Swedish FSA details capital rules, but questions remain

May 8th, 2014

The Swedish FSA announced details of tighter capital requirements today (Thursday), which market participants said provide welcome but only partial clarification of the capital regime in Sweden, with outstanding questions about Pillar 2 requirements obscuring the outlook for AT1 supply.

FinansinspektionenThe announcement from the Financial Supervisory Authority (Finansinspektionen), sets out the requirement for systemic risk buffers to be held by the four major Swedish banks, information about the countercyclical capital buffer, a higher risk weight floor for Swedish mortgages, and the approach to Pillar 2 requirements.

The four major Swedish banks — Nordea, SEB, Swedbank and Svenska Handelsbanken — will have to hold a systemic risk buffer of 3% in Common Equity Tier 1 (CET1) as of 1 January 2015, according to the rules announced today, and a further 2% in CET1 for Pillar 2 requirements.

The FSA also said that it has decided that banks should hold a countercyclical capital buffer, although the level has still to be decided — for now it is working with a pro-forma level of 1.5%. Of the decisions announced by the FSA today, an increase in the risk weight floor for Swedish mortgages from 15% to 25% had been the most well flagged.

“On the whole, the implementation of the strengthened capital adequacy rules involves a clear tightening of capital requirements for Swedish banks, particularly the systemically important major banks,” the FSA said, adding that banks have little time to adapt their capital planning and targets to the total capital requirements but that it believes they will be able to meet the requirements.

“At the same time, because of the need for continuing adaptation, certain firms still need to be conservative in their capital planning and show restraint in measures that weaken their resilience, such as profit distribution and share buybacks,” it said.

It estimated the total own funds requirement of the four major banks to be 18.7%-24.5%, and the total CET1 requirement at 14.5%-19.3%.

The Swedish Bankers’ Association noted that the FSA’s announcement clarifies how the systemic risk buffer should be composed and how the Pillar 2 process will work, as well as setting the timetable for the countercyclical buffer.

However, a not insignificant amount of uncertainty remains, mainly in relation to Pillar 2 requirements and what type of capital will be allowed to meet these, according to Crédit Agricole CIB bankers. This in turn has implications for the likelihood and volume of new-style hybrid capital issuance by Swedish banks, which have yet to participate in the burgeoning market for Additional Tier 1 (AT1) instruments.

“The minimum Pillar 1 requirements for AT1 and Tier 2 Capital are in line with the European standard, but the question is what type of capital instruments can be used to fill any Pillar 2 requirements outside the CET1 share,” said Stefano Rossetto, hybrid capital and liability management at Crédit Agricole CIB.

An English language memorandum published today states that the four major Swedish banks would be required to hold 2% in Common Equity Tier 1 (CET1) within the framework of Pillar 2 requirements, but also that the CET1 share of the capital requirement under Pillar 2, excluding risk weight floors and systemic risk, “is determined by the breakdown of type of capital according to Pillar 1 (including buffer requirements besides the countercyclical capital buffer)”.

Alex Sönnerberg, Nordic FIG DCM origination at Crédit Agricole CIB, said that other than the systemic risk buffer and risk weight floors, several components of Pillar 2 requirements are not yet known, and that at a conference this afternoon the FSA said it could be another year before it comes up with a standardised approach for Pillar 2 requirements.

Pillar 2 requirements are those requirements specific to individual banks, and come on top of general requirements under Pillar 1. The FSA said that it “does not normally intend to make a formal decision on the capital requirement under Pillar 2” but that Pillar 2 requirements will not affect the level at which automatic restrictions on distributions linked to combined buffer requirements come into effect.

Rossetto noted that this is in line with the general approach in the EU although different from that in the UK, where so-called Pillar 2A requirements could be taken into account as part of calculations relating to the maximum distributable amount (MDA).


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