Banks Dwarfing Sweden Told High-Growth Goals Are Misplaced

Sweden’s government is making it clear it doesn’t want banking to become a high-growth industry.

The nation’s efforts to reduce bank system risk should also ensure the industry doesn’t grow at a faster pace than the economy, Financial Markets Minister Peter Norman said.

“The dream scenario would be that the economy grows a little bit faster than the bank sector,” Norman said yesterday in an interview in Stockholm.

The government of Prime Minister Fredrik Reinfeldt has told Sweden’s four biggest banks to hold larger capital buffers than those set elsewhere in Europe in an effort to protect taxpayers from financial industry risk. Norman says the stricter standards are necessary in Sweden, where the bank industry is four times the nation’s $540 billion economy.

The comments mark Sweden’s latest signal to its biggest banks that any business model that entails risk-taking will be frowned upon by the government. In August, Norman told banks that Sweden’s counter-cyclical buffer will be used to ensure there’s no upper limit on reserve requirements. The same week, he criticized banks for targeting a return on equity of 15 percent, a goal he described as “not reasonable” given the risks he said are involved in achieving it.

‘Vulnerable’ Banks

Sweden has also slammed its banks for their reliance on short-term dollar funding, and warned the industry may need to help pay for the central bank’s currency reserves. The concerns were echoed by Moody’s Investors Service, which said today Sweden’s banking system is “vulnerable” to swings in sentiment because of its dependency on market funding. The country’s banks generate 35 percent of their funding from deposits, Moody’s said.

Though the government won’t take steps that directly cap the size of the bank industry, Norman said Sweden’s stricter capital rules come as a direct result of the financial system’s size.

Swedish gross domestic product will grow 1.2 percent this year and 2.7 percent in 2014, after expanding 0.7 percent in 2012, the central bank estimates. Revenue at Nordea Bank AB, Sweden’s biggest bank by market capitalization, has grown 5.1 percent on average since the first quarter of last year, according to data compiled by Bloomberg. The bank’s assets were 677 billion euros ($914 billion) at the end of 2012, having grown 74 percent since the end of 2007.

Stock Performance

Swedish bank shares have outperformed a gauge of European financial companies this year as investors respond to management pledges on equity returns.

Nordea, which is also Scandinavia’s biggest lender, has told investors it will try to deliver a return on equity of 15 percent in a “normalized interest rate environment.” The bank returned 11.6 percent in 2012. Swedbank AB, which also targets 15 percent, reported a 14.6 percent return for 2012.

SEB AB aims to “generate return on equity that is competitive with peers,” which means “the bank in the long-term aspires to reach a return on equity of 15 percent,” the lender said in its second-quarter report on July 15. Svenska Handelsbanken AB says it targets a higher return on equity than the average of its peers in the Nordic region and the U.K.

Financial Risks

Nordea shares have gained 25 percent this year through yesterday’s close, SEB is up 23 percent. Handelsbanken has risen 18 percent, about the same as Swedbank since the start of the year. That compares with a 12 percent gain in the 44-member Bloomberg index of European banks over the same period.

“It’s reasonable to try to manage Swedish taxpayers’ financial risks,” Norman said. “We can reduce those by having more capital in Swedish banks than other banks in Europe.”

Nordea lost as much as 0.6 percent today, driving the stock down to its lowest since July, based on closing prices. The Bloomberg index of European banks rose 1.1 percent as of 11:52 Frankfurt time.

Sweden’s four biggest banks must hold at least 12 percent core Tier 1 capital of their risk-weighted assets by 2015. The Basel Committee on Banking Supervision sets a 7 percent floor and a 2019 deadline.

Sweden this year also required banks to triple the risk weights they apply to mortgage assets to force lenders to build even bigger reserves. Finance Minister Anders Borg said last month banks need to prepare for years of continual regulatory tightening to protect the economy. Borg has also cited Stefan Ingves, governor of Sweden’s central bank and the chairman of the Basel committee, in signaling even stricter risk weights may be warranted to prevent banks underestimating the probability of losses.

Ingves said last week global regulators are stepping up efforts to ensure a leverage ratio, which measures capital relative to total assets before they’ve been adjusted for risk, also catches off-balance sheet items.

Preventing banks from finding loopholes is “really important for the legitimacy of the whole financial system,” Norman said.

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