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Swedish banks serve as shining example for European banking sector

The European banking system received a proverbial wake-up call, amidst pressure to converge in a race towards more tightened and fortified banking structures, following the recent report that Swedish regulators told their banks to target minimum capital buffers equivalent to 12% of their risk-weighted assets.

According to European Banking Federation President Christian Clausen, “That would create a super-strong banking system, given that is three times as much capital as we had before the crisis.” Clausen, who also wears the hat of the chief executive officer at Stockholm-based Nordea Bank AB, added that Europe’s capital requirements are in need of uniformity to streamline their overall effectiveness. As such, banks with the highest regulatory buffers enjoy the fruits of lower funding costs, the financial industry’s biggest relationship in Europe is portending that the benefits of converging up may far outweigh the initial costs of setting aside extra reserves.

“The total package of regulation will make it necessary for all banks to move fairly high,” Clausen stated. “That could result in a minimum core Tier 1 capital ratio that’s 12% of risk-weighted assets, Clausen added at a presentation in Helsinki. Swedish regulators will require banks to set aside capital equivalent to at least 10% of their risk-weighted assets this year, with the minimum rising up 12% by 2015. Indeed, the country’s four biggest banks, including Nordea, already exceed this target.

Briefing the Swedish big-four, Nordea’s core Tier 1 capital ratio reached a healthy 13.1% of risk-weighted assets at the end of last year, while Swedbank AB’s was 17.4% and SEB AB’s 15.1%. In particular, Svebsja Handelsbanken AB had an impressive ratio of 18.4% during the latter months of 2012. Perhaps unsurprisingly, these robust figures put Sweden’s biggest banks at the top of capital rankings in the European Union.

In addition, Danske Bank A/S, Denmark’s largest bank, sold 93 million new shares in October last year, generating gross proceeds of 7 billion kroner (USD $1.2 billion). The move was aimed at helping the bank revitalize its capital ratio and improve its credit ratings in a bid to lower funding costs, which have crept higher relative to its better-capitalized Swedish rivals.

Investors have shown their love and backing with renewed confidence, rewarding the lenders for the perceived extra hedge against losses. According to Bloomberg estimates, it costs approximately 12 basis points less to insure against losses on senior notes issued by Nordea than it does for equivalent securities sold by Deutsche Bank AG, using five-year credit default swaps. Handelsbanken default-swaps trade 36 basis points lower.

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