Sweden
07 March 2012
Sweden remains in rude health despite other problems in the euro area, and its banks are well-prepared to capitalise
Image: Shutterstock
The financial sector is one of the most important growth areas of the Swedish economy. It employs approximately 100,000 people, has high productivity and great innovative power, and represents about four per cent of Sweden’s GNP. Internationally, Sweden is at the forefront of the development of financial products and services, as well as new technology.
Stockholm aspires to be a leading financial centre in the Baltic region and northern Europe, and is the domicile for the area’s largest stock exchange. Four of the six leading banks in Nordic countries have their head offices in Stockholm.
The foreign presence in Swedish financial markets is obvious. A majority of the foreign companies that operate financing or securities businesses in Nordic countries and the Baltic region have placed their regional head offices in Stockholm. Also, foreign operators and investors have a considerable share in the trade on the Swedish securities market.
Companies that operate a business in the financial sector are authorised and supervised by Finansinspektionen. At present, Finansinspektionen supervises approximately 3,900 entities incorporated in Sweden and 600 foreign financial institutions with an operation in Sweden: banks and other credit institutions; securities companies, securities exchanges and clearing houses; fund management companies; and insurance companies and insurance brokers. Finansinspektionen is also responsible for monitoring the financial markets. For instance, it monitors the disclosure of information from the 300 companies publicly traded on a stock exchange or a marketplace in Sweden.
The most central rules for institutions acting on the Swedish capital markets are defined by the Act on banking and financing activities (Lag 2004:297), and the Act on capital adequacy and large exposures (Lag 2006:1371). These acts set forth a framework for the organisation of a financing business, reporting duties and rules for monitoring and intervention.
The corresponding regulations applicable to the securities markets are the Financial Markets Act (Lag 2007:528), and the Financial Trading Act (Lag 1991:980). In addition to these acts, reporting duties, insider rules, takeover rules and money-laundering regulations are found in separate acts.
Generally speaking, any company planning to offer services on the Swedish capital or securities markets, must file an application with Finansinspektionen for a licence. The same applies when an institution holding a licence wants to change the direction of its business. The change may be due to product development, restructuring or a change in nature of the business. An application must set forth a description of the company’s organisational structure, information concerning ownership, management, a budget and an account of control routines and security measures.
Based on the EU Transparency Directive, Swedish regulation states that the sale and purchase of shares exceeding five per cent of the share capital or votes in a company listed in Sweden must be reported to the company itself and to Finansinspektionen no later than the day after the transaction.
The financial crisis increased the focus on transparency and risk management within the market, and has led to the introduction of a CCP and a single-platform CSD. These have increased liquidity and driven down costs, but have had a knock-on effect on the custody business, where margins have been squeezed and value added services now the norm.
EMCF and Nasdaq OMX Nordic agreed to implement CCP clearing for cash equities in 2009. In a statement EMCF said: “The introduction of a CCP, in contrast to fragmented bilateral settlements, will benefit market participants by driving liquidity and lowering costs. Most European markets today are centrally cleared, and this move ensures that the Nordics keep pace with international standards. Most crucially in the current climate, a CCP acting as counterparty to both the buyer and seller will significantly reduce counterparty risk.”
“The introduction of the CCP was driven by the crisis and competition from MFTs,” says Christel Leonhard, head of customer services, group trading and investment support at Danske Bank. “There had been talk about implementing it for at least 10 years but in 2008/9 we drove forward to be able to implement it in three markets by October 2009, with Norway following in July 2010.”
“The introduction of CCP in 2009 was undoubtedly the biggest event in the post trade market for the past five years,” says Ulf Noren, global head of sub custody at SEB. “This has completely re-shaped the operative models and also the revenue situation. Going from a situation where exchange trades where settling bilaterally in 1:1 relationship to a situation with netting has not made great wonders to sub-custodian’s gross revenues.
