Euro Zone's Too-Big-to-Fail List Swells as Nordea Sets Precedent

  • Nordic region’s only global SIFI is moving its HQ to Finland
  • Bank has said regulatory environment in Sweden is too harsh

Nordea CEO Says Finland Move May Impact Capital

A European banking giant just snubbed one of the world’s strictest financial supervisors by moving to a more accommodating regulatory setting.

Nordea Bank AB’s decision to relocate its headquarters from Sweden to Finland puts the Nordic region’s only global systemically important bank inside the euro zone. After months of railing against Swedish efforts to make banks pay more to protect taxpayers, Nordea estimates its decision to go to Helsinki will save it as much as $1.3 billion in regulatory costs.

The move, which is due to take place in the second half of next year, promises to become a test case as Nordea blazes a trail in regulatory arbitrage.

Nordea says the move will have a “limited” effect on staffing, and expects all its Nordic operations to “remain unchanged.” Customers will see no perceptible difference in the bank’s day-to-day operations, it said on Wednesday. But the Nordic region’s regulatory landscape will change.

Swedish authorities are already warning that their ability to deal with financial crises will be hurt by the move.

Hans Lindblad, the head of Sweden’s debt office, says he regrets Nordea’s decision. “The risks don’t move with the headquarters,” he said in an emailed response to questions. The bank will now probably get a lower requirement for bail-inable debt (known as MREL) and Sweden “is somewhat worse off when it comes to having the conditions needed to handle banking crises, and safeguard financial stability as well as Sweden’s economy,” he said.

Sweden is moving ahead with plans to force its banks to pay more toward a resolution reserve, which is intended to protect taxpayers from finance industry losses. In June, it watered down an earlier proposal following criticism from both the banking industry and various authorities, but the industry has complained that Swedish requirements remain stricter than those in the EU.

By moving, Nordea estimates it will save as much as 1.1 billion euros ($1.3 billion) over time compared with the cost of staying in Sweden. The savings (at net present value) would be derived from lower resolution and deposit guarantee fees, as well as other transitional effects.

Being based in Finland could allow Nordea to wipe about 6.8 percentage points off its current common equity Tier 1 requirement of 17.6 percent of risk weighted assets, Citigroup said in a note. Citigroup had also predicted Nordea would be able to save about 200 million euros more than the bank’s own estimate, as a consequence of moving. Nordea’s earnings per share will probably also be boosted by about 2 percent, according to analysts at DNB, who say the CET1 requirement could drop by up to 6 percentage points of its market cap thanks to the new domicile.

During a press conference in Helsinki on Thursday, Chief Executive Officer Casper von Koskull said management wants a tough regulatory environment. He expects operating inside the banking union will put Nordea on a “level playing field” with its peers, he said. An ECB spokesman declined to comment on an individual bank’s business decision

While Sweden has lamented Nordea’s decision, Finland has applauded the move. Finance Minister Petteri Orpo was quick to react. “Welcome to Finland,” he tweeted. Finance Finland, which represents the industry, underscored the importance of not having rules that are stricter than the EU average.

In an interview, Orpo said Nordea’s decision carries a “big symbolic meaning.” It adds a layer to a debate on whether Finland should have joined the euro in the first place, he said. Nordea’s relocation to Helsinki “means we’ve made the right decisions by joining the euro and the banking union,” he said. “In public debate, negative arguments are brought forward, but this is a clear example that” euro membership “can also bring advantages."

Von Koskull had made clear that he would prefer Nordea to be inside Europe’s banking union, of which Finland is the only Nordic member.

But Sweden questioned the notion that putting the Nordic region’s biggest bank inside the European banking union, which was first created in 2012, would be a cure-all for financial risk.

“It’s also important to remember that the banking union is not yet complete,” Swedish Financial Markets Minister Per Bolund said in an interview. “What happens if a bank ends up in financial uncertainty before the resolution reserve has been built, which won’t happen until 2024 or 2025, and what happens with the deposit guarantee, where there’s still no common system for how to handle that?”

Bolund suggested that “at least during that transition period, I can imagine that the Finnish finance minister feels a bit stressed.”

At Finland’s Financial Supervisory Authority, there were few signs of stress. “My first reaction is that it’s great that Nordea joins the banking union and ECB supervision,” Anneli Tuominen, director general at the FSA in Helsinki, said by phone. “My faith in the ECB supervision is strong.”

“Given it’s a big entity, it brings larger risks than a smaller entity, but on the other hand we have strong supervision and crisis resolution mechanism, which are balancing factors,” she said.

Nordea’s decision follows a reorganization of its legal structure. The bank converted its Nordic subsidiaries into branches this year. The change set off protests from Finnish and Danish regulators, who lost their supervisory clout over systemically important operations. Now, Sweden is left with a systemically important branch and little supervisory power.

“We will have a dialog with Nordea and other Nordic countries about how the change will be implemented,” Swedish Financial Supervisory Authority Director General Erik Thedeen said in a statement. “The most important thing is that the bank has stable and sound operations, regardless of where the headquarters are located.”

Nordea’s Swedish operations are the product of a banking story that started way back in the mid-1800s. After a series of mergers late last century and a wave of deregulation, what was then called Nordbanken was bailed out and restructured by the Swedish government during a financial crisis in the 1990s. The state chose to combine two bankrupt lenders, Nordbanken and Gota, and put the remaining impaired assets into a bad bank. That entity then merged with banks in Finland, Denmark and Norway to form today’s Nordea.

Swedish Finance Minister Magdalena Andersson touched on Nordea’s history as she justified the country’s stricter financial requirements.

“We have high capital requirements,” she said in an interview. “That’s not least against the background of the experiences we have in Sweden from having rescued Nordbanken and risked taxpayer’s money by doing so.”

— With assistance by Raine Tiessalo, Niclas Rolander, Frances Schwartzkopff, Hanna Hoikkala, and Alessandro Speciale

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE