Bank Rescues Defended in Sweden as Issuers Find Out at What Cost

Sweden’s banks are discovering the price of their government’s support.

As Europe tries to reconcile Italy’s handling of Monte Paschi with post-crisis taxpayer protections, there are other signs that the region’s bank resolution framework is more elastic than first thought. In Sweden, the government has repeatedly made clear it reserves the right to step in and rescue banks in an industry with assets roughly four times the size of the economy.

But it’s now becoming evident that much of the cost of any future rescue will be passed on to the banks.

Sweden’s National Debt Office is in the process of implementing the EU’s Bank Recovery and Resolution Directive. BRRD gives local regulators considerable leeway -- it’s the same legislation Italy is using to defend its so-called precautionary recapitalization of Monte Paschi.

Alternative Interpretation

Sweden is interpreting BRRD another way. Banks in the country now need to build more defenses than most of their peers elsewhere in the EU to protect taxpayers, Tom Andersson, the Stockholm-based debt office’s expert on resolution, said in an interview.

Sweden may force banks to subordinate all debt used to meet a minimum requirement for own funds and liabilities (MREL), designed to absorb losses and help a bank recapitalize. It’s a tougher requirement than a standard model the EU is set to propose and, all things being equal, will raise issuance costs for Swedish banks. The debt office is due to finalize its proposal by the end of March.

Sweden also wants to create a national resolution fund that’s three times bigger than the minimum EU requirement of 1 percent of covered deposits. Even once the facility is fully funded, banks will be required to continue contributions.

That’s got Nordea Bank AB up in arms. The Stockholm-based lender has asked to meet with government officials to protest the requirement, Chief Operating Officer Torsten Jorgensen said in a press conference. The bank wants it applied only to its Swedish operations, to ensure a “level playing field,” he said.

Stability Fund

Swedish banks already need to contribute more than their peers to deposit guarantees. Sweden has also chosen to maintain a national stability fund, established in 2008, rather than fold it into the resolution fund. The plan is for it to be used for the kinds of precautionary recapitalizations akin to the one applied to Monte Paschi.

“If precautionary support is to be used, the idea of using the stability fund is to avoid having costs end up with the government/taxpayers,” Andersson said in an e-mail.

Sweden’s banks already comply with some of Europe’s toughest capital requirements, based on risk-weighted assets, and the debt office’s measures could put the industry at a competitive disadvantage, says Johan Hansing, chief economist for the Swedish Bankers’ Association.

“We want harmonized rules in Europe and we can’t see a reason why Swedish banks have to pay much more and have to pay on different grounds,” Hansing said. “We already have the largest deposit guarantee fund in Europe, maybe matched by Norway, but we still have to pay, yearly, a high fee, so the fund is growing every year.”

So far, around 100 billion kronor ($11.3 billion) has collected in the three funds, Hansing said. That figure will climb by at least another 22 billion kronor as banks contribute over the next three to four years to the resolution fund.

Funding Benefits

But the assumption of government support has so far allowed Swedish banks to fund themselves at a lower cost than their competitors. And the notion that the state will step in is something S&P Global Ratings incorporates into its evaluations, singling out Sweden. The debt office’s latest measures underscore the case, according to Olivia Fleischmann, an analyst at the ratings company.

There are some other perks. The sheer size of Sweden’s resolution fund (three times the minimum EU requirement) means banks may be able to tap into it earlier in the event of losses, according to EU rules. That creates some “flexibility” on the extent to which losses are passed on to creditors, Andersson at the debt office said. Fleischmann at S&P says it means “sparing senior creditors a risk for write-down.”

On top of that comes the stability fund, which has a balance of 40.5 billion kronor, including a contribution from the government. There’s a chance it “could be upsized even if this would require parliamentary approval,” Fleischmann said. “This underpins our view that the government remains supportive of its systemically important banks in Sweden.”

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