Bank Tests Faulted for Ignoring Swedish Risks Market Is Watching

Sweden topped the European Banking Authority’s stress tests last week. But a closer look at the numbers raises some questions.

The tests showed how European banks’ capital buffers would hold up against risk-weighted assets if times get tough. But when risk weights are removed and bank capital is measured against total assets -- the so-called leverage ratio -- Sweden’s lenders lose their top ranking, with the country’s best bank only coming in 10th.

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According to Ole Einar Stokstad, head of credit research at DNB Markets in Oslo, investors should treat the risk-weighted numbers with some caution. “The leverage ratio tells a bit more about the reality,” he said.

The tests look like they were designed to “calm market participants and politicians,” Stokstad said. There was only room to “admit the weaknesses that are already exposed by the markets -- in this case: tell the world that we are aware of the weaknesses in the Italian banks.”

Banca Monte dei Paschi di Siena SpA had its capital wiped out in the test, the worst performer in the EBA exercise. The lender has already said it will tap investors in an effort to address the shortfall.

In Sweden, the best-capitalized bank would still have common equity Tier 1 capital of 23.1 percent of risk-weighted assets in an adverse scenario, according to the EBA tests. But the same lender, Swedbank AB, would have a leverage ratio of 4.8 percent in the adverse scenario, bumping its ranking down to 13th out of 51, compared with 2nd overall using CET1 ratios, the EBA tests showed.

Sweden’s largest mortgage bank also showed the biggest decline in its leverage ratio compared with its Swedish peers. (In the stress test, exposures remain constant while capital falls amid deteriorating credit quality, especially of corporate and non-mortgage retail exposures.)

The outlier is SEB AB. The leverage ratio of Sweden’s fourth-largest bank actually rose in the adverse scenario, making it the only lender among the 51 to post an improvement. According to Magnus Agustsson, head of group risk at SEB, that’s because the bank is focused on profitability and asset quality. Its tougher lending criteria led earlier this year to a decline in market share in mortgage lending.

“The bank’s strong pre-stress profitability contributes to an increasing capital base despite stress effects,” Agustsson told Bloomberg. At the same time, having “blue-chip counterparts results in relatively low loan losses.”

The Financial Supervisory Authority in Stockholm isn’t using the EBA’s tests to decide capital requirements for Swedish banks, said Peter Svensson, a spokesman for the regulator. Sweden’s FSA is set to finalize stricter risk-weight requirements for the banks it oversees later this year. The rules are intended to raise banks’ assessments of the risks in their corporate loan books, which the FSA has said are currently too low.

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