Tags: sweden | eu | europe | bank

Sweden Regulator: EU Bank Risks Growing ‘Rapidly’

Wednesday, 12 Oct 2011 06:38 PM

Risks to Europe’s bank industry are “rapidly” mounting as the fallout of Greece’s debt crisis engulfs the whole region, said Martin Andersson, director-general of Sweden’s Financial Supervisory Authority.

“We don’t see any positive signs,” Andersson said in an interview in Stockholm Wednesday. “Things are getting worse and, of course, then you’re more concerned about liquidity and solvency.”

Europe’s debt crisis has reached “a systemic dimension” and needs to be tackled “decisively,” European Central Bank President Jean-Claude Trichet told lawmakers in Brussels this week. Policy makers are debating how to recapitalize the region’s troubled banks as the sovereign debt crisis threatens to wreak havoc on balance sheets, undermining any recovery prospects.

“We might end up in a situation similar to what happened in 2008” following the collapse of Lehman Brothers Holdings Inc., Andersson said. “And then of course there will be problems with liquidity.”

In Sweden, banks need to reduce their reliance on dollar funding, the central bank and Finance Minister Anders Borg have warned. Swedish banks’ efforts to boost capital since 2008 are encouraging, though higher buffers are needed to compensate for dollar funding risks, Andersson said.

“The banks now have a better liquidity management,” he said. “They are much more prepared for this uncertainty that’s in the market right now and potentially much worse turbulence.”

Capital Buffers

While bank funding markets across much of Europe are tightening up, “Swedish banks have easier access to funding than many European banks and they are better-capitalized,” he said. Still, they “have structural risks on the funding side.”

Nordea Bank AB, Sweden’s biggest lender, had a Core Tier 1 capital ratio -- a measure of financial strength -- of 10.3 percent of its risk-weighted assets at the end of last year, according to the Riksbank’s latest financial stability report published in May. Swedbank AB’s ratio was 13.9 percent, Svenska Handelsbanken AB had 13.8 percent, while SEB AB had 12.2 percent.

Borg said Wednesday that European efforts to tackle a banking crisis should encompass the whole region, and not be limited to the 17 nations that share the euro.

“We don’t have a banking system for the euro countries. We have a banking system for Europe,” he said in an interview outside Stockholm. The risk of an outright European banking crisis won’t be averted until policy makers put Greece on a path to sustainable debt reduction, he said. The 21 percent haircut that Europe’s leaders have agreed that private investors should take on their Greek holdings isn’t enough, Borg said.

‘Significantly More’

It needs to be “significantly more,” he said. “The market must feel comfortable with the debt logic.”

Sweden’s Riksbank has urged the country’s banks to reduce a mismatch in dollar funding and krona lending to prevent a rerun of the liquidity crisis that followed the failure of Lehman Brothers. That event forced the central bank to step in and provide emergency dollars, peaking at $30 billion.

Foreign currency borrowing by Swedish banks, whose combined balance sheets are about four times the size of the economy, has risen to about 1.5 trillion kronor ($227 billion), from 200 billion kronor in 1998, according to Riksbank data.

Nordea Chief Executive Officer Christian Clausen last month characterized Europe’s bank funding market as “very stressed,” and warned failure to solve Greece’s debt woes will trigger a broader crisis.

“Things are going in the wrong direction quite rapidly in the market,” Andersson said. “Something that started off as a Greek problem has a potentially global impact,” he said.

Creditor Risks

The risk of a banking crisis in Europe increases the urgency for policy makers and regulators to design effective resolution models, Andersson said. He says Sweden shouldn’t be afraid to impose bail-in rules before such legislation is adopted in the rest of Europe.

Denmark, which in October last year became the first EU nation to pass a bail-in bill, has seen most of its lenders frozen out of funding markets after bank failures led to senior creditor losses. The Danish experience shouldn’t persuade other countries to rethink the model, Andersson said.

“The whole idea of credit risk is that creditors should bare part of the loss,” he said. “We can’t have a financial system that only can survive in upturns. It’s really about getting the incentives right and I think the resolution framework is absolutely key.”

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Risks to Europe s bank industry are rapidly mounting as the fallout of Greece s debt crisis engulfs the whole region, said Martin Andersson, director-general of Sweden s Financial Supervisory Authority. We don t see any positive signs, Andersson said in an interview in...
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Wednesday, 12 Oct 2011 06:38 PM
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