Lehman Lesson Lost as Bank Lobby Gains Clout, Reinfeldt Says

Sweden’s Prime Minister Fredrik Reinfeldt said the world risks forgetting the lessons of the financial crisis as the bank lobby gains dominance.

Regulators “have listened too much to banks and others who argue that if you try to do something like this we won’t be able to conduct a banking business,” the 48-year-old said in an interview last week at his Rosenbad office in Stockholm.

Since the Basel Committee on Banking Supervision unveiled rules in 2010 to rein in an industry whose excesses plunged the global economy into crisis, banks have attacked the standards as posing a threat to economic growth. Reinfeldt says there’s a risk politicians might stray from the original policy goals articulated during the darkest hours of the crisis, as memory of the financial shock triggered by the 2008 failure of Lehman Brothers Holding Inc. fades.

The premier, whose government has imposed some of the world’s strictest bank capital rules and faces an election in September, is urging regulators to show more resolve in their efforts to protect economies from financial risks.

“There are financial players that are trying to reshape society in such a way that high risk-taking should be rewarded in terms of their private finances when things go well and debts should be sent the way of taxpayers when things go badly,” Reinfeldt said. “We simply can’t accept that.”

Dwarfing GDP

Sweden is home to one of the world’s largest financial industries relative to its gross domestic product. Nordea Bank AB alone has total assets that exceed the nation’s $560 billion economy. Sweden’s four biggest banks have combined balance sheets that are four times the nation’s GDP.

Though Sweden’s banks are now among the world’s best capitalized, some of them boasting reserve levels close to 20 percent of risk-weighted assets, Reinfeldt’s government has warned it will seek to tighten rules further. He says the main danger is that governments and regulators grow complacent as their economies start to recover.

“I was there during the nights of the financial crisis and know how things sound and what kinds of arguments were used by financial players,” he said. “Experiences are forgotten quickly and life goes on with somewhat better conditions and then the willingness to solve the problem that they actually were facing subsides, and that’s a big mistake.”

Bank Union

Sweden, a European Union member that hasn’t adopted the euro, emerged largely unscathed from Europe’s debt crisis. The nation’s biggest difficulties came in 2009, when its banks’ expansion into the Baltics backfired. Still, Swedbank AB and SEB AB were quick to recover from those losses and are now raising dividend payments to shareholders as profits grow.

Reinfeldt has opted to keep Sweden outside Europe’s new banking union because the construction doesn’t do enough to protect taxpayers, he said.

Sweden’s decision on whether to join will depend on where the “final bills end up,” Reinfeldt said. “If it’s handed to the taxpayer in some way, even across borders, so that a Spanish banking crisis can end up with Swedish taxpayers, Sweden won’t join.”

All EU governments, except the U.K. and Sweden, signed an agreement in May on pooling money into a fund designed to deal with crisis-hit banks. That was part of a broader move toward joint supervision and crisis management of euro-area banks that non-euro EU nations can join voluntarily.

Moody’s Investors Service last week lowered its outlook on 82 European banks to negative citing risks to senior unsecured creditors following the adoption of the Bank Recovery & Resolution Directive and the Single Resolution Mechanism.

Resolution Framework

EU officials have described the banking union as the bloc’s most ambitious project since the creation of the euro in 1999. The first plank will take effect on Nov. 4, when the European Central Bank assumes oversight of about 6,000 euro-area banks; a common resolution system for banks will follow next year.

The banking union can be traced back to a June 2012 meeting of EU leaders at which it was agreed that the step was crucial to untangle the link binding banks and governments.

Sweden’s approach to tackling the latest crisis was shaped by lessons from its most recent bank industry upheaval. In the early 1990s, Sweden suffered three years of recession after its financial system collapsed. Back then, the government responded with swift nationalization and separation of good assets from bad. Two bankrupt lenders, Nordbanken and Gota, were merged by the state and had their bad loans dumped in so-called bad banks. The company later combined with banks in Finland, Denmark and Norway to form today’s Nordea.

Raising Capital

“We don’t think that they have worked on the bank union so that it has all the answers but, I must say, the bank union in itself is an answer that didn’t exist before,” he said.

Sweden in May reiterated plans to raise capital standards further, forcing its biggest banks to hold 14.5 percent to 19.3 percent in common equity Tier 1 capital, as a percentage of risk-weighted assets.

That compares with a Basel III minimum target of 7 percent, due to take effect from 2019. At the end of March, SEB had a ratio of 15.7 percent, Handelsbanken 19.5 percent, Nordea 14.6 percent and Swedbank 18.3 percent.

Part of the reason why Sweden’s regulators insist on imposing higher capital requirements than those set elsewhere is because of the nation’s record private debt load. A central bank report last month found that homeowners now owe their creditors 370 percent of disposable incomes.

‘Proud’ Banks

The pace of credit growth creates a need for further, direct measures to contain debt levels, Riksbank Deputy Governor Per Jansson told reporters in Stockholm today. Indebtedness among households is moving in the wrong direction, he said.

To address bank industry risks, Finance Minister Anders Borg said the government “will need to come back with new measures for a long time,” in comments to reporters today. “There won’t be a time when I can say that we’ve now done enough and no more will be done.”

Reinfeldt signaled the government won’t be appeased by industry assurances that the banks have adequate reserves.

“When banks have increased capital they normally proudly talk about how well-capitalized they are,” Reinfeldt said. “They want to say that they’re stable and that they have a lot of resources.”

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