Interview: Thomas Östros, Swedish Bankers’ Association

Thomas Östros, managing director at the Swedish Bankers’ Association, spoke to Nordic FIs & Covered about the state of the Swedish banking sector, risks stemming from the NSFR, the potential for regulatory overreach, and more.

To set the scene, how do you assess the state of the Swedish banking system?

One of the fundamental factors behind why the Swedish economy is performing quite well is that we have a healthy banking system that has the opportunity to finance the economy in a way that is not the case in a large part of Europe. It is a healthy system that is also able to finance the economy.

One of the reasons, of course, is that Swedish banks are well capitalised by international standards. That puts them in quite a strong position on international funding markets and they are able to transfer attractive funding to customers in Sweden, not least companies.Sweden went through quite a dramatic financial crisis in the early 90s and that is of course something that we have learned from. And that is one of the fundamental reasons why we were able to handle this crisis in a much better way.

What are the main challenges facing Swedish banks? Are they mainly in the form of new regulations?

I would say that the discussion on future regulation is of course a challenge for all European banks. I think it was very reasonable to increase capital and liquidity requirements as a lesson from the financial crisis, but it is important not to go too far. Banks must be able to finance the real economy and if we are now going through a slow upturn in the economy we must be very careful to balance new regulation in the right way. I think, for example, that it would be a big mistake to go forward with the Liikanen report before we have seen the consequences of CRD IV, for instance.

What are the priorities for the Swedish Banking Association with respect to regulation?

There is a specific concern about currency areas outside the euro area when it comes to some of the regulatory initiatives. Both the FTT [financial transaction tax] and the Liikanen proposal would be damaging for Swedish secondary bond markets because they are relatively small currency areas where banks are market-makers and if you regulate that too hard that could be quite a challenge, for instance. But the main discussion now in Sweden are the new responsibilities for the Finansinspektionen, the Swedish FSA, which now has sole responsibility for macro-prudential tools.

What has been decided in that respect and what are the association’s views?

The government made its proposal a couple of weeks ago to put all the macro-prudential tools in the hand of the Swedish FSA. There had been a discussion between the Swedish central bank and the Swedish FSA about who should have those tools and the central bank wanted some of the authority, but I think it was very good that the government was very clear on who is going to have the responsibility.

But now comes the next discussion, of course, about how this will be implemented, for example with respect to the countercyclical capital buffer that is one of the main tools.

Is there any clarity on what the countercyclical capital buffer requirements might look like?

The Swedish authorities and the Swedish government in 2011 already said that Swedish banks must meet a 12% capital requirement and that is sort of the basis for the discussion. They will use the CRD tools to get up to that 12% and that is something that Swedish banks are already reaching so there are no surprises there.

When it comes to the countercyclical buffer the Swedish FSA is very clear that this will be connected to the credit cycle. This is important, of course, as it is not a tool that can be used for any reason whatsoever. Nobody knows at this point in time where exactly between 0% and 2.5% the requirement will start. In my opinion it would be rational not to start at the maximum — let’s bear in mind that this is a tool that can be changed over time.

Back to regulations coming out of Basel and the EU – you have been critical about the NSFR. What is it about this ratio that you have concerns with?

The starting point is that we think it is reasonable to continue to have, as we do internationally now, a closer matching of maturities of asset and liabilities. That is good for the banking system, both short and long term. But, we have to recognise that the Swedish household sector behaves in a different way than in many other countries. It has a very high savings ratio and has had so for a very long time, but households do not save traditionally in bank deposits but in pension funds, in equities, in different funds. The reason for that, I think, is probably because they feel secure from the social security system so they can invest long term savings not in deposits but on the market, and that is something that is very good for the Swedish economy, of course, because it finances companies.

But it means that we have a lower deposit ratio in Sweden than in many other countries despite a very high household saving ratio, and that means that if we have the original definition of the NSFR it will not treat the Swedish economy neutrally in comparison with other countries. We have a strong banking system, a strong funding situation, a strong household saving ratio, but this won’t be reflected in the NSFR figures unless we have a new definition. Is it good for the Swedish economy to force households not to save in equities and funds and instead save in deposits? No, I don’t think it’s good for the Swedish economy. I think it’s bad for the companies and their economic growth. So that is why we need to have a discussion with authorities on how to balance the NSFR ratio so that it doesn’t give a wrong picture of the Swedish economy.

How are those discussions advancing?

It is a discussion that we have just started with the FSA, the central bank, and the government. My first impression is that they realise that it wouldn’t be good for the Swedish economy as a whole to draw back these funds from the capital markets. I can’t say anything about what the outcome will be but there have been some interesting reactions from the authorities on this subject. In the coming year this will be an important topic for us together with the discussion of macro-prudential tools and the Liikanen proposal. But of course we also have the implementation of CRD IV that is taking up a lot of time for us, to also make sure that smaller banks get all the information they need to be able to handle the new rules.

Yes, it is quite incredible just how much is coming out in terms of new regulation …

It really is a threat to the competitiveness of the banking market in the whole of Europe. The legislative burden will be so tough on smaller banks that I think new actors will hesitate to go into the market in the future because of the cost of just handling the regulation. I think it’s time now to think a little bit about the long term effects and I think that is probably what we will see in the coming years. Was the response perfect, did we go too far, was it too complicated? From my experience as a politician I know that it is easy to overreact when you have this kind of severe crisis. You go a little bit too far and it takes a few years before you with hindsight start to discuss reforms, but I do think we will get to that point.

A question about the LCR in CRD IV – how important is it that Swedish covered bonds should count as Level 1 assets?

It is of course important that Swedish covered bonds should be seen as Level 1 assets. When you look at the track record of Swedish covered bonds they have been highly liquid, almost comparable to government bonds, also during the acute phase of the crisis. I think this should really be reflected in regulation and that it is reasonable to expect that this will happen.

Another big topic at the moment is the new European bail-in regime? What is the situation in Sweden and what are the implications for Swedish banks?

I think there are good reasons to have a European regulation on bail-in and I think it will be a system that will be important in the future. I expect that banks that are strongly capitalised and have strong market positions will also have a strong position when it comes to bail-in instruments because it will be tightly connected to how strong the general position of the bank is. In the Swedish context I do not see a problem with the bail-in regime. I see it as another way of showing competitiveness and don’t see a dramatic change. But it creates a cushion that makes it even more improbable that the state will have to intervene in future because you have higher capital levels and the bail-in instruments, so it will be quite a change from how it was before the crisis.

Swedish regulators have expressed some concerns about rising household debt levels in Sweden – are these justified in your view?

I think it is very important to follow this closely and I have great respect for the authorities as they are doing this, because they should. But of course it is important to recognise, and the authorities say this when they present the problem, that household balance sheets are very strong. The assets have grown faster than household debt in recent years so in that respect yes, we have a fairly high household debt compared with disposable income, but the assets are three times greater so the balance sheet is quite robust. But of course we have discussions with the authorities to see to it that this continues. That is why the Swedish Bankers’ Association has for a couple of years had the general view that in a first step we should see to it that households amortise on their housing debt down to 75% of the value of the property, and that is very strongly implemented all over.

Has the FSA recently started talking about stricter debt repayment obligations?

The Swedish FSA might consider that in future but they haven’t put forward any specific proposals. That is a discussion we might have in the future if household debt increases in an unsustainable way. In the mid-2000s the yearly increase in indebtedness was over 10% and now it is under 5%, so it has decreased very sharply in recent years, which is of course a good signal.