Scandinavia Splits Over Common Bank Rulebook

Denmark will no longer strive to be among the first to impose stricter bank rules as the nation breaks away from Sweden and closer to the rest of Europe in setting a timeline for financial regulation.

The government in Copenhagen says a too-big-to-fail package agreed in September was probably the last time Denmark moves faster than the European Union in tightening bank requirements. The signal follows evidence that Denmark, burdened by the world’s biggest private debt load, is falling behind its Nordic neighbors in surfacing from the crisis.

“There’s no point in Denmark moving ahead on its own as long as we don’t know what the EU will propose,” Benny Engelbrecht, a spokesman for the ruling Social Democrats on the parliament business committee, said in an interview. Business Minister Henrik Sass Larsen put it even more concisely: “Rules must be aligned across the EU,” he said in an interview.

The comments are at odds with a vision outlined by Sweden’s Financial Markets Minister Peter Norman, who last week urged his counterparts across Scandinavia to work toward a common bank rulebook for the region. The cross-border operations of banks in Sweden, Denmark and Norway necessitate a harmonized approach, he said during a Nordic meeting at which no Danish minister was present.

Housing Bubbles

Sweden, which like Denmark has a bank industry whose assets are about four times gross national product, has set some of the world’s strictest capital standards. Finance Minister Anders Borg says Swedish banks should expect continued tightening in the years ahead, and he backs central bank calls to more than double risk-weight requirements on mortgage assets, which were already tripled this year. Sweden also wants to use a countercyclical buffer to ensure there’s no limit on how high capital requirements can rise.

Borg today underlined his ambition to continue tightening bank regulation and said Sweden’s bank system constitutes a “challenge,” during a speech in Stockholm.

Sweden and neighboring Norway are stepping up bank requirements in part as regulators in the two countries warn their housing markets are overheated. Denmark’s property bubble burst in 2008 and prices have since tumbled 20 percent.

Different State

“The Danish economy is in an entirely different state than the Swedish and Norwegian ones,” Jesper Berg, senior vice president and head of regulatory affairs at Nykredit Realkredit A/S in Copenhagen, said in an interview. “Looking at property prices in Sweden and Norway it would be a surprise if they don’t fall back from the current level, so banks face very different challenges there compared to those faced in Denmark.”

Unlike Denmark, Sweden’s banks emerged relatively unscathed from the financial crisis. That’s helped Nordea Bank AB, SEB AB, Swedbank AB and Svenska Handelsbanken AB build up more reserves without sacrificing shareholder returns.

Sweden’s four biggest banks already exceed the nation’s 12 percent minimum core Tier 1 capital requirement, which takes effect from 2015. Handelsbanken had 19.3 percent capital relative to its risk-weighted assets at the end of September. Sweden’s biggest banks all returned more than 10 percent on equity last quarter, compared with the 4.3 percent given to shareholders in Danske Bank.

Danske Valuation

“I value Danske like a European bank. Given its structure, level of profitability and the problems it faces I rate it as a typical European bank,” Andreas Hakansson, an analyst at Exane BNP Paribas in Stockholm, said by phone. “The problem with Danske is that it has the structure of a European bank but competes with Swedish banks head-on in all its main markets.”

Danish lawmakers are reluctant to re-live the fallout of the nation’s bail-in package. Denmark’s decision to pass the burden-sharing bill into law in 2010 made it the first and only EU nation to require bank creditors to share losses. That sent Danish bank funding costs soaring and exacerbated the effect of a 2008 housing bust, wiping out 62 lenders in the past five years. The exercise became a European lesson in the costs of going solo on key financial legislation.

Denmark’s weaker banking environment has also prompted the government to retreat from earlier signals it will impose firewalls to prevent financial conglomerates re-allocating capital. Sass Larsen said additional capital requirements for systemically important financial institutions may remove the need for explicit firewalls.

Firewall Plan

“Much of what was intended with firewalls is already happening with the sifi-laws,” Sass Larsen said. “We’re making sure banks are strongly bolstered, and that there’s no overlap on liquidity or equity matters to ensure the bank doesn’t crash if one unit does.”

Denmark, which is home to the world’s biggest mortgage market per capita, will only consider explicit firewalls if the EU agrees on a model based on proposals from a group led by European Central Bank board member Erkki Liikanen, Sass Larsen said.

The EU won’t be able to address the need for such regulation until July, after parliamentary elections, according to Michel Barnier, the EU’s financial services commissioner.

The EU “may come up with new and interesting proposals, so I won’t rule out new initiatives completely,” Sass Larsen said.

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