Swedish Banks May Win Time on Capital Needs

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October 24, 2011, 5:15 AM EDT By Johan Carlstrom and Adam Ewing

(Updates with strategist comment in sixth paragraph.)

Oct. 24 (Bloomberg) -- Sweden may push back a plan to require banks to meet tougher capital standards than lenders outside the Nordic country as Europe’s debt crisis persists.

Regulators in Stockholm want the country’s four biggest banks to have core Tier 1 capital ratios of “a few percentage points more” than the 10 percent minimum Sweden is targeting by 2013, said Lars Frisell, the chief economist at the country’s financial watchdog and a member of the Basel Committee for Banking Supervision.

“We could possibly imagine that, if things get worse in Europe, we could give the banks more time” to reach that goal, Frisell said in an Oct. 21 interview in Stockholm.

Sweden has signaled that its banks will need to meet tougher goals than the 2.5 percentage point surcharge the Basel Committee wants to impose on systemically important lenders. The government has also said it will enforce such rules earlier than elsewhere. The Nordic country’s bank industry is four times the size of the economy, meaning stricter capital standards are necessary to offset systemic risks, Financial Markets Minister Peter Norman said last week.

The government will publish specific targets for lenders including Nordea Bank AB, Scandinavia’s biggest, by the end of the year, Norman said in an interview. Still, any tightening of capital requirements “will be slowly implemented,” he said. “The implementation is from 2013 to 2019. Who knows the business cycle at that time.”

‘Rhetoric Softened’

“It’s noticeable that the regulator rhetoric has definitely softened in Sweden,” Prateek Datta, a credit strategist at Royal Bank of Scotland Plc in London, said in a note today. “Swedish banks are very strongly capitalized and will be able to manage any such regulation.”

Nordea shares rose 1.1 percent to 58.65 kronor as of 10:45 a.m. in Stockholm. Swedbank AB rose 0.7 percent, SEB AB gained 0.5 percent and Svenska Handelsbanken AB slipped 0.2 percent. The 46-member Bloomberg index of European financials rose 0.9 percent.

Sweden’s decision to open the door to laxer regulatory targets follows concern that Europe may be unable to end the debt crisis that has raged for two years and now threatens to engulf the region’s banks. Euro area officials will meet again on Oct. 26 after outlining plans for aiding banks during the weekend’s crisis talks.

Bolstering Capital

Banks that need to bolster capital will be required to meet extra demands first before turning to national governments for help. Tapping Europe’s rescue fund will be a last resort.

Though lenders in the Nordics have negligible holdings of bonds sold by Europe’s most indebted nations, the euro area’s crisis is affecting banks outside the 17-member currency bloc, Swedish Finance Minister Anders Borg said this month.

Nordea last week reported a 43 percent slump in third- quarter profit, missing analysts’ estimates by 25 percent. Chief Executive Officer Christian Clausen cited “market turmoil,” even though the lender has “no direct exposure” to debt from the euro area’s periphery.

Clausen has argued against government plans to pursue stricter regulatory standards in Sweden than elsewhere.

“We have to find the same level and everybody agrees on that,” he said in an Oct. 19 interview. “We agree we should have more capital. We are just arguing against one country or region having much higher capital rules.”

Converging Capital

Nordea had a core Tier 1 capital ratio -- a measure of financial strength -- of 9.2 percent in the third quarter. Banks in Europe and the U.S. need to converge around a core Tier 1 capital ratio of about 10 percent, Clausen said.

Under the so-called Basel III rules, banks are required to have a minimum core Tier 1 capital ratio of 7 percent, plus a so-called counter-cyclical buffer of as much as 2.5 percentage points. Banks deemed too big to fail face a capital surcharge.

The European Union may require banks in the region to increase core capital ratios to 9 percent of their risk-weighted assets. The deadline for the increased levels may be mid-2012, German Finance Minister Wolfgang Schaeuble told a closed parliamentary committee this month, according to two lawmakers who attended the meeting.

Borg signaled last week the government will exercise caution in enforcing tighter capital rules in Sweden.

‘Eventually, Gradually’

“We want to eventually continue to gradually sharpen demands on Swedish banks both when it comes to liquidity and own capital,” Borg said. “We have a very responsible attitude that we also intend to implement in a cautious and moderate way.”

Nordea’s Clausen said last week his bank has no plans to sell shares to raise more capital. Sweden’s biggest lenders, which also include Swedbank AB, Svenska Handelsbanken AB and SEB AB, all passed the European Banking Authority’s stress test on July 15. Their core Tier 1 capital ratios ranged from 8.6 percent to 10.5 percent of their risk-weighted assets in the test, compared with a minimum requirement of 5 percent.

“As long as saving the banks in an adverse scenario is a national task, the respective countries should potentially put stricter rules on the banks’ capitalization to reduce downside risk,” said Fridtjof Berents, an Oslo-based analyst at Arctic Securities ASA. “The most important matter is to view capitalization within a Nordic perspective as the banks’ operate cross-broader.”

--Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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