Mentions of Nordic countries bring to mind fjords, frost and fish, but the region continues to provide a rich source of financial innovation
The Nordics consist of Denmark, Norway, Sweden, Finland and Iceland, with the Faroe Islands, Greenland and Åland also forming a part of the region. With countries the world over having to deal with geopolitical tensions and macroeconomic turmoil — all while still feeling the strain of recent years’ global crises — how are the Nordics faring?
Road to recovery
According to Deloitte’s analysis of major Nordic banks’ 2022 Q3 results, the region is performing impressively well in the face of global challenges. While consumers may be struggling with the burden of rising inflation rates, the banks are benefitting from increased profits. With improved net interest income, Deloitte says, they are earning more on the deposits they hold.
SEB’s 2023 Nordic Outlook predicts overall inflation to fall in 2023, with rates declining in a number of sectors. However, rents and wages are still on the rise — central banks’ inflation targets won’t meet their 2 per cent target “until well into 2024”, the report warns.
The industry is starting from something of a low point. Deloitte’s report is quick to bring attention to “signs of distress” visible in banks’ income statements as a result of recent macroeconomic events. Falling equity prices combined with rising interest rates have led to lower asset valuations and reduced fee income in the capital markets and asset management sectors, and lending portfolios are presenting considerable risk factors, it says.
However, while this remains a concern, SEB’s February 2023 Investment Outlook paper affirms that “rapidly falling” US inflation rates will prevent further central bank stimulus programmes, improving share valuations and helping to stabilise markets.
New money
As so many central banks around the world are considering, the Swedish Riksbank is investigating the possibility of issuing the e-krona. While it’s still in the discussion phase, the project began more than five years ago, in 2017. Since then, national and international agents have been consulted, Accenture has been brought on board to work on a technical platform model and legal issues have been reviewed.
Denmark’s Nationalbanken, too, is looking into producing a CBDC, as is the Central Bank of Norway. The e-krona pilot has been part of a collaborative effort from the Bank of Israel, Norges Bank and the Bank for International Settlements, considering the role of CBDCs in cross-border payments. With two of the four firms in the group being based in the region, it’s clear that the Nordics are engaged with digital assets and technology developments.
Regulation around digital assets and cryptocurrency differs across the region, with countries taking different approaches and building on EU law in a variety of ways.
Norway has proved itself to be a popular location for blockchain start-ups. While anti-money laundering (AML) regulations were put in place for crypto storage services and virtual currency exchanges by the Financial Supervisory Authority of Norway and the Ministry of Finance, other crypto services can operate freely.
That being said, the Authority has been clear about the risks associated with crypto, the prevalence of money laundering, illicit activities and scams outlined in published warnings.
Sweden’s Financial Supervisory Authority and central bank have been equally vocal about the risks associated with crypto. As in Norway, Sweden requires financial institutions to comply with AML.
Finland has been more strict in its approach, requiring virtual currency exchange providers, wallets and issuers of virtual currencies to register with the Financial Supervisory Authority.
Without doing so, they cannot market virtual currencies or related services. This practice was introduced in May 2019; as of April 2022, less than 10 companies are registered as supervised entities.
Cleaning up AML
Money laundering is an issue that goes beyond just cryptocurrencies. Despite historically high standards of financial supervision, some recent cases of money laundering have been identified in the region.
In December 2022, Denmark-based Danske Bank pled guilty to money laundering in its Estonian branches, following years of investigation and significant reputational damage since the scandal came to light in 2018.
The company was fined DKK 3.5 billion (€470 million), paid €1.9 billion to resolve fraud investigations against the US banks that were targeted, and had €168 million in profits from transactions by its subsidiaries confiscated. In total, more than €200 billion had been laundered through its Estonian division.
The scandal shone a spotlight on AML in the region. SEB and Swedbank were fined SEK 1 billion and SEK 4 billion respectively after suspect payments in their Baltic branches and insufficient AML procedures were uncovered.
Banks weren’t the only ones subjected to extra scrutiny after the landmark case, with the EU and European Banking Authority investigating Danish and Estonian regulators to find out how so great a crime went undetected for so long.
Since the string of crises, there has been “a shift in the region’s mindset,” says Felix Edgren, regional head of corporate products for Nordics at Apex Group. “AML considerations are now being viewed as a crucial operational aspect, particularly for banks.”
Cross-border payment security and know-your-customer (KYC) practices are two areas that the region has worked to improve over recent years, with Edgren observing a greater number of firms “using pre-payment callbacks, proactively contacting parties for unexpected payment streams, and investing in technological solutions for enhanced screening capabilities.”
A green approach
Along with the rest of the world, financial or otherwise, “ESG has been, and will likely continue to be, a key area of focus” for the Nordics, says Edgren. After being seen as a pioneer in the sustainability field for many years, the global push for greater ESG consideration has led to “a greater alignment of ambitions” between the Nordics and the rest of the world, he affirms, with “a number of regions joining the Nordics in driving sustainable development.”
Nordea’s report on sustainable finance for Q1 2023
shows that the Nordic sustainable bond supply is slowly but surely on the rise, with green bonds taking an 86 per cent share of volume over the quarter and the remaining 14 per cent being made up of sustainability-linked bonds.
These figures are above the global average, and did not suffer the dip in volume seen globally in 2022.
Perhaps one of the most glaring signs of the Nordic region’s commitment to ESG is its blacklisting by the US state of Kentucky, which passed a law banning ESG investment practices in the state earlier this year.
The Nordics have faced numerous challenges over recent years, both regional and worldwide. However, the region appears to be recovering from its wounds, learning from its mistakes and reclaiming its image as an innovative and trustworthy jurisdiction.
