Sweden will go beyond Basel III capital rules, says Ingves

Riksbank governor Stefan Ingves says Sweden will follow Switzerland and UK in implementing higher capital adequacy requirements than Basel III for largest banks; details to be released soon

Stefan Ingves, governor of the Riksbank and chairman of the Basel Committee on Banking Supervision, has said Sweden's largest banks will be required to meet higher capital requirements than the minimum standards set out in Basel III.

Speaking at the Swedish Bankers' Association meeting in Stockholm, Sweden, on November 10, Ingves said: "Capital requirements for major Swedish banks need to go beyond the requirements of Basel III. The costs of higher capital adequacy requirements are limited and largely private, as opposed to the true economic costs. The advantages in the form of a safer banking system are considerable. A reduced risk of financial crises is good for the real economy, good for taxpayers and also good for the banks' shareholders."

Under Basel III, banks will need to hold common equity of 7%, comprising a 4.5% minimum requirement and a 2.5% capital conservation buffer. Higher loss-absorbency requirements on globally systemically important banks will also be introduced in line with the Basel III capital conservation and counter-cyclical buffers, with the aim of becoming fully effective by January 1, 2019.

Ingves did not reveal exact figures, but said the Riksbank would soon present concrete proposals for the new measures, including how much higher than Basel III's minimum levels the capital adequacy requirements for the major banks should be.

Ingves said the increased capital adequacy requirement would need to be matched by a tighter leverage ratio requirement. He said the Basel Committee's short-term liquidity requirements also need to be met on a per-currency basis. A floor for banks' risk weightings could also be needed so that the risks in mortgages are not underestimated, according to Ingves.

Other countries with large banks that also plan to introduce more stringent regulations than Basel III include the UK and Switzerland. In Switzerland, an expert committee has proposed progressive capital adequacy requirements for its two major banks, UBS and Credit Suisse, of 19%, at least 10% of which is to be common equity Tier I with the remaining 9% supplied by contingent convertibles – debt instruments that can be converted to equity under certain circumstances. In the UK, the Vickers Commission has recently proposed measures to introduce a structural separation of retail and investment banking, with total capital in major banks amounting to 17–20%.

Ingves said like the UK and Switzerland, the Swedish banking system was also characterised by large and international dependent banks, with a high degree of concentration, significant implicit state guarantees, a heavy dependence on market funding, particularly in foreign currency, and low risk weightings. As a result, he said that from an international perspective, there was an increasing risk of problems or socio-economic costs if problems arise in the banking sector.

Sweden's banking sector is dominated by four major banks, which according to the central bank account for around three-quarters of both lending and deposits and assets equivalent to about 425% of Sweden's GDP. The major Swedish banks also receive about half their funding from the financial markets, almost 50% of which is in foreign currency, leaving the banking sector heavily exposed to disruptions in international markets.

A report will also be published alongside the Financial Stability Report on November 29, which will analyse the economically appropriate capital adequacy requirements for the major Swedish banks.

 

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