Swedish banks – Tips from an ageing model
Where banks are both safe and profitable
Ask almost any banker in New York or London whether banks can have strong capital ratios and still generate mouthwatering returns for shareholders, and they will probably think you a fool. A doubling of the capital a bank has will, all else being equal, halve the bank’s return on equity (ROE). For most bankers there is an uneasy tension between making banks safer and making them attractive investments. Developments in Sweden, however, suggest it is possible to have both safety and profitability.
On September 24th Sweden sold its remaining 7% stake in Nordea, Scandinavia’s biggest bank, a legacy of the country’s 1990s banking crisis. That crisis – in which Swedish authorities swiftly wrote down bad assets, moved them into a “bad bank” and recapitalised the remaining “good bank” – informed many of the bail-outs in the 2008 financial crisis.
Since then Sweden has again taken a lead on regulation. It has imposed some of the highest capital ratios in the rich world, with minimum levels of core tier-1 capital (the best sort) set at 12% from 2015, compared with a minimum of 7% by 2019 under Basel 3. In late August it proposed to ratchet capital levels yet higher, with plans to add up to 2.5% to the capital ratio as a counter-cyclical buffer. It has also interpreted risk-weightings far more strictly than many peers. It has tripled the amount of equity that banks have to use to fund mortgages; it may tighten further. Yet even these punitive levels of capital seem easily within reach. Many of the country’s biggest banks already have capital ratios of about 12% under the new rules (and close to 15% under the old Basel 2 regime).
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