Stefan Ingves, 10 November 2011

Basel III – regulations for

safer banking

Swedish Bankers’ Association

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

…and, in a financial crisis, the bill for the taxpayers is considerable

Crises have permanent negative effects on growth…

Sources: The Riksbank, Independent Committee on Banking

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

GDP

Time

Crisis

Trend

Post-crisis trend

GDP level

Conceptual sketch

Banks need a substantial amount of equity

Capital adequacy requirements in Basel III and Basel II

Basel II

4.5%

2.5%

1.5%

2%

Minimum requirement

Conservationbuffer

Contracyclical buffer0-2.5%

Additional Tier 1

Tier 2

9.5%

7%

CET 1

Basel III

2%

2%

4%

Additional Tier 1

CET 1 Tier 2

2%

4%

8%

Basel III sets up clear measures for liquidity

Liquidity in the short term Liquidity in the long term

Liquidity Coverage RatioLiquidity Coverage Ratio

High quality liquid assets

Net cash outflow over the coming 30 calender days

Net Stable Funding RatioNet Stable Funding Ratio

Available stable funding

Need for stable funding > 100% > 100%

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 Indicators of systemic importancesystemic importance

• Cross-jurisdictional activity

• Size

• Interconnectedness

• Substitutability

• Complexity

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

Sources: OECD and World Bank

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

Source: Bloomberg

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

Large share of market funding in foreign currency

0

500

1 000

1 500

2 000

2 500

3 000

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Foreign currency SEK

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

Stable funding as share of illiquid assets, December 2010

Sources: Liquidatum and the Riksbank

Survival period in the Riksbank’s stressed scenario, months, December 2010

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SEB Handels-banken

Nordea Swedbank Mean,Europeanbanks

0,0

0,5

1,0

1,5

2,0

2,5

Swedbank Nordea Handels-banken

SEB Mean,European

banks

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

0

10

20

30

40

50

60

Swed

en

Bel

giu

m

Finla

nd

Den

mar

k

Norw

ay

Gre

ece

Net

her

lands

Ger

man

y

Ital

y

Esto

nia

Lith

uan

ia

Spai

n

Hungar

y

Latv

ia

Slova

kia

Sweden has had bad experiences of low capital adequacy

Source: The Riksbank

Resilience is needed in uncertain times

Loan losses and provisions Loan losses and provisions 2007-20102007-2010

Example: Example: Similarly large loan losses Similarly large loan losses

in the next few years in the next few years

Common Equity Tier 1 Common Equity Tier 1 20102010

SEK 350 billion

45 per cent of Common Equity Tier 1

SEK 780 billion

Example: Rough estimate of loss aversion in 35 major European banks

350

780

Source: The Riksbank

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

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

Bank assets in relation to GDP, June 2010

The Riksbank sees a need for regulation in several areas

Capital adequacy Capital adequacy requirementsrequirements

Short-term liquidity Short-term liquidity and reserve and reserve

requirementsrequirements

Need to go beyond requirements of Basel III•Leverage ratio measure

Need for a floor

Need to be met on per-currency basis•ESRB recommendations

Risk weightingsRisk weightings

The Riksbank will clarify its recommendations soon

The Financial Stability Report 2011:2 will be

published on29 November