Swedish Banks punished by drive to level playing field

BLOOMBERG

Efforts by regulators to level the playing field among European banks is putting Swedish lenders at a disadvantage, according to the chief executive officer of SEB AB, one of the Nordic country’s four big banks.
Regulators from Stockholm to Basel are pushing to shrink differences in how banks estimate potential losses, an undertaking designed to ensure that lenders don’t use internal models that could underestimate risks and reduce capital requirements.
While that effort is desirable, the harmonisation shouldn’t stop at risk weights but also adjust capital levels, Annika Falkengren said. The country should now follow the UK’s lead and lower capital requirements, she said.
“If you now have higher risk weighting in Sweden, including higher capital, you might actually suffocate the banks,” the 54-year-old executive said. “You have to find some mitigating
action.”
Swedish banks face among Europe’s toughest capital requirements as national regulators have sought to protect the economy from a financial industry that’s about four times its gross domestic product. So far, that’s not hurt Sweden’s growth, which has outpaced most of Europe, and also benefited its lenders through lower borrowing costs.

Slowdown Signs
But signs are emerging that the boom times may soon be over for Sweden and the nation’s hot housing market is also cooling.
SEB reported a 15 percent trading-driven increase in profits in the second-quarter, beating analysts’ estimates, even as interest income was under pressure from negative rates.
Falkengren said the jump in trading profit was unlikely to be repeated since it was tied to the turmoil of the UK’s referendum on the European Union. Corporate clients “are now waiting for what will happen,” she said.
Sweden also signaled earlier this week that it probably won’t raise banks’ countercyclical buffers, which are designed to rise during good times to build capital for when turmoil strikes.
Lower Buffers
It should instead follow the Bank of England, which after the Brexit vote lowered the countercyclical buffer, according to Falkengren.
In the UK, “they came out immediately and gave the banks some relief, making sure the banks can stay strong in this difficult moment,” she said. “I think that will happen in the future. Let’s hope for more harmonising.”
Sweden’s Financial Supervisory Authority this year tightened rules on use of internal models to gauge risks in corporate loan books. SEB has allocated capital to cover an estimated 10.6 billion-krona increase in risk-weighted assets that will follow when the final wording of the new rules is completed.
“It may cost us around 1 percentage point,” Falkengren said. “We’re prepared. When that one comes, we don’t really need to hoard capital, for example, or anything.”
SEB reported a common
equity Tier 1 capital ratio of 18.7 percent, 2.4 percentage points higher than its FSA requirement as of June 30. The bank aims to have an excess over requirements of 1.5
percentage points.
Svenska Handelsbanken AB reported a CET1 ratio of 23 percent, compared with a requirement of 19 percent at the end of March. The bank said its final requirement, incorporating the FSA’s new orders, hasn’t been set yet, but that existing capital will be enough to cover an expected increase in corporate risk weights.
Swedish banks have had higher capital requirements in part to compensate for lower risk weights, while regulators in other countries imposed lower capital levels while being tougher on risk weights. Both need adjusting, she said.
“You need harmonization,” Falkengren said.

“You can’t have different conditions for banks in different countries, when we’re all competing in each other’s countries.”