Swedish Banks’ big risk becomes a benefit

epa05154505 A undated handout image made available by Sweden's central bank, Sveriges Riksbank, showing the central bank building in Stockholm, Sweden.  The Swedish central bank 11 February 2016 cut its key repo rate by 0.15 percentage points to a record low of minus 0.50 per cent in a bid to support a rise in inflation. Sweden's inflation rate was 0.1 per cent in December, according to the country's statistics agency. The central bank's inflation target is 2 per cent. The central bank, known as the Riksbank, projected inflation to be 0.7 per cent in 2016, lower than its December estimate of 1.3 per cent. Lower energy prices and low rent increases were contributing factors. In addition to safeguarding its inflation target, the cuts were also necessary amid uncertainty regarding global developments and moves by other central banks, the Riksbank said. The repo rate is the interest rate that commercial banks get when they deposit money for seven days at the Riksbank. A negative rate means banks have to pay money for keeping deposits with the central bank. Many analysts had expected the interest rate cut.  EPA/SVERIGES RIKSBANK / HANDOUT  HANDOUT EDITORIAL USE ONLY/NO SALES


For years, the country’s central bank and financial supervisor have railed against lenders’ dependence on markets — rather than deposits — because of the risk that investors might flee, leaving banks in a lurch. Now, Sweden is finding the markets may be a better funding source than savers as central bank rates go deeper into negative territory.
Market funding “contributes to liquidity risk in the banking sector,” Uldis Cerps, executive director forbanking at the Stockholm-based Financial Supervisory Authority, told Bloomberg. But, “it simultaneously reduces the need to fund balance sheet with deposits.”
Sweden’s Riksbank last week cut rates to a record low minus 0.50 percent in a bid to spur inflation and keep the krona in check. Central Bank Governor Stefan Ingves brushed aside concerns about the impact on banks, saying “profit levels are very, very good.”
Swedish banks, which have AA credit ratings and big capital buffers, also have good access to wholesale funding. That’s resulted in “low funding costs compared to other banks,” the Riksbank said in November. And helping offset the impact of negative rates, as greater dependence on market funding means less dependence on deposits.
Deposits “have shown to be difficult to re-price or charge negative rates,” Cerps said.
The recognition that marking funding has an upside, that it’s not just a major risk to financial stability in Sweden, is yet another twist in the strange world that’s taking shape as central banks’ use of subzero rates to jolt economies to life becomes more widespread and rates sink lower.
Another: Banks have the power to shrink deposits and, short of charging retail clients, they’re using it. Sweden banks generally are able to control pricing because the industry is “concentrated,” Cerps said. That “has implications for the pricing power of banks and possibility to adjust margins to current market circumstances.”
Svenska Handelsbanken AB, Sweden’s second largest lender by assets, has adjusted its prices for institutional clients to discourage them from depositing money with the Stockholm bank. Partly as a result, the bank’s been able to reduceby half the cash and liquid assets it keeps with central banks.
“If you don’t need it, it would be a little bit funny to pay for it,”
Chief Executive Officer Frank Vang-Jensen said.

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