Brexit Alarm Has Bank Watchdog in Sweden Demanding Action Plansby
Swedish FSA seeks detailed plans on response to both scenarios
How to cope with Brexit has been ‘top of our agenda’ at FSA
Sweden’s financial regulator has told the banks it oversees to produce action plans showing how they will cope with the potential market shocks that would follow a British exit from the European Union.
“We are in close contact with banks and with other regulated companies that are essential for the smooth functioning of the Swedish infrastructure, and we are making sure they have contingency plans for both outcomes and that they are adequately capitalized and have sufficient liquidity ahead of the mid-summer vote,” Uldis Cerps, head of banking at the Swedish Financial Supervisory Authority, said in a phone interview.
Sweden’s Biggest Banks
- Nordea Bank AB, with a market value of about $40 billion, almost double Deutsche Bank AG’s $25 billion
- Swedbank AB, with a market cap of $25 billion
- Svenska Handelsbanken AB, with a market value of slightly under $25 billion
- SEB AB, with a market cap of about $21 billion
The June 23 referendum on Britain’s relationship with the EU is already disrupting markets, with the pound taking a beating this week after a poll published by the Guardian newspaper put the “Leave” camp in the lead. A Bloomberg composite poll has both sides in a dead heat at 41 percent, with the rest undecided. A probability calculation based on the poll data still shows a so-called Brexit is an unlikely outcome.
But the risk that Britain might actually leave the EU has made planning for all possible outcomes a priority for banks in the largest Nordic economy, where the financial industry has assets equivalent to four times gross domestic product.
It has “been at the top of our agenda when we have the regular risk meetings with the banks,” which happens every quarter, Cerps said. “Since the issue of Brexit came up, we have been engaging with banks at different levels.” That includes asking banks to provide “contingency arrangements,” he said. Based on what the FSA has seen so far, the industry has “sufficient liquidity” to cope with the “potential market turbulence, should that occur,” he said.
The ultimate ramifications of a Brexit are “somewhat uncertain,” Cerps said. “We also have analytic work in-house going on in respect to more long-term effects,” he said.
Moody’s Investors Service has already warned that the risk of a Brexit puts at stake the U.K. growth plans of Handelsbanken, the Nordic bank with the biggest ambitions in Britain. Should the June vote result in a “stark, prolonged, depreciation of the pound versus major currencies, including the Swedish kronor, then you have a negative impact on the income that Handelsbanken repatriates from the U.K.,” Moody’s analyst Andrea Usai said. “The value of the assets, liabilities and capital could obviously change.”
Banks in the region have warned that a Brexit threatens to fan demand for the kind of AAA-rated assets that Scandinavia offers. In Denmark, where the krone is pegged to the euro, banks are warning clients to hedge for sudden strengthening of the local currency and potential central bank responses that could drive policy interest rates even further below zero. Nordea estimates the ripple effects of a Brexit would be “overwhelmingly negative” for Scandinavian markets.
The risk of a Brexit is also shaping talks between Denmark’s regulator and its banks. Kristian Vie Madsen, deputy director general at the Copenhagen-based FSA, says the agency has also discussed contingency plans with the banks it oversees. A Brexit “would have an influence on Danish, European and U.K. growth and that, of course, could have an influence on the long-term profitability of the banks.”