“[It] has made the market more attractive from a cross border cost perspective,” Noren continues. “It might also have contributed to a safer and more predictable market even if all current European clearing models leaves a few things to be desired on that account. A related effect of CCP is that banks have developed more sophisticated and advanced risk management models, partly in response to the nature of a clearing environment but equally so in response to market supervisory requirements and the same for their own management for counterparty risk control. A surprising effect of the CCP introduction (even if apples not necessarily are compared with apples here)is the lowered settlement rates - an issue that is addressed by an informal CSD/Bank consultation process at this very moment.”
The Nordic Central Securities Depository (NCSD) was acquired by Euroclear from the previous main shareholders, Nordea, SEB, Svenska Handelsbanken and Swedbank. The purchase also included the Finnish and Swedish CSDs, which meant that transaction processing activities for the region will transferred to Euroclear’s multi currency platform that allows clients to settle all trades - including settling cross-border transactions as if they are domestic trades, and with reduced costs. There’s no set date for the transfer, but it’s expected to take place some time this year.
Nordic custodians are also having to deal with the introduction of the Target 2 Securities regulation, which aims to centralise the settlement of euro denominated securities on a single European platform by 2013. This could mean that competition for custody business will move from an inter-custodian battle to include CSDs as well - again reducing margins.
Corporate debt
Sweden’s government has said it’s ready to help the financial industry create a bigger corporate bond market as companies struggle to find alternative funding sources to compensate for a lack of bank credit.
“It would be good if we in Sweden took more steps toward a larger, more transparent corporate debt market,” Peter Norman, financial markets minister, said in an interview in Stockholm. “The financial industry has made a lot of money by trading equities and government debt so there’s been no real drive” to expand in other markets, he said.
Swedish companies have relied on banks for about 80 per cent of their funding, versus 30 per cent for US firms, according to Mats Carlsson, the head of investment bank Pareto Ohman AB. With the country’s lenders facing some of the world’s toughest capital rules from next year, bank financing is becoming more expensive. That’s putting pressure on companies to look elsewhere for funds.
The country’s financial regulator and central bank in November told Sweden’s four biggest lenders to target common equity Tier 1 capital of at least 10 per cent from January 2013 and 12 per cent two years later. Basel sets a seven per cent target, to be met by 2019. The rules affect Nordea Bank, Svenska Handelsbanken AB, SEB, and Swedbank AB.
Staying strong
The major Swedish banks are well-equipped to meet poorer economic developments. They are well-capitalised in an international comparison and have good access to market funding, despite the financial turbulence abroad. However, there is considerable uncertainty over future economic developments in the euro area. The banks should therefore retain or increase their capital ratios from the current level to preserve and further increase their resilience.
Over the past six months the public finance problems in the euro area have led to increased turbulence in the financial markets. This has also affected the conditions for the European banks, as it has become more difficult and more expensive for them to obtain market funding.
Unlike many European banks, the Swedish banks have good access to the international capital markets, despite the financial turbulence abroad. This is because the major Swedish banks are still well-capitalised in an international perspective and they have only small exposures to the European countries with weak public finances. Earnings have increased and loan losses are expected to remain low. This means that the Swedish banks are well-equipped to meet a future economic downturn.
But there is still considerable uncertainty over future developments. If concerns over sovereign debt problems increase further, Swedish banks may also be affected. The Riksbank’s stress tests show, however, that the Swedish banks have sufficient capital to give them good resilience, even if the loan losses were much greater than those expected in the report’s main scenario. However, their liquidity risks are still higher than in many other European banks, although the risks have on the whole declined somewhat over the year.
The Riksbank makes recommendations on measures that aim to reduce risks and vulnerabilities that may affect the stability of the financial system. The recommendations can be aimed at banks as well as legislators and other authorities. The Riksbank considers that the recommendations presented in the previous Financial Stability Report still apply, but also sees reasons to clarify and supplement them.
The Riksbank, together with Finansinspektionen (the Swedish Financial Supervisory Authority) and the Ministry of Finance, advocates that the major Swedish banks should hold more capital than the minimum levels stipulated in Basel III. They propose that the four major Swedish banking groups, Handelsbanken, Nordea, SEB and Swedbank, should hold at least 10 per cent of their risk-weighted assets in Common Equity Tier 1 capital with effect from 1 January 2013 and 12 per cent with effect from 1 January 2015.
