Should Nordic banks do more?
CAPITAL REQUIREMENTS. How can we make sure banks will not need governments to bail them out if a new crisis hits them? What is needed to make financial institutions safeguard employees’ jobs and tax payers’ money in the future? The EU believes in raised capital requirements, but is the answer so simple?
Nordic banks look pretty healthy again. They are earning money and most of them also meet the coming Basel III standard of holding 8.5 percent equity capital in percentage of their total assets (also known as tier 1). And their capital is increasing, slowly but surely.
But how do we know that 8.5 percent in capital requirement is enough to safeguard employees’ jobs and protect tax payers from bailing out banks in the future?
The Swedish government does not believe the Basel III standard is high enough. Sweden wants higher standards to minimize the risk for a future financial crisis and to safeguard taxpayers from bailing out banks. Therefore, the capital requirement for Swedish banks is 11.5 percent and rising to 13.5 percent in 2015.
By judging by the figure to the right, you could actually argue that most Nordic banks could increase their equity capital even more, instead of spending their profit on dividend payouts while at the same time laying off thousands of employees. But why should Nordic banks increase their capital more when no regulation forces them to?
One argument could be this: Swedbank borrowed nearly 40 million euros from the Swedish government during the financial crisis, which is three times the banks equity capital today. If this sort of money is needed again, today’s capital requirements are too soft to safeguard the taxpayers.
Another argument is related to bank size. Nordea’s assets are over 677 000 million EURO, six times the GDP of Sweden. If Nordea would get in trouble it will be though times for those trying to save it.
But the story might not be so easy. Higher capital requirements also mean increased costs, costs that unfortunately seem to be borne by the employees. So what else could be needed to reach sustainable financial sectors?
NFU has said that capital requirements need to be balanced and need to be complemented by sound and risk-conscious corporate governance. Long-term oriented business models are crucial if future crises are to be avoided. Trade unions and employee representation in corporate boards are vital factors in order to place that long-termism in banks.
What does all this come down to? The positive side is that many Nordic banks already live up to the future capital requirements – the negative side is that it might not be that key solution some suggest.
It is essential that banks act in a risk-conscious way and have enough capital to be able to withstand big losses. But should banks also increase their capital more if they, like today, have the opportunity not to? Or put differently, when is enough capital, enough?