Regulator's reputation for requiring banks to recognize losses allows Swedish banks to borrow for less

In a financial marketplace where the lack of disclosure makes all banks 'black boxes', Swedish banks are able to borrow at attractive rates because of their regulator's reputation for forcing the banks to recognize their losses.

One of the advantages enjoyed by Swedish banks is the reputation of their regulator.

In the 1990s, rather than bailout the banks, the regulator forced the banks to recognize all of their losses.  Those that could were given the time to rebuild their book capital levels.  Those that couldn't, were closed.

Regular readers recognized this as the Swedish model for dealing with a bank solvency led financial crisis.

Implementing the Swedish model allowed the regulator to establish a reputation.  Now, the banks are able to raise money at attractive rates because of this reputation as market participants believe (which they must because without ultra transparency it cannot be verified) that if there were losses hidden on and off the Swedish bank balance sheets the regulator would force the losses to be recognized.

From a Bloomberg article,

Sweden’s financial regulator said the country’s banks can increase lending to households and businesses even as the industry adopts some of the world’s strictest regulatory standards. 

“Swedish banks have adapted well to the new regulation, they are well-capitalized and have access to funding, which means they have the ability to continue increasing their lending to households and companies,” Magnus Karlsson, an analyst at the Swedish Financial Supervisory Authority in Stockholm, said in a phone interview yesterday.... 

Nordea Bank AB (NDA), SEB AB (SEBA), Swedbank AB (SWEDA) and Svenska Handelsbanken AB (SHBA) need to set aside 10 percent of their risk- weighted assets in core Tier 1 capital from January, with the ratio rising to 12 percent two years later. That compares with Basel’s 7 percent goal for 2019. Sweden’s banks, which credit default swaps show are among Europe’s safest, are able to fund themselves at better rates than many of their peers, lowering the cost of passing on credit to borrowers.... 

In Sweden, credit growth has stabilized from rates as high as 13 percent before the crisis, after stricter mortgage lending rules capping loans at 85 percent of a property’s value were introduced in 2010, the FSA said. Banks should stick to current lending rates to avoid imbalances, Karlsson said. 

Swedish bank shares outperformed a European benchmark index for financial stocks today. Nordea rose 0.6 percent to 61.70 kronor as of 10:38 a.m. in Stockholm. SEB gained 0.9 percent, Handelsbanken and Swedbank rose about 0.1 percent, compared with a 0.5 percent loss in the 38-member Bloomberg index of European financial companies. 

At the end of last year, Swedbank and Handelsbanken were the two best-capitalized lenders in Europe under Basel II in a Riksbank ranking of 24 of the region’s largest banks, including Deutsche Bank AG (DBK), BNP Paribas SA (BNP) and Barclays Plc. (BARC) SEB was No. 4 and Nordea was seventh.