Swedish Chamber of Commerce / Stockholm School of Economics in Riga Open Lecture

Swedish Chamber of Commerce / Stockholm School of Economicsin Riga Open LectureGlobal Banking Crisis: focus SwedenUldis [email protected] 8, 2009

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Global perspective on present crisis

Increased risk appetite (e.g. Sub-prime, emerging market exposures)

Unusually low interest rates

Complex structured products, misperceptions of risk diversification

Increased cross-border capital flows

Credit rating agencies

Procyclicality

Remuneration

logga

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Reports documenting causes and solutions

Turner review (UK FSA)

De Laroisière (on request of COM)

”Geneva report”

ECOFIN roadmap

G20 conclusions

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Swedish perspective: State remedies

Liquidity support program and capital support program

Emergency Support for banks

National Debt Office responsible for executing the programs

Finansinspektionen responsible for monitoring and reporting to the government whether the programs are benefitting consumers and companies

No explicit or implicit restrictions on cross-border capital flows

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Liquidity Support Program

Aim is to facilitate borrowing and reduce borrowing costs during the financial crisis. Extended until October 31, 2009 with an option of further extension

Total frame of SEK 1500 billion, no restrictions on currency

Ceiling on each participating institution– up to 20 percent of deposit base as of September 1, 2008, or – the ”sum of maturing debt instruments with maturity over 90

days maturing between September 1, 2008 to April 30, 2009

Guaranteeing issues of debt securities for up to 5 years of maturity (but not subordinated debt or complex structured products)

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Liquidity Support Program (2)

Point 4.4 in bacground comments to the proposition explicitly makes clear that the liquidity support program can be used even to improve the liquidity in subsidiaries – ”.. även likviditetsförsörjningen i de svenska

bankernas dotterbolag i utlandet, exempelvis i

Baltikum, kan förväntas förbättras genom detta

åtgärd.”

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Liquidity Support Program: affiliated institutions

Swedbank AB (publ)

Swedbank Hypotek AB (publ)

Sveriges Bostadsfinansieringsaktiebolag SBAB (publ)

Volvofinans Bank AB (publ)

Carnegie Investment Bank

SEB Bank AB (publ): in the process of application

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Support for capital base of banks: the underlying reasons

Swedish banks are entering the crisis with strong balance sheets

But…– international credit markets are constrained– companies have difficulty to finance themselves– increased risk that the Swedish economy could be

exposed to serious turbulence– state has the responsibility for the stability of the

financial system

Underlying basic idea is still preference for private sector solutions

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Support for capital base of banks: basic features

Based on the Law on State Aid to Credit Institutions (2008:814)

Structured according to EU-principles

Applicable to solvent and financially sound credit institutions in Sweden

Shares, hybrid capital

Total frame: SEK 50 billion

Maximum support equivalent to an increase of 2 percentage points in capital adequacy

Financed through Stability Fund (expected to reach 2.5% of GDP in 2023 or SEK 150 Bn)

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Support for capital base of banks: alternative 1

Up to 70% of infusion of capital from the state

The state receives adequate, market-based returns from investment and participates on the same terms as private investors

No limitations on dividend payouts to shareholders

Limitations on remuneration to 5 highest ranking directors

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Support for capital base of banks: alternative 2

More than 70% of infusion of capital from the state.

Yield from the capital support decided by the National Debt Office

The state shall benefit from the possible increase in the value in the company

Limitations on remuneration to 5 highest ranking directors

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Emergency Support for Banks

Broad mandate for the National Debt Office to intervene if a particular institutions threatens financial stability

Broad set of instruments and strategies (including winding-up of institution)

Support only provided to banks that are considered sustainable

National Debt Office can consider a support matter without a formal application, if the situation so requires

Support provided on commercial basis and shall not distort competition

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Tangible Effects on Markets

Mortgage Benchmarks, 5 Year, Close

Government Benchmarks, Bid, 5 Year, Yield, Close

Treasury Bills, Bid, 3 Month, Yield, Close

Interbank Rates, STIBOR, 3 Month, Fixing

Source: Reuters EcoWin

Oct-08

3 8 13 16 21 24 29

Nov-08

3 6 11 14 19 24 27

Dec-08

2 5

Per

cent

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Ränta 5-årig bostadsobligation och 3 månaders interbankränta, samt räntor statspapper 20081001-20081208

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Financial crisis – focus areas of Finansinspektionen

Credit risk related examinations

Enhanced risk reporting

Funding situation

Intensified dialogue with banks on stress tests

Exposures to business areas of particular attention (e.g. Baltic states, commercial real estate, private equity)

Establishment and coordination of colleges

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Financial crisis – failed institutions

Failure of two minor banks (Carnegie and Kaupthing)

Both cases resolved by private solutions following public intervention

Emergency liquidity in both cases and takeover by National Debt Office in one case, followed by a private sector solution

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Swedish banks lending to the public

0

500

1 000

1 500

2 000

2 500

3 000

3 500

09:1

SEB Handelsbanken Nordea Swedbank

Mdkr

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Handelsbanken SEB Swedbank Nordea

Other countries

Great Britain

Germany

Baltics

Finland

Norway

Denmark

Sweden

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The three phases of the crisis

Phase 1: 2007 Q2 – 2008 Q3

Fall in asset prices and drying up of funding market

Phase 2: 2008 Q4 - ???

Recession and credit losses

Phase 3:

The world after the crisis …

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Swedish banks in phase 1

Profits ”stable”. Net profit 2008: about 80 bn SEK

Sizable capital buffers over the regulatory minimum. Capital adequacy rations strengthened by all 4 systemically important banks

All 3 systemically important banks that raised capital managed to raise it from private sources, as opposed to many other large European banking groups

But…increasing credit losses

Continued funding market risks

Grim macroeconomic outlook

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GDP and projections

Sweden

2009 2010 2011

Konjunkturinstitutet -3,9 0,9 2,6

Finansdepartementet -4,2 0,2 2,4

2009 2010

Estonia Latvia Lithuania Estonia Latvia Lithuania

Centralbank in resp. country -12,3 -12,0 -4,9 0,2 -3,9

Swedbank -8,0 -15,0 -6,0 1,0 -4,2 -3,0

SEB -12,0 -12,0 -9,0 -2,3 -3,0 -3,5

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Cumulative credit lossessince 2007 for the Swedish operations

-200

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

07:1 07:2 07:3 07:4 08:1 08:2 08:3 08:4 09:1

Swedbank SEB Nordea Handelsbanken

MSEK

Note that the banks define the Swedish operations somewhat different from each other.

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Cumulative credit lossessince 2007 for the Baltic operations

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

07:1 07:2 07:3 07:4 08:1 08:2 08:3 08:4 09:1

Swedbank Baltikum SEB Baltikum Nordea Baltikum

MSE

OBS. Notera att data ej finns för Nordea för Q1 och Q2

Note there is no data for Nordea for Q1 and Q2 2007.

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Tier 1 strong in the Swedish banks

Note. According to Basel II. Nordea is pro forma new issuance of shares.

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

07:2 07:3 07:4 08:1 08:2 08:3 08:4 09:1

Swedbank Nordea SEB Handelsbanken

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Financial crisis – effect on SE insurance sector

Industry as a whole still has sufficient capital buffers

Fears (now diminished) on extremely low long interest rates and the effect on technical reserves.

Possibility to use long term covered bond rates in calculation of risk free interest rate for discount of technical provisions

Falling assets prices and the associated need for reallocation in companies managed in accordance with mutual principles

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Phase 2: recession and credit losses

Recession

Low interest rates

Lower profits

Credit losses

Migrations in IRB models

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Thank you!

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