EU Crackdown on Bank Capital Reporting Sparks Nordic Protest

Scandinavia’s banks are contesting a plan by the European Banking Authority that requires lenders to adopt a uniform approach when calculating capital buffers, saying the reporting rule penalizes a region that performed better than most during the global financial crisis.

EBA Chairman Andrea Enria said last month there are no “rational justifications” behind the different methodologies now used as the London-based authority pursues a harmonized model. Yet bank groups in Sweden, Finland, Denmark and Norway, whose members include Nordea Bank AB, DNB ASA and Danske Bank A/S, say the EBA’s approach ignores earlier rules on how to measure reserves.

In Finland, the Nordic region’s only euro member, banks would lose about 1 percentage point from their capital ratios if calculations are harmonized as the EBA envisions, said Elina Salminen, an analyst at the Helsinki-based Federation of Finnish Financial Services. “It is an enormous amount of money at a time when banks are forced to cut expenses, lay off employees and close offices.”

Scandinavia’s banks, among the best-capitalized in Europe, argue the EBA’s approach doesn’t reflect the safety of their mortgage assets. It’s not the first time Nordic banks have taken on global regulators. Danish lenders lobbied to change 2010 liquidity rules by the Basel Committee on Banking Supervision, arguing they threatened to destabilize the world’s biggest mortgage-bond market per capita. Those efforts led to some concessions inside Europe, though a final outcome is still pending.

Basel Floor

Scandinavia’s bankers associations are now appealing the EBA’s decision. The associations, backed by the Brussels-based European Banking Federation, have urged the European Commission to reject the EBA’s method, according to a letter dated last month. The EBF is headed by Christian Clausen, who is also chief executive officer at Nordea, the largest Nordic bank. The commission may decide as early as this week.

At issue is how to interpret a floor on capital requirements designed to prevent banks underestimating balance sheet risk. Under Basel transition rules that apply until 2018, banks are free to use an internal ratings model as long as they don’t breach a given threshold.

‘Wrong’ Approach

Yet countries have employed different methods for arriving at that threshold. According to the draft EBA reporting requirement, the floor should be interpreted as a lower limit on risk-weighted assets, giving lenders less leeway to calculate their own loss probabilities. That contradicts rules given to European banks under the Capital Requirements Regulation, according to Johan Hansing, chief economist at the Swedish Bankers’ Association.

Michael Friis, head of prudential regulation at the Danish Bankers Association in Copenhagen, said he has “discussed the issue with colleagues in the banking associations in Norway, Finland and Sweden and the European Banking Association, and we agree that the EBA approach is wrong.”

Under the EBA’s draft, the threshold is set at 80 percent of risk-weighted assets, calculated under Basel I, while under CRR, the floor is set at 80 percent of own funds, according to the banking groups. Applying the two approaches to a sampling of banks resulted in a “staggering” difference in capital requirements, Enria said in a Sept. 26 speech.

Norway’s Position

In Norway, the former government said it will accept the EBA’s interpretation, while the new Conservative-led coalition that took office this month has signaled it will ease national bank regulation.

Banks’ risk weighting of assets has come under increased scrutiny amid concerns internal models are being adjusted to reduce capital requirements. Lenders face an overhaul of how they calculate possible losses in their trading books. Basel may publish draft proposals as soon as this month in a step that would give banks “less freedom” to use their own models, according to Sabine Lautenschlaeger, vice president of the Bundesbank and a member of the Basel committee.

As Europe struggles to deliver one bank rulebook to match its goal of creating a single supervisor, compromises made along the way are returning to haunt regulators. In November, the EBA advised Michel Barnier, the European Union’s financial services chief, to adopt “neutral” wording on methodologies in the new capital regulations approved by the European Parliament this year. The EBA finalized its work in July. It declined to comment further beyond referring to its November remarks to Barnier.

Basel Floor

European regulators first sought to impose a floor on capital levels in 2007, after Basel II rules gave banks more freedom to assign risk weights to their assets. Five years later, the EBA said it found “serious discrepancies” in national interpretations of the floor with “deeply unsettling” results.

Svenska Handelsbanken AB, Swedbank AB, SEB AB, Nordea and Danske have Tier 1 capital ratios relative to their risk-weighted assets that are among the world’s highest. Handelsbanken is the best-capitalized major bank in the EU.

Bigger Dividends

“If people think Handelsbanken is a sound bank and you have a measure that suggests otherwise, you might want to take another look at that measure,” said Jesper Berg, senior vice president and head of regulatory affairs at Nykredit A/S.

Most Scandinavian lenders already exceed national capital requirements, which are stricter than Basel III rules. That’s led them to promise shareholders bigger payouts.

Ulf Riese, chief financial officer at Handelsbanken, said in July the Stockholm-based bank was considering buying back shares and paying an extraordinary dividend once regulatory demands become clear. Nordea CEO Clausen also has signaled the bank has enough excess cash to pay shareholders more.

Nordea said today it had core Tier 1 capital equivalent to 14.4 percent of its risk-weighted assets at the end of September, not taking transition rules into account. The core Tier 1 ratio, including transition rules under Basel II, was 10.9 percent, the bank said.

The extra buffer requirement the EBA is placing on banks would threaten Scandinavian lenders’ plans.

“The EBA should not be allowed to decide on reporting standards that are in conflict with CRR,” Hansing at the Swedish Bankers’ Association said.

Salminen at Finland’s bankers group says the industry “had expected that once the CRR test was finalized, the EBA reporting would reflect that. Banks are now confused because the EBA reporting standard takes a different interpretation than the CRR text.” The discrepancy “is a major problem for Nordic banks,” she said.

Before it's here, it's on the Bloomberg Terminal.