Implications of the SSM for the Nordic banking sector. Stefan Ingves, June

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1 Implications of the SSM for the Nordic banking sector Stefan Ingves, June

2 Financial trilemma Financial stability Financial integration National supervision

3 Arrangements for cross-border cooperation MoU:s 2010 MoU between relevant authorities in the Nordic and Baltic countries 2008 MoU between EU authorities 2006 MoU between Nordic Central Banks 2000 MoU between Nordic supervisory authorities Crisis management simulation exercises Several domestic and cross-border crisis simulation exercises Large Nordic crisis management simulation exercise in 2007

4 Arrangements for cross-border cooperation II Various fora for Nordic-Baltic cooperation 2002 Nordic-Baltic cross-border supervisory college

5 The Swedish banking system is large in relation to the Swedish economy December 2013, per cent Switzerland as per december 2012 Sources: ECB, the European Commission, the Swiss National Bank and the Riksbank

6 Arguments that have been made for joining Our cost benefit analysis indicates that the UK, Spain, Sweden and the Netherlands are the main beneficiaries and thus have the largest economic incentives to join Europe s Banking Union. (Schoenmaker, Siegman (2013) -Benefits of joining the banking union)

7 Euro leaders motivation for SSM establishment it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals for a single supervisory mechanism...when an effective single supervisory mechanism is established the ESM could recapitalize banks directly (Euro area summit statement 29 June 2012)

8 Cost for secured financing Percentage points Italy France Spain Germany Sweden Swap rate Sources: Barclays Research and Bloomberg

9 Indicative cost for un-secured financing CDS-premia, basis points Germany Spain France Italy Netherlands Sweden Sources: Bloomberg and the Riksbank

10 Indication: Swedish banks under SSM via foreign subsidiaries Balance sheet (bn ) No 1 No 1 No 2 No 2 No 2 No 1 Sources: bank reports 2012 & the Riksbank

11 Will the banking union be a success? It has already calmed markets but challenges remain

12 Challenges: from country to pan- European focus Gigantic merger cultural shift National interest no longer the focus Regulatory capture longer distance to supervisors Credibility at stake Appropriate division of labour ECB/National Supervision

13 Challenges - Banking Union in a wider context The world Non-EU European Countries Non-SSM EU countries FSB IMF Non-eurozone SSM BCBS ESA:S ESRB Supervisory colleges Eurozone Resolution colleges

14 Sweden: Groups operating across the borders of banking union Swedish and UK banks have subsidiaries under SSM Split between home and host countries representation in SSM presents a new challenge The Nordic-Baltic supervisory college has been functioning very well Due to mutual trust, openness and exchange of information Utmost importance that work in supervisory colleges be based on these successful factors also going forward

15 The Basel Committee on banking supervision Banking union is no panacea, still a need to further develop regulatory frameworks The Basel Committee is the banking union s best friend Well capitalized banks are not only safer - but more able to lend and support the real economy in the long term

16 Basel work going forward: important for the success of the Banking union Finalizing Basel III Leverage ratio Net stable funding ratio & Liquidity Coverage Ratio G-SIB framework Focus on monitoring and assessing implementation of Basel standards: timely and consistent Promote effective supervision

17 Problem: Comparability & reliability of risk-weight calculations An illustrative example showing differences in risk-weight calculations for a similar set of exposures Bank A Low RWA Bank B High RWA 7 % 4.5 % - 4 ppt Basel III minimum requirement Common Equity Tier 1 Common Equity Tier 1 17

18 Summing up SSM is the logical answer to the integrated European financial markets The Nordic-Baltic countries have a track record of good cooperation utmost importance that this can continue also when some of us are under the SSM and some not Ultimately, what matters is that banks are stable and sound work on strengthening the resilience of banks must continue