Sweden Rejects Easing Bank Requirements as Means to Spur Growth

  • Financial markets minister says better ways to help SMEs
  • Banking groups in Europe are seeking lower capital buffers

Sweden is drawing the line at looser capital requirements for banks that lend to smaller companies, saying it won’t sacrifice the stability of its financial system to stimulate growth.

“We have a strong focus on making conditions better for small and medium-sized enterprises,” Per Bolund, Sweden’s minister for financial markets, said by phone Monday. “We don’t think lower capital requirements is the best option.”

Lackluster economic growth in Europe is prompting politicians to review the bevy of regulations imposed on banks since the financial crisis, with the European Commission weighing possible changes. Last week, banking groups urged EU regulators to extend looser capital requirements for loans to small businesses beyond 2016.

The home of Nordea Bank, a globally significant lender, Sweden is warning such measures undermine credit standards and threaten long-term financial stability, not only in the Nordic country but in the EU as a whole.

Sweden’s banking sector has combined assets at home and abroad worth more than four times the country’s gross domestic product. That’s largely why it has imposed among Europe’s toughest rules, with total capital requirements as high as 25 percent of risk-weighted assets.

In fact, its regulator is seeking to tighten oversight further by closing a loophole that has allowed lenders to understate the risk on their corporate loan books by funding long-term commitments with short-term financing. 

Better Ways

“The main focus from Sweden isn’t working with capital requirements as it’s more working with other conditions that make it easier for small and medium-sized businesses to get access to capital,” Bolund said.

That includes simplifying the process for listing by easing prospectus requirements and providing potential investors with more uniform information so they’re better able to assess risks. Those actions would already go a long way to increasing investors’ confidence, Bolund said.

It’s not the first time Nordic countries have opposed calls for lower buffers to spur growth.

Denmark’s central bank has repeatedly warned banks against lowering the capital they hold against possible losses from smaller businesses, saying history has shown they increase during times of stress. Norway’s Finance Ministry last year decided that the so-called SME discount wouldn’t be included in Norwegian regulations.

Ironically, Sweden’s tougher capital requirements have made it cheaper for the country’s lenders to issue debt. Its banks are among the best performing in Europe.

The trend is likely to continue, according to Deutsche Bank. In an Oct. 6 note, analyst Omar Keenan said that while lenders may face higher capital requirements next year,  he’s still “bullish” as the economy picks up.

Sweden intends to have SMEs in focus "when we regulate the financial markets as a whole,” Bolund said. "Financial stability has to be the main focus.”

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