Bloomberg News

Nordic Banks ‘Punished’ as EBA Tests Penalize Mortgage Debt

November 02, 2011

(Updates with share performance in 14th paragraph.)

Oct. 28 (Bloomberg) -- Nordic banks are being penalized by European rules that assign tougher risk weights to mortgage assets than local regulators, forcing lenders to scrap payouts for shareholders to fulfill capital rules.

Scandinavia is home to Copenhagen-based Nykredit A/S, Europe’s biggest mortgage-backed covered bond issuer. Other lenders in the region, including Swedbank AB and Svenska Handelsbanken AB, also rely on mortgage credit for much of their business. That means the European Banking Authority’s decision to assign risk weightings up to eight times higher than those enforced by local regulators is hitting Nordic banks harder than lenders elsewhere.

Though the rules, announced as part of a European crisis- management package on Oct. 26, will only apply until the end of 2012, the fallout in the meantime may be costly for the region.

“The choice to use transitional rules is of course unfortunate for these banks and punishes them in a way,” Martin Noreus, deputy director of the Banking and Securities Department at the Swedish Financial Supervisory Authority, said in an interview. “It’s clearly not favorable for Swedish banks.”

Scandinavia’s banks sailed through the EBA’s July stress tests, while credit and equity markets suggest investors deem the region’s lenders to be some of the safest in Europe. Still, the EBA’s punitive handling of mortgage assets isn’t the first time an international regulator has designed rules that penalize the securities. The Basel Committee on Banking Supervision’s December proposal treats mortgage debt as inherently less liquid than government bonds, a position the region has argued against.

‘Well-Capitalized’

The EBA’s results belie how well banks in the region are.

“Swedish banks are well-capitalized, they are very well capitalized compared with a lot of other banks,” said Stefan Ingves, the governor of Sweden’s central bank and the chairman of the Basel Committee, in an interview. “In particular, Swedish banks have plenty of simple, ordinary share capital which is not the case in many other places.”

Swedish lenders have the means to generate the capital they need without hurting their business, he said.

“It’s important that the exact same rules are applied in all of Europe since a discussion has arisen about how banks in various countries are functioning or, in some countries not functioning, so that we once and for all erase the uncertainty that this creates.”

Reconciled to Rules

The EBA says Sweden’s Handelsbanken and Swedbank, the country’s two largest mortgage lenders, need to boost capital by about 12.5 billion kronor ($1.9 billion) before July, while Nykredit says it will withhold dividends to meet the roughly 50 million euros ($70 million) in extra capital need to reach the EBA’s threshold.

“Handelsbanken is affected a bit harder than others banks” in Sweden “in relative terms maybe more than any other bank in all of Europe,” Swedish Financial Markets Minister Peter Norman said yesterday.

The EBA wants a June 30, 2012, deadline for European lenders to reach a core capital reserve of 9 percent. Lenders from Norway, Sweden and Denmark will need to raise a combined 2.7 billion euros to meet the EBA’s capital requirement.

While Scandinavia, led by Denmark, has lobbied inside the European Union to ensure that Basel’s liquidity rules are eased, the region is more resigned to accepting the EBA’s treatment of mortgage assets.

‘Take It on the Chin’

“If the region’s banks take it on the chin this time in order to help get the rest of Europe get back on track, maybe that’s just something we have to deal with,” said Jesper Berg, senior vice president and head of ratings and regulatory affairs at Nykredit.

Swedbank shares fell the most in a week, sliding as much as 4.4 percent. The stock was down 3.2 percent at 95.25 kronor as of 1:47 p.m. in Stockholm. Handelsbanken shares lost as much as 0.7 percent before trading at 187.60 kronor. The Bloomberg Europe Banks and Financial Services Index slipped 0.4 percent.

The EBA estimates banks’ capital needs at 106 billion euros to meet the July deadline. Nordic banks have been gearing up to meet the so-called Basel III capital requirements before the 2019 deadline. While most lenders in the region already have enough capital to meet Basel’s latest targets, the EBA’s decision to use so-called transition rules puts them at a disadvantage.

Sweden’s FSA says while mortgage assets were given risk weightings of 5 percent to 10 percent under Basel II, using the transition rules, banks need to apply weightings as high as 40 percent.

‘Higher Vs Basel’

“Since the risk-weighting in Sweden is low compared with many other countries in Europe it’s worth looking at whether it should be like that,” Ingves said. “It’s a question that’s there, that we should look at and that we should return to. There are good reasons that, in a country like Sweden, to have higher than the Basel minimum requirements.”

Telling banks to follow the EBA rules “is justified because we believe that the overall EU package agreed to is very important to strengthen the European banking sector,” Noreus said. “These capital measures in a European perspective are very important and we are therefore willing to comply to these rules even if the definition of these thresholds is somewhat unfavorable to our banks.”

At Swedbank, shareholders may be forced to wait longer for a planned share buyback. “We will of course comply if that is what they want,” said Swedbank spokesman Thomas Backteman. “This shouldn’t affect our dividend policy, but it means our share buyback plan is probably further away.”

Norway’s Financial Supervisory Authority said it supports the recapitalization of the banks, according to an e-mailed statement. The EBA calculated that Norwegian banks need to raise 1.3 billion euros to reach the required 9 percent.

DnB NOR ASA, Norway’s biggest bank, said it will meet the EBA’s requirements by redistributing capital internally.

The EBA’s capital rules won’t affect Stockholm-based SEB, Chief Executive Officer Annika Falkengren said in an interview. “We have double-digit capital, however you measure us.”

--With assistance from Johan Carlstrom in Stockholm and Josiane Kremer in Oslo. Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporters on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net; To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Tasneem Brogger at tbrogger@bloomberg.net


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