May 24, 2017 / 10:22 AM / 8 months ago

Fitch: Basel Floors Won't Force Swedish Banks to Issue Capital

(The following statement was released by the rating agency) LONDON, May 24 (Fitch) Swedish banks would not have to raise new capital as a result of proposed floors on the risk weights that banks use to calculate capital requirements, Fitch Ratings says. Capital floors would increase banks' modelled Pillar 1 capital requirements under the international Basel regulatory framework. But we believe reductions in the Swedish regulator's Pillar 2 requirements, which are conservative relative to other European jurisdictions, would largely offset the impact, and that any remaining capital needs could be met from Swedish banks' strong internal capital generation. We expect Basel capital floors would be phased in gradually, giving banks time to transition to the new requirements. We do not expect that the proposals would trigger changes in our ratings of Swedish banks. The Swedish regulator, the Financial Supervisory Authority (FSA), requires banks to hold significant buffers for systemic risks as the country's banking system is concentrated and large relative to the Swedish economy. Banks have to apply a 25% risk-weight floor in Pillar 2 for Swedish mortgages, reflecting high household debt, a risk which the Swedish central bank highlighted again today as a serious threat to financial and macroeconomic stability. All banks must hold a countercyclical capital buffer of 2% of risk-weighted assets, compared with zero elsewhere in the EU. The four domestic systemically important banks, Nordea Bank, Svenska Handelsbanken, Skandinaviska Enskilda Banken and Swedbank, must hold an additional systemic risk buffer of 5% of risk-weighted assets (of which 2% is Pillar 2), compared with the EU norm of 1%. We think the FSA will reduce these Pillar 2 requirements if the Basel framework adopted by the EU includes significantly higher Pillar 1 capital requirements. The FSA may have to reduce Pillar 2 requirements anyway if a proposal to limit Pillar 2 to a purely micro-prudential regulatory function is passed by the European Parliament. In November 2016 the European Commission proposed that Pillar 2 should no longer take account of systemic or macro-prudential risks, to avoid undermining approaches at the EU level to these risks. The Swedish parliament has opposed this, saying it would limit flexibility to act at a national level to protect financial stability. We expect banks to pass the cost of the extra capital requirements to customers if the capital impact of Basel floors is not fully offset by a reduction in Swedish Pillar 2 requirements, although any significant increase may dampen borrower demand. A capital floor for low-risk lending might drive some banks to take on higher risks where capital requirements are not increased by a floor. However, the Swedish banks we rate have a low risk appetite and we expect them to maintain this approach. The Basel Committee on Banking Supervision has proposed that banks using their own models to calculate capital requirements should apply risk weights no lower than 60%-90% of those defined in the standardised approach. The Committee will discuss this at its next meeting on 14-15 June in Sweden but we do not expect consensus to emerge yet, given differences of opinion on the calibration and the absence of a lead US representative, following the resignation of Daniel Tarullo from the Fed's board of governors in February. Fitch analysts will be in Stockholm on 2 June to present our latest views on credit themes and trends across all major sectors. To register for this event, visit: here Contact: Bjorn Norrman Senior Director, Financial Institutions +44 20 3530 1330 Fitch Ratings Limited 30 North Colonnade London E14 5GN Monsur Hussain Senior Director, Financial Institutions +44 20 3530 1793 David Prowse Senior Analyst, Fitch Wire +44 20 3530 1250 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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