The Swedish approach to capital requirements in CRD IV State Secretary Johanna Lybeck Lilja
The aim of capital requirements Enhancing growth creating potential of a integrated, stable financial system Boosting investor confidence Internationally competitive and robust while containing the destabilizing powers embedded in the system Financial systems are subject to instability, crises will re-emerge
The directive Powers and responsibilities of national authorities Authorization Supervision Capital buffers Sanctions Internal risk management Corporate governance provisions
The regulation Requirements of Capital Liquidity Leverage Counterparty credit risk
Important improvements 14,0% 12,0% 2,5% 10,0% 8,0% 2,0% 1,5% Countercyclical buffer Tier 2 Remaining Tier 1 6,0% 4,0% 2,5% Conservation buffer Core Tier 1 4,0% 2,0% 2,0% 4,5% 2,0% 0,0% Basel II Basel III
The Swedish view Strongly supports the Basel III agreement Welcomes further harmonisation of the rules and legislation governing credit institutions Advocates national flexibility More capital than the minimum pillar I requirements of Basel III
Why does Sweden propose stricter capital requirements? One of the largest banking sectors in Europe in relation to GDP Multinational reach Intertwined and highly concentrated Basel III sets minimum standards
Challenges varies across countries Bank assets in relation to GDP 800% 700% 600% 500% 400% 300% 200% 100% 0% Switzerland* Great Britain Sweden Netherlands Spain Germany France Ireland Austria Denmark Portugal Luxembourg Mean Belgium Greece Italy Slovenia Finland Hungary Latvia Poland Bulgaria Lithuania Czech Republic Slovakia Estonia Source: ECB, SNB, Riksbanken
Why does Sweden propose stricter capital requirements? One of the largest banking sectors in Europe in relation to GDP Multinational reach Intertwined and highly concentrated Basel III sets minimum standards
Effective financial markets Externalities that lead to systemic risks SIFIs are subject to subsidies Competitive advantage => Higher capital requirements leads to a more level playing field
Public finances at risk (1) Too low capital requirement levels put public finances and the economy as a whole at risk The cost of a financial crisis is borne by each country s taxpayers The challenges varies between countries => Capital requirement levels is an important fiscal policy parameter.
Public finances at risk (2) Empirical effects of financial crises over the past one hundred years, in developed economies and emerging economies. Average. The financial crisis of 2007 and 2008 is not included. Increase of unemployment (percentage points) Decrease in production Decrease in housing prices Stock market downturn Real increase of national debt* 0% 20% 40% 60% 80% 100% * The statistics for the increase of national debt is based on financial crises after World War II. Source: Reinhart & Rogoff, 2010
Public finances at risk (3) The Public Sector gross debt as part of GDP 140 120 100 80 60 40 20 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Iceland Ireland Source: OECD
What is an optimal level? Varies across countries Basel committee proposes a 7 % global minimum At the moment, the market require a higher ratio Studies from BIS finds the optimal level to be around 12-14 % The optimal level for Sweden is yet to be determined
Is the Swedish approach a disadvantage to Swedish banks? The case of Switzerland and Singapore The risk of instability is costly to investors and shareholders too
Comparison of Basel II, Basel III and the current Swiss proposal 20,0% 18,0% 16,0% 6,0% 14,0% 12,0% 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% 2,5% 3,0% 2,0% 1,5% 4,0% 2,5% 10,0% 2,0% 4,5% 2,0% Basel II Basel III Switzerland Countercyclical buffer Tier 2 Remaining Tier 1 Conservation buffer Cocos with trigger 5 % Cocos with trigger 7 % Core Tier 1
Is the Swedish view detrimental to a single financial market? Differences across countries will still prevail Risk weights will still be set by each national financial supervision authority Pillar II regulations will affect financial institutions differently SIFIs and non-sifis will have different capital requirements
Are there other solutions to Sweden s concerns? Countercyclical buffer Affects all banks Additional capital requirement imposed by supervisory authorities (pillar II) Less predictable Less transparent Time dependent
Conclusion Sweden welcomes the implementation of Basel III which will strengthen the financial single market in the EU SIFIs have an unfair competitive advantage Taxpayers in individual countries will have to pay for a future crisis Higher pillar I capital requirement is the most effective way to achieve this protection The need for protection varies across countries Flexibility in pillar I capital requirements is thus necessary