Banks in Scandinavia Reveal Everything as New Standards Sought

Is there such a thing as too much transparency? If you ask a Scandinavian financial regulator, the answer is likely to be “Nej.”

And it’s in that spirit that Norway is now moving closer to Denmark and Sweden, which release total bank capital requirements. While minimum so-called Pillar 1 capital amounts are published everywhere, regulators generally keep quiet on the Pillar 2 amounts that local watchdogs add. Not so in Scandinavia, where investors get to see the whole show.

DNB Debt (to next call, according to payment rank)

Without that information, investors can only guesstimate how much capital banks hold in excess of requirements, the Scandinavian argument goes. The issue of transparency has become more pressing as banks rely on increasingly complex bonds to meet regulatory needs. These include hybrids that stop paying coupons if capital falls too low and, if it falls even lower, convert into equity or are written down.

“Information and transparency are cornerstones for functioning markets,” said Tore Vamraak, state secretary to the Finance Ministry in Oslo. “We believe that more transparency and predictability is positive for all parts –- regulators, banks and the market.” The watchdog is still deciding how to proceed and how far to go, he said.

DNB, Norway’s biggest bank, in October revealed that it must hold core equity Tier 1 capital equal to 1.5 percent of risk-weighted assets to meet FSA Pillar 2 requirements.

European law allows for disclosure if the local supervisors demand it, but doesn’t require it. Only 30 percent of banks in the region fully comply with existing rules on disclosure, the third pillar of bank regulation intended to foster market discipline, according to a November report by the European Banking Authority. The agency,which last month recommended disclosure, warns that failure to do so means banks may risk running foul of insider trading rules.

But some worry that too much transparency can be dangerous, even leading to bank runs in a worst case scenario. Daniele Nouy, head of the European Central Bank’s supervisory arm, has told banks not to publish.

But the Scandinavian experience would suggest the concerns may be overdone. Denmark started disclosing Pillar 2 requirements after a regional bank collapsed in 2008; Sweden started in 2014, the same year that Norway’s Finance Ministry began laying the groundwork for a similar move. The region’s lenders are among Europe’s best capitalized and, as a result, enjoy some of the lowest funding costs.

“It has been quite a game changer for quite a few individual supervisors who have worked a long time in the old system to start accepting that it is inevitable that Pillar 2 will have to be transparent,” Karin Lundberg, deputy executive director for banks at the FSA in Stockholm, told Bloomberg. “All of Europe is definitely not through that process.”

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