Mega Branches Test Too-Big-to-Fail Oversight in Nordea Maneuver

  • Sweden’s FSA moves to reassure other Nordic regulators
  • Nordea wins approval to move ahead with new branch structure

The biggest Nordic bank just won approval to convert its subsidiaries into branches in a move that gives local regulators less say over their systemically important financial institutions.

This week, the governments of Denmark and Norway said Nordea can convert subsidiaries (supervised locally) into branches (overseen from Sweden). The restructuring creates branches across the Nordic region that in some cases are as big as the main unit in Stockholm. Sweden’s FSA says how regulators handle the process will probably become a model for the rest of Europe.

It is “most important from a principle perspective,” Erik Thedeen, director general of Sweden’s Financial Supervisory Authority, said in an interview in Stockholm. “Most of the countries here are EU countries, so I guess it will set a little bit of an idea, maybe, of how you can work with systemically important branches.”

Losing Clout

Supervisors in Denmark and Finland have already voiced their concerns as Nordea oversees assets across the region equivalent to more than half combined Nordic GDP. Thedeen says there has been “extensive discussion” and the regulators have come up with a memorandum of understanding, signed on Dec. 19, to coordinate regulation across borders.

Nordea says the new structure will improve governance and reduce complexity at the bank. It said in March the impact on its capital requirements will be “minor.”

Other banks in Europe are considering similar conversions, with a growing number of firms exploring the option of turning subsidiaries into branches, according to the European Banking Authority. The regulator proposed guidelines this week for cross-border supervisory coordination to help fill “potential gaps” in procedures which now largely address subsidiaries.

European Central Bank Executive Board member Peter Praet has said he’s surprised more banks haven’t followed Nordea’s lead, since it would ease capital and liquidity restrictions.

Swedish Assurances

Sweden has taken pains to assure its neighbors and the ECB that their loss of immediate control over Nordea won’t pose a threat to their financial systems. Thedeen and Uldis Cerps, the FSA’s executive director for banks, say Sweden is committed to working closely with other regulators.

“There will be an extensive cooperation and extensive information sharing when it comes to data, but still of course acknowledging a little bit of a shift in responsibility here,” Thedeen said. “But we have a very, very strong commitment to working with the ECB, the Finns and the Danes and the Norwegians around this and, for that matter, also the Baltic countries.”

Nordea is the Nordic region’s only global systemically important financial institution, and regulators outside Sweden have been reluctant to relinquish control.

The Questions

Anneli Tuominen, director general of the FSA in Helsinki, said last month a branch structure wasn’t appropriate for a lender like Nordea, which has a market share in Finland of more than 30 percent. But Finland had little chance of successfully opposing the change, she said.

In Norway, the FSA said it couldn’t impose any conditions on Nordea that would adequately counter the risks associated with its new branch structure. But Norway’s regulator said it was “doubtful” that EU rules would allow it to block Nordea’s application.

According to Cerps at the Swedish FSA, other regulators will continue to play a role in monitoring Nordea through their participation in so-called supervisory and resolution colleges. Nordea also will have locally regulated mortgage subsidiaries in each country, he said.

“On top of that, we’ll also have coordinated supervision plans, joint inspections and generally close working relationships between countries,” Cerps said.

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