, legislators need to err on the side of caution rather than risk another crisis, Larsen said.

“We have done a lot to prevent new crises,” he said. “Many financial institutions had too-loose credit policies in the years leading up to the crisis. We will not go back to that situation.”