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Banks in Capital Race to Top as Sweden’s 12% Rule Sets Pace

Since Swedish regulators told their banks to target minimum capital buffers equivalent to 12 percent of their risk-weighted assets, banks across Europe have faced pressure to converge up in a race to the top.

“That would create a super-strong banking system,” European Banking Federation President Christian Clausen said in an interview in Helsinki yesterday. “That is three times as much capital as we had before the crisis.”

Clausen, who is also the chief executive officer at Stockholm-based Nordea Bank AB, says Europe’s capital requirements need to become more uniform to be effective. And as banks with the highest regulatory buffers enjoy lower funding costs, the industry’s biggest association in Europe is signaling that the benefits of converging up may outweigh the costs of setting aside extra reserves.

“The total package of regulation will make it necessary for all banks to move fairly high,” Clausen said.

That could result in a minimum core Tier 1 capital ratio that’s 12 percent of risk-weighted assets, Clausen said yesterday at a presentation in the Finnish capital.

Swedish regulators will require banks to set aside capital equivalent to at least 10 percent of their risk-weighted assets this year, with the minimum rising to 12 percent in 2015. The country’s four biggest banks, including Nordea, already exceed this target.

Banks Rewarded

Nordea’s core Tier 1 capital ratio reached 13.1 percent of risk-weighted assets at the end of last year, while Swedbank AB’s was 17.4 percent and SEB AB’s 15.1 percent. Svenska Handelsbanken AB had a ratio of 18.4 percent in the final three months of 2012. The results put Sweden’s biggest banks at the top of capital rankings in the European Union.

Danske Bank A/S, Denmark’s largest bank, in October last year sold 93 million new shares, generating gross proceeds of 7 billion kroner ($1.2 billion). The move was aimed at helping the bank raise its capital ratio and improve its credit ratings in a bid to lower its funding costs, which have been higher relative to its better-capitalized Swedish rivals.

Investors have rewarded the lenders for the perceived extra hedge against losses. It costs about 12 basis points less to insure against losses on senior notes issued by Nordea than it does for equivalent securities sold by Deutsche Bank AG, using five-year credit default swaps. Handelsbanken default-swaps trade 36 basis points lower.

Share Gains

Danske’s shares have gained 12 percent this year, while Nordea’s stock is up about 19 percent. The 40-member Bloomberg index of European financial companies has risen about 9 percent in the period.

The Basel Committee on Banking Supervision sets a 7 percent minimum core Tier 1 capital requirement, due to take effect by 2019, while the European Banking Authority has set a temporary 9 percent target for some banks.

“Where we today have different rules in different countries, countries will start to convert towards the same standards on rules and on supervision,” Clausen said. “That must be a very good thing because we still want this banking market to work.”

The stricter rules now being implemented across Europe will cost banks as much as 115 billion euros ($155 billion) a year, a figure that exceeds total financial industry profits for 2011, Clausen said. In response, banks need to adjust their business models and focus on “capital-light” areas that don’t burden their balance sheets, Clausen said in an interview last month.

Job Cuts

Many lenders have already started adjusting their business and cut jobs in retail and corporate lending to focus instead on debt underwriting. Nordea and Danske are both hiring more bankers in units that help manage corporate and agency bond sales. That’s in contrast to cuts elsewhere. Nordea is cutting 10 percent of its workforce, while Danske this month reiterated plans to eliminate 3,000 jobs.

Plans to have a single bank supervisor within the European Central Bank should also target a harmonized framework across Europe, Clausen said yesterday.

Banks need “one rulebook and one book on how to enforce” those rules, he said. “You have one law and one police to enforce it.”

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