Bank Watchdog in Sweden Says Risk-Weight Rule Can Hit Dividends

The head of Sweden’s financial regulator says new rules unveiled this month may lead to smaller shareholder rewards.

Erik Thedeen, director general of the Swedish Financial Supervisory Authority, warned that stricter risk-weight requirements targeting banks’ corporate assets are likely to affect dividends. The rules, announced on March 1, allow banks to continue using their own calculations but force them to work in tougher assumptions on potential losses.

The FSA’s latest requirement will lead to an average risk weight of 30 percent for banks’ corporate assets. For some, that’s a considerable extra burden, with Svenska Handelsbanken AB suffering the biggest blow. Analysts at DNB have warned that Handelsbanken may not be FSA compliant in 2017 as a result. The Stockholm-based bank says it needs time to calculate the full effect of the stricter risk weights.

Even before the most recent wave of regulatory tightening, investors in Swedish banks have faced smaller rewards. Nordea Bank AB, Scandinavia’s biggest lender, this year backtracked on a target of returning at least 75 percent of profit to shareholders. DNB says Handelsbanken, which in February promised a record investor payout, may also need to reduce dividends.

And there’s more tightening to come. The FSA on March 1 warned Swedish banks to gird for stricter rules as a result of measures put forward by the Basel Committee on Banking Supervision and European authorities.

Thedeen, speaking at a conference in Stockholm on Tuesday, said the latest credit data from Sweden point in the “wrong direction” and warns that more macro-prudential measures will be needed to address the imbalances forming. In particular, household debt growth is leading to potentially “very large risks” forming in the economy, he said. For now, the regulator still doesn’t have the tools it needs to deal with the challenges it faces, he said.

Worth keeping in mind -

  • Sweden’s central bank lowered its benchmark repo rate to minus 0.5 percent on Feb. 11 after an extended period of disinflation (and even deflation)
  • Riksbank Governor Stefan Ingves (also the head of the Basel Committee on Banking Supervision) has repeatedly warned that excessively lax monetary policy creates macro-prudential risks
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