Basel iii regulations for safer banking swedish bankers association
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Basel III – regulations for safer banking Swedish Bankers’ Association. Stefan Ingves, 10 November 2011. The banks are important to the economy. A motorway junction for the economy Important, but risk of serious external effects. Financial crises have significant economic costs.

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Basel III – regulations for safer banking Swedish Bankers’ Association

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Basel iii regulations for safer banking swedish bankers association

Basel III – regulations for safer bankingSwedish Bankers’ Association

Stefan Ingves, 10 November 2011


The banks are important to the economy

The banks are important to the economy

A motorway junction for the economy

Important, but risk of serious external effects


Financial crises have significant economic costs

Financial crises have significant economic costs

Crises have permanent

negative effects on growth…

…and, in a financial crisis,

the bill for the taxpayers is considerable

Conceptual sketch

Public sector net debt in the United Kingdom, 2001-2013

GDP

GDP level

Trend

Crisis

Post-crisis

trend

Time

Sources: The Riksbank, Independent Committee on Banking


Banks need a substantial amount of equity

Banks need a substantial amount of equity

Capital adequacy requirements in Basel III and Basel II

2%

1.5%

9.5%

Contracyclical buffer

0-2.5%

8%

7%

4%

2.5%

Conservation

buffer

4.5%

4%

2%

Minimum requirement

2%

2%

CET 1

Additional

Tier 1

Tier 2

CET 1

Additional

Tier 1

Tier 2

Basel III

Basel II


Basel iii sets up clear measures for liquidity

Basel III sets up clear measures for liquidity

Liquidity in the short term

Liquidity in the long term

Liquidity Coverage Ratio

Net Stable Funding Ratio

High quality liquid assets

Available stable funding

> 100%

> 100%

Net cash outflow over the

coming 30 calender days

Need for stable funding


Systemically important banks need special regulation

Systemically-important banks need special regulation

  • Almost 30 global systemically-important banks (G-SIB)

  • Package for special resilience

    • Framework for crisis management

    • Extra buffer of Common Equity Tier 1 equal to 1-2.5 per cent of RWA

    • More intensive supervision

  • On the way – D-SIB

Indicators of

systemic importance

  • Cross-jurisdictional activity

  • Size

  • Interconnectedness

  • Substitutability

  • Complexity


Features of the swedish banking market

Features of the Swedish banking market

  • Concentration

  • Size and international operations

  • Implicit state guarantees

  • Market funding and funding in foreign currencies

  • Liquidity

  • Risk weighting


The swedish banking system is concentrated

The Swedish banking system is concentrated

Sources: OECD and World Bank


Swedish banks are large and internationally dependent

Swedish banks are large and internationally dependent

Bank assets in relation to GDP, June 2010

Sources: The ECB, the Swiss National Bank and the Riksbank


Implicit state guarantees

Implicit state guarantees

Five-year CDS for Danske Bank and Nordea 2010-2011, basis points

Source: Bloomberg


Large share of market funding in foreign currency

3 000

2 500

2 000

1 500

1 000

500

0

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

Foreign currency

SEK

Large share of market funding in foreign currency

The major Swedish banks’ market funding via Swedish parent companies and subsidiaries,

1998-2011 (quarter 1), SEK billions

Sources: Statistics Sweden and the Riksbank


Weaker liquidity position than others in europe

Weaker liquidity position than others in Europe

Survival period in the Riksbank’s

stressed scenario, months, December 2010

Stable funding as share of illiquid assets,

December 2010

2,5

100%

90%

80%

2,0

70%

60%

1,5

50%

40%

30%

1,0

20%

10%

0,5

0%

SEB

Handels-

banken

Nordea

Swedbank

Mean,

European

banks

0,0

Handels-

banken

Swedbank

Nordea

SEB

Mean,

European

banks

Sources: Liquidatum and the Riksbank


Swedish banks have low risk weightings

Swedish banks have low risk weightings

Risk weighting on mortgages according to Basel II, per cent

Sources: National central banks and the Riksbank, FSR 2011:1


Sweden has had bad experiences of low capital adequacy

Sweden has had bad experiences of low capital adequacy

Source: The Riksbank


Resilience is needed in uncertain times

Resilience is needed in uncertain times

Example:

Rough estimate of loss aversion in 35 major European banks

Loan losses and provisions

2007-2010

SEK 350 billion

Common Equity Tier 1

2010

SEK 780 billion

Example:

Similarly large loan losses in the next few years

45 per cent of

Common Equity Tier 1

350

780

Source: The Riksbank


Other countries with large banking industries have more stringent regulations than basel iii

Other countries with large banking industries have more stringent regulations than Basel III

Bank assets in relation to GDP,

June 2010

  • Commission of Experts

  • Progressive capital requirements

  • 10 per cent equity

  • 9 per cent contingent convertibles

  • Independent Commission

  • on Banking

  • Structural separation of retail and investment banking

  • Extra capital buffer for retail banks

  • Capital and bail-in bonds to total 17-20 per cent


The riksbank sees a need for regulation in several areas

The Riksbank sees a need for regulation in several areas

Capital adequacy requirements

  • Need to go beyond requirements of Basel III

  • Leverage ratio measure

Short-term liquidity and reserve requirements

  • Need to be met on per-currency basis

  • ESRB recommendations

Risk weightings

Need for a floor


The riksbank will clarify its recommendations soon

The Riksbank will clarify its recommendations soon

The Financial Stability Report 2011:2 will be published on

29 November


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