The battle over Sweden’s Bank Resolution Fund

1 April by Daniel Munevar

Over the last few weeks a public battle has erupted between the Swedish government and the largest bank in the country, Nordea. The struggle between government and bank revolves around the intention of the former of increasing the contribution of financial institutions to a special resolution fund. The fund in question was established in 2008 with the objective of providing a safety net to rescue banks in the event of a financial crisis through the collection of an annual fee to be paid by financial institutions. In response to the government proposal, NORDEA has threatened to leave the country. Even though the case of Sweden is extremely particular, the evolution of the discussion in the Nordic country serves to illustrate both the broader debates regarding the different options available to avoid the use of taxpayer money to bailout banks, as well as the increasing pushback on the regulatory front from those same institutions in recent times.

To understand the current situation, it’s useful to provide some context. In the early 90’s, Sweden experienced a large credit boom which ended in a financial crisis. In response to this crisis, the government of the country adopted a series of measures to re-capitalize the banks while minimizing the costs to the taxpayers. These involved the acquisition of controlling shares on the major financial institutions as well as the creation of a bad bank to transfer portfolios of bad loans. As the economy, and banks, recovered the government proceeded to sell its participation on the financial institutions that had received government support. This allowed the government to recover the public funds used to rescue the banks while stabilizing the financial system of the country.

This experience conditioned the response of the government to financial crisis in 2008. As the tremors of the crisis spread through Europe, Sweden established its own Stability Fund. The fund was capitalized with an initial contribution by the government of close to 1.5 billion Euros. In addition, financial institutions in the country were required to pay an annual stability fee equivalent to 0.09 per cent of debts minus guaranteed deposits. The contributions have as a target to accumulate a total of resources equal to 2.5% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
by 2023. These funds are to provide support to struggling financial institutions through both credit guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). as well as capital injections. The only time the Fund has been deployed was in 2009, when it bought around 550 million Euros in shares of Nordea. Even though the bank was deemed solvent by the country regulators, the capital injection was presented as preventive measure to avoid the contraction of credit in the country |1|. Eventually, the government sold its participation in the bank in 2013, generating a profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. of 44% over its initial investment |2|.

The fund became relevant again over the last few months, as the government has proposed to increase the contributions of financial institutions. Years of low interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
have caused a massive expansion of credit in the country, mainly associated to real state. Even though there is a debate on whether Sweden is currently experiencing a credit bubble, there are some troubling signs. On the one hand, the debt to income ratio of households in the country has reached 170%, among the highest in Europe |3|. On the other, rapid credit growth and regional expansions have led to a massive increase in the size of banks. Currently, bank assets represent more than 350% of Sweden’s GDP |4|. Thus, any problem with banks arising from a financial crisis would require significant resources which in theory justify adopting measure to ensure the stability of the system.

In this regard, the proposal of the government consists of 3 elements. First, it increases the contribution of banks from 0.09 to 0.125 of debts minus guaranteed deposits |5|. Second, the contributions made by banks would no longer be kept at the fund, but instead will go into the main government budget |6|. Third, parallel to these changes, the government will require expanding the national deposit insurance scheme to above 3 per cent of total insured deposits. Nordea is opposing these proposals, as recent changes in its structure would expose the bank to a large increase in its contributions to the fund. Last year, Nordea consolidated all its operations in Nordic countries, which include Sweden, Norway, Denmark and Finland, in Sweden. As a result, the size of its balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheet, and by extension of its contributions to the Stability Fund, are to increase substantially. An initial estimation shows that by 2019 the contributions by Nordea to the fund would increase 12 times from their levels in 2016, costing the bank a total of 600 million Euros |7|.

Nordea bases its opposition to the changes on two grounds. First, that the measure would effectively force costumers of the bank in other countries in the region to pay taxes in Sweden. Second, that the increase in the costs of operation would put the bank at a disadvantage against other global banks. Furthermore, it is using its geographic spread across Nordic countries to back its threat of moving out of Sweden, as it could potentially relocate with ease to any of the other countries in the region. Regarding the first argument, is telling that no official complaints have been filed by regulators in the other countries in the region against the government proposal. In the case of the second, the global financial crisis clearly showed that, as Mervyn King put it, global banks are international in life but national in debt. If Nordea, which represents nearly a third of the assets of the banking system of the country, were to experience difficulties the costs of a potential rescue would fall directly onto Swedish taxpayer. A good example of this type of dynamic was the case of Icelandic banks operating in the UK and Netherlands. As the branches became insolvent, the government of the UK and Netherlands sued the government of Iceland to force it to recognize the costs associated to the failure of those branches. In this regard, it makes sense for Swedish authorities to adopt measures in the phase of credit expansion to ensure that enough resources are set aside in the event of a financial crisis. However, it’s important to note that if this is the case, it would be better to set aside the resources into the original fund instead of incorporating them into the national budget. Even though the Swedish government enjoys of a strong fiscal position, the funds obtained from this type of fee should be set aside explicitly for their intended purpose of serving as a safety net for banks.

In any event, the discussion remains open and it’s unclear on whether the government will push ahead with the proposed measures. What it’s important to highlight is that the overall approach of Swedish authorities is the correct one in a context characterized by low interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates and rapid credit growth. Experiences over the last decades have shown time and again that the adoption of lax attitudes by regulators end up in the short run in massive bonuses for bankers but, in the long run, in large costs to the taxpayers.


Footnotes

|1| Swedish National Audit Office. (2011). The Stabilization Fund – Does it live up to its name? Retrieved from http://www.riksrevisionen.se/PageFi... 2011_26_ENG_Customized.pdf

|2| Riksgalden. (2017). Stability fund - Riksgalden.se. Retrieved March 30, 2017, from https://www.riksgalden.se/en/abouts...

|3| Reuters. (2014). Sweden grapples with massive household debt as rates hit zero | Reuters. Retrieved March 30, 2017, from http://www.reuters.com/article/swed...

|4| IMF. (2016). Sweden FINANCIAL SYSTEM STABILITY ASSESSMENT. Retrieved from https://www.imf.org/external/pubs/f...

|5| Bloomberg. (2017). Nordea Fights Sweden on Crisis Fees It Says Will Tempt Fate - Bloomberg. Retrieved March 31, 2017, from https://www.bloomberg.com/news/arti...

|6| FT. (2017). Nordea and Sweden come to blows over resolution fees. Retrieved March 31, 2017, from https://www.ft.com/content/de061fc6...

|7| FT. (2017). Nordea and Sweden come to blows over resolution fees. Retrieved March 31, 2017, from https://www.ft.com/content/de061fc6...

Author

Daniel Munevar

is a 30-year-old post-Keynesian economist from Bogotá, Colombia. MPAff. LBJ School of Public Affairs at the University of Texas at Austin. From March to July 2015 he worked as a close aide to former Greek finance minister Yanis Varoufakis, advising him on issues of fiscal policy and debt sustainability. He was previously fiscal advisor to the Ministry of Finance of Colombia and special advisor on Foreign Direct Investment for the Ministry of Foreign Affairs of Ecuador. He is considered to be one of the foremost figures in the study of Latin American public debt. He is member of CADTM AYNA.


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