Moreover, the Riksbank considers that binding liquidity requirements should be imposed on the banks in Swedish krona and foreign currencies with effect from January 2013. These and further recommendations are explained in more detail in the Financial Stability Report.
Stockholm aspires to be a leading financial centre in the Baltic region and northern Europe, and is the domicile for the area’s largest stock exchange. Four of the six leading banks in Nordic countries have their head offices in Stockholm.
The foreign presence in Swedish financial markets is obvious. A majority of the foreign companies that operate financing or securities businesses in Nordic countries and the Baltic region have placed their regional head offices in Stockholm. Also, foreign operators and investors have a considerable share in the trade on the Swedish securities market.
Companies that operate a business in the financial sector are authorised and supervised by Finansinspektionen. At present, Finansinspektionen supervises approximately 3,900 entities incorporated in Sweden and 600 foreign financial institutions with an operation in Sweden: banks and other credit institutions; securities companies, securities exchanges and clearing houses; fund management companies; and insurance companies and insurance brokers. Finansinspektionen is also responsible for monitoring the financial markets. For instance, it monitors the disclosure of information from the 300 companies publicly traded on a stock exchange or a marketplace in Sweden.
The most central rules for institutions acting on the Swedish capital markets are defined by the Act on banking and financing activities (Lag 2004:297), and the Act on capital adequacy and large exposures (Lag 2006:1371). These acts set forth a framework for the organisation of a financing business, reporting duties and rules for monitoring and intervention.
The corresponding regulations applicable to the securities markets are the Financial Markets Act (Lag 2007:528), and the Financial Trading Act (Lag 1991:980). In addition to these acts, reporting duties, insider rules, takeover rules and money-laundering regulations are found in separate acts.
Generally speaking, any company planning to offer services on the Swedish capital or securities markets, must file an application with Finansinspektionen for a licence. The same applies when an institution holding a licence wants to change the direction of its business. The change may be due to product development, restructuring or a change in nature of the business. An application must set forth a description of the company’s organisational structure, information concerning ownership, management, a budget and an account of control routines and security measures.
Based on the EU Transparency Directive, Swedish regulation states that the sale and purchase of shares exceeding five per cent of the share capital or votes in a company listed in Sweden must be reported to the company itself and to Finansinspektionen no later than the day after the transaction.
The financial crisis increased the focus on transparency and risk management within the market, and has led to the introduction of a CCP and a single-platform CSD. These have increased liquidity and driven down costs, but have had a knock-on effect on the custody business, where margins have been squeezed and value added services now the norm.
EMCF and Nasdaq OMX Nordic agreed to implement CCP clearing for cash equities in 2009. In a statement EMCF said: “The introduction of a CCP, in contrast to fragmented bilateral settlements, will benefit market participants by driving liquidity and lowering costs. Most European markets today are centrally cleared, and this move ensures that the Nordics keep pace with international standards. Most crucially in the current climate, a CCP acting as counterparty to both the buyer and seller will significantly reduce counterparty risk.”
“The introduction of the CCP was driven by the crisis and competition from MFTs,” says Christel Leonhard, head of customer services, group trading and investment support at Danske Bank. “There had been talk about implementing it for at least 10 years but in 2008/9 we drove forward to be able to implement it in three markets by October 2009, with Norway following in July 2010.”
“The introduction of CCP in 2009 was undoubtedly the biggest event in the post trade market for the past five years,” says Ulf Noren, global head of sub custody at SEB. “This has completely re-shaped the operative models and also the revenue situation. Going from a situation where exchange trades where settling bilaterally in 1:1 relationship to a situation with netting has not made great wonders to sub-custodian’s gross revenues.
“[It] has made the market more attractive from a cross border cost perspective,” Noren continues. “It might also have contributed to a safer and more predictable market even if all current European clearing models leaves a few things to be desired on that account. A related effect of CCP is that banks have developed more sophisticated and advanced risk management models, partly in response to the nature of a clearing environment but equally so in response to market supervisory requirements and the same for their own management for counterparty risk control. A surprising effect of the CCP introduction (even if apples not necessarily are compared with apples here)is the lowered settlement rates - an issue that is addressed by an informal CSD/Bank consultation process at this very moment.”
