Nordea’s Bid to End Subsidiary Structure Has Regulators Worried

  • Denmark’s FSA director says branch bid may trigger EU review
  • EU alert to risk of banks seeking regulatory arbitrage

As Scandinavia’s biggest bank tries to redefine its subsidiaries as branches, regulators across Europe are starting to wonder whether the move is in keeping with the spirit of the region’s rules.

Nordea Bank AB in May won Swedish approval to move ahead with its plan to transform subsidiaries in Denmark, Norway and Finland into branches. The step will be executed through cross-border mergers, which Nordea intends to complete in early 2017. The maneuver means the bank will make branches of units that, in some cases, have tended to generate as much income for the bank as the Swedish operations.

“Nordea’s case of branchification has drawn the EU’s attention to the issue of how to treat branches that are larger than was originally intended under the definition,” Jesper Berg, the head of Denmark’s Financial Supervisory Authority, said in a phone interview on Friday. “Because Nordea is now trying to transform its subsidiary structure into a branch structure, the EU will have to take a close look at the ramifications of this kind of development and whether we need to review the existing rules to ensure that branches aren’t too large.”

Nordea, whose shares opened lower on Monday, has argued the plan will help simplify its legal structure and allow the bank to strengthen its governance. The bank’s shareholders have approved the step.

ABN Merger

The bank made headlines last week when a Dutch newspaper said the Nordea chairman, Bjoern Wahlroos, had approached the government of the Netherlands to discuss a merger with state-owned ABN Amro Group NV. The talks, which a person familiar with the matter said took place between June and September, ended with the Dutch government rejecting Wahlroos’s bid.

Since then, analysts trying to interpret the reported merger talks have suggested there was an element of regulatory arbitrage involved. Wahlroos has been an outspoken critic of Swedish government plans to impose a financial tax by 2018, which would come on top of some of the world’s strictest capital requirements. The chairman has repeatedly suggested Nordea would consider moving some operations outside Sweden should the business environment in the country become too inhospitable.

Gaming the System

Berg at the Danish FSA declined to comment on the specific case of Nordea and ABN Amro. But in general, he noted that regulators in the EU are alert to the issue of gaming cross-border nuances in financial rules and are keen to ensure lenders don’t get away with any form of arbitrage.

“If a bank wants to move its operations within the EU in the hope of finding a more accommodating regulatory climate, it’s worth remembering that regulators in the region operate according to the principle of reciprocity, which is intended to rule out arbitrage,” Berg said.

“What’s more, rules targeting a stricter application of risk weights are also coordinated across the region,” he said. “So the Single Supervisory Mechanism will have been a party to discussions, also with regard to what the Swedes are doing. So that also makes it unlikely that, by making itself answerable to a different regulator elsewhere in the EU, a bank will be able to lower its risk weight requirements.”

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