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, 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 Conservation buffer Contracyclical buffer 0-2.5% Additional Tier 1 Tier 2 9.5% 7% CET 1 Basel III 2% 4% Additional Tier 1 CET 1Tier 2 2% 4% 8%

Basel III sets up clear measures for liquidity Liquidity in the short termLiquidity in the long term Liquidity Coverage Ratio High quality liquid assets Net cash outflow over the coming 30 calender days Net Stable Funding Ratio Available stable funding Need for stable funding > 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 per cent of RWA More intensive supervision On the way – D-SIB Indicators of systemic 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 , basis points

Large share of market funding in foreign currency Foreign currencySEK The major Swedish banks’ market funding via Swedish parent companies and subsidiaries, (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 % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% SEBHandels- banken NordeaSwedbankMean, European banks 0,0 0,5 1,0 1,5 2,0 2,5 SwedbankNordea Handels- banken SEBMean, 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

Sweden has had bad experiences of low capital adequacy Source: The Riksbank

Resilience is needed in uncertain times Loan losses and provisions Example: Similarly large loan losses in the next few years Common Equity Tier 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  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 per cent Bank assets in relation to GDP, June 2010

The Riksbank sees a need for regulation in several areas Capital adequacy requirements Short-term liquidity and reserve requirements 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 weightings

The Riksbank will clarify its recommendations soon The Financial Stability Report 2011:2 will be published on 29 November