EU deal: Swedish regulator warns that capitalisation agreement has flaws
Strong Swedish banks may be unfairly penalised because of the way the Core Tier 1 capitalisation ratio of 9% is to be calculated following the agreement overnight by Europe’s politicians.
Finansinspektionen (FI), the Swedish Financial Supervisory Authority, said that the EU’s agreement of a core capitalisation requirement of 9% after allowing for revaluations of sovereign debt is a positive step towards dealing with the problems that Europe’s banking sector is struggling with, and as a way to stop the contagion of market fear.
It said that the Swedish banks are among the best capitalised in Europe, and have little exposure to countries with poor finances. They are therefore only marginally affected by the writedown in values of these assets.
However, the decision by the European Banking Authority (EBA) to measure captial ratios according to the transition rules from Basel I will hugely impact on some of the Swedish banks because lower risk assets, such as Swedish mortgages, will be given a higher risk rating in the EBA’s measurements than under the coming Basel III regulatory framework, FI said.
The difference between the transition rules and Basel III is biggest for Handelsbanken and Swedbank, which have the biggest proportion of residential property loans and overall low risk in their asset bases, FI said.
These two banks will therefore not reach the 9% hurdle set by the EBA according to the transition rules. According to the EBA’s preliminary calculations the difference is SEK9.7bn (€1.1bn) for Handelsbanken and SEK2.9bn (€320m) for Swedbank.
However, FI said that all of Sweden’s large banks are well capitalised, even against a very conservative valuation of the risks on their balance sheets.
The EBA’s methodology for calculating capitalisation buffers is available here: http://www.eba.europa.eu/cebs/media/aboutus/News%20and%20Communications/Sovereign-capital-shortfall_Methodology-FINAL.pdf
It has also published estimates of sovereign debt buffers as a proportion of overall capitalisation buffers: http://www.eba.europa.eu/News–Communications/Year/2011/The-EBA-details-the-EU-measures-to-restore-confide.aspx