Toughest Bank Rules Underpin Sweden Stress Test Supremacy

By Niklas Magnusson and Kati Pohjanpalo

Photographer: Casper Hedberg/Bloomberg

Customers queue to use automated teller machines (ATM) outside a Nordea Bank AB branch... Read More

Sweden’s banks topped the European Banking Authority’s examination, a result the nation’s regulator says is largely due to its commitment to some of the world’s strictest capital requirements.
In an adverse scenario, Sweden’s four biggest banks would have an average capital ratio of 14.6 percent of risk-weighted assets, compared with the 5.5 percent needed to pass, according to the EBA and Bloomberg calculations. That was the highest simple average of major banks of any European Union country.
“It shows that they are capable of coping with a significant stress in
their external environment,” Uldis Cerps, executive director for banking at the Stockholm-based regulator, said by phone. “The performance largely depends on the fact that we have imposed higher national requirements in the context of our domestic supervisory policy.”
Sweden, drawing on lessons from its banking crisis in the early 1990s when it was forced to nationalize two lenders, requires its banks to hold common equity Tier 1 capital ranging from 14.7 percent for Nordea Bank AB to 19 percent for Swedbank AB. Basel III sets a 7 percent minimum. Sweden’s lenders, whose assets are equivalent to four times the nation’s $550 billion economy, have met the stricter rules by retaining earnings, reducing risks and cutting costs.

Funding Costs

Cerps said the regulator will continue to tighten standards. Tougher requirements to date have helped Sweden’s banks tap capital markets at some of Europe’s cheapest rates. Nordea last month sold contingent Tier 1 capital at the lowest dollar yield on record.
A preference for tighter rules than those set elsewhere is common among all Scandinavian regulators. In Denmark, the Financial Supervisory Authority says the policy helps create “maximum credibility.” Even the banks can see the benefits.
“Of course it will be easier for us to meet the quality criteria that are set when we’re more closely supervised and have stricter limits -- Nordic banks have performed well on the European scale,” Risto Tornivaara, chief executive officer of Danske Bank A/S’s Finnish unit, said by phone. The lender’s Helsinki-based operations were part of the European Central Bank’s test to reflect Finland’s euro membership.

‘Flying Colors’

All Nordic banks, including Finnish lenders tested by the ECB, passed and none will need to raise fresh capital. The ECB identified a 25 billion-euro shortfall ($32 billion) after 25 euro-area lenders failed its stress test.
The Nordic region’s banks passed the stress test “with flying colors,” Lars Holm and Thomas Hovard, analysts at Danske Bank A/S, said in a note. “The exercise confirmed the robustness of the Nordic banks, which we also think was widely expected in the market.”
With an average ratio of 12.9 percent in the adverse scenario and under full CRD4 rules by 2016, the Nordic banks were 5.3 percentage points above the European average, they said.
The Nordic region has learned from its 1990s banking crisis, Tornivaara said. “That affects the regulation environment and requirements. Looking back 20 years, that’s a short time.”
Cerps said Sweden’s regulator “will continue to have a dialog” with banks “on their preparedness for resolution,” as EU nations prepare to implement a directive on winding down insolvent lenders.
“The regulatory agenda is by no means complete -- we still have the implementation of the net stable funding ratio pending and the implementation of the leverage ratio is also something that is going to happen in the future,” Cerps said.
The biggest risks to Swedish banks “stem primarily from the fact that their business model requires dependence on market funding,” he said. The watchdog is also “looking closely” at developments in household debt burdens and their impact on financial stability and Sweden’s economy, he said.