The Nordic Central Securities Depository (NCSD) was acquired by Euroclear from the previous main shareholders, Nordea, SEB, Svenska Handelsbanken and Swedbank. The purchase also included the Finnish and Swedish CSDs, which meant that transaction processing activities for the region will transferred to Euroclear’s multi currency platform that allows clients to settle all trades - including settling cross-border transactions as if they are domestic trades, and with reduced costs. There’s no set date for the transfer, but it’s expected to take place some time this year.
Nordic custodians are also having to deal with the introduction of the Target 2 Securities regulation, which aims to centralise the settlement of euro denominated securities on a single European platform by 2013. This could mean that competition for custody business will move from an inter-custodian battle to include CSDs as well - again reducing margins.
Corporate debt
Sweden’s government has said it’s ready to help the financial industry create a bigger corporate bond market as companies struggle to find alternative funding sources to compensate for a lack of bank credit.
“It would be good if we in Sweden took more steps toward a larger, more transparent corporate debt market,” Peter Norman, financial markets minister, said in an interview in Stockholm. “The financial industry has made a lot of money by trading equities and government debt so there’s been no real drive” to expand in other markets, he said.
Swedish companies have relied on banks for about 80 per cent of their funding, versus 30 per cent for US firms, according to Mats Carlsson, the head of investment bank Pareto Ohman AB. With the country’s lenders facing some of the world’s toughest capital rules from next year, bank financing is becoming more expensive. That’s putting pressure on companies to look elsewhere for funds.
The country’s financial regulator and central bank in November told Sweden’s four biggest lenders to target common equity Tier 1 capital of at least 10 per cent from January 2013 and 12 per cent two years later. Basel sets a seven per cent target, to be met by 2019. The rules affect Nordea Bank, Svenska Handelsbanken AB, SEB, and Swedbank AB.
Staying strong
The major Swedish banks are well-equipped to meet poorer economic developments. They are well-capitalised in an international comparison and have good access to market funding, despite the financial turbulence abroad. However, there is considerable uncertainty over future economic developments in the euro area. The banks should therefore retain or increase their capital ratios from the current level to preserve and further increase their resilience.
Over the past six months the public finance problems in the euro area have led to increased turbulence in the financial markets. This has also affected the conditions for the European banks, as it has become more difficult and more expensive for them to obtain market funding.
Unlike many European banks, the Swedish banks have good access to the international capital markets, despite the financial turbulence abroad. This is because the major Swedish banks are still well-capitalised in an international perspective and they have only small exposures to the European countries with weak public finances. Earnings have increased and loan losses are expected to remain low. This means that the Swedish banks are well-equipped to meet a future economic downturn.
But there is still considerable uncertainty over future developments. If concerns over sovereign debt problems increase further, Swedish banks may also be affected. The Riksbank’s stress tests show, however, that the Swedish banks have sufficient capital to give them good resilience, even if the loan losses were much greater than those expected in the report’s main scenario. However, their liquidity risks are still higher than in many other European banks, although the risks have on the whole declined somewhat over the year.
The Riksbank makes recommendations on measures that aim to reduce risks and vulnerabilities that may affect the stability of the financial system. The recommendations can be aimed at banks as well as legislators and other authorities. The Riksbank considers that the recommendations presented in the previous Financial Stability Report still apply, but also sees reasons to clarify and supplement them.
The Riksbank, together with Finansinspektionen (the Swedish Financial Supervisory Authority) and the Ministry of Finance, advocates that the major Swedish banks should hold more capital than the minimum levels stipulated in Basel III. They propose that the four major Swedish banking groups, Handelsbanken, Nordea, SEB and Swedbank, should hold at least 10 per cent of their risk-weighted assets in Common Equity Tier 1 capital with effect from 1 January 2013 and 12 per cent with effect from 1 January 2015.
Moreover, the Riksbank considers that binding liquidity requirements should be imposed on the banks in Swedish krona and foreign currencies with effect from January 2013. These and further recommendations are explained in more detail in the Financial Stability Report.
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