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Basel III - Sweden pushes banks on capital rules

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Sweden has warned its banks to prepare for tougher capital rules on a quicker timeline than other European nations, infuriating lenders who say a patchwork approach to global banking regulations will put them at a competitive disadvantage.

The brewing battle could be a hint of what’s to come as more European governments push for harsher standards than were laid out in Basel III, the global banking requirements drawn up in response to the financial crisis.

“We see with increasing concern what the Swiss have done and now what is taking place in Sweden,” said Andres Portilla, deputy director of regulatory affairs for the Institute of International Finance, a global association of financial institutions. “To the extent that countries start gold-plating and topping up, it’s going to introduce not only competitive inequalities across jurisdictions but will undermine the global nature of Basel standards.”

So far, Swedish Finance Minister Anders Borg appears unmoved.

He has repeatedly warned against hubris as Sweden powers out of the recession, with record growth figures and strong public finances. The country’s banks are still recovering from the property market crash in the Baltic region, he has argued, and they face additional risks from rapid household credit growth.

“We live in a brutal world, and Sweden will not be in a position to expose itself to such high vulnerability,” he told the Expressen newpaper.

It wasn’t hard to see this coming. Though the Basel committee of 27 central banks and financial supervisors set minimum requirements for global financial institutions in the fall, it has yet to issue separate guidelines for “systemically important” banks except to say that they should be held to an even higher standard.

In the absence of guidelines, countries are making their own plans.

Switzerland has already suggested it will go well beyond the Basel III rules, which call for minimum capital of 10.5 to 13 per cent of their assets, including seven to 9 per cent high quality common equity or earnings by 2019. The largest Swiss banks may face a total capital requirement of 19 per cent of risk-weighted assets, 10 per cent in the form of common equity.

Last week, Sweden’s Financial Supervisory Authority suggested another approach, which would see the country’s biggest banks set aside 15 to 16 per cent total capital consisting of 10 to 12 per cent common equity. The government body said those requirements should be met in a few years, well ahead of the Basel deadline.

Mr. Borg hasn’t said if he’ll pursue that recommendation, though he warned Swedish banks – already well-capitalized compared to their European counterparts - to expect a one per cent annual increase in capital requirements over the next few years.

While banks warn of credit becoming scarce and expensive, others insist the impact will be minimal.

Though banks may lose some business “that’s a price worth paying for increased stability,” said Maximilian Hall, a professor of banking and financial regulation at Loughborough University in the UK.

“At the end of the day, as far as regulators are concerned, financial stability is more important than competitiveness.”

In any case, the clash in Sweden won’t be the last – other nations, including the UK and Italy are examining additional measures.

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