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Stefan Ingves, 10 November 2011 Basel III – regulations for safer banking Swedish Bankers’ Association.

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Presentation on theme: "Stefan Ingves, 10 November 2011 Basel III – regulations for safer banking Swedish Bankers’ Association."— Presentation transcript:

1 Stefan Ingves, 10 November 2011 Basel III – regulations for safer banking Swedish Bankers’ Association

2 The banks are important to the economy A motorway junction for the economy Important, but risk of serious external effects

3 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

4 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%

5 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%

6 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 systemic importance Cross-jurisdictional activity Size Interconnectedness Substitutability Complexity

7 Features of the Swedish banking market Concentration Size and international operations Implicit state guarantees Market funding and funding in foreign currencies Liquidity Risk weighting

8 The Swedish banking system is concentrated Sources: OECD and World Bank

9 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

10 Implicit state guarantees Source: Bloomberg Five-year CDS for Danske Bank and Nordea 2010-2011, basis points

11 Large share of market funding in foreign currency 0 500 1 000 1 500 2 000 2 500 3 000 989900010203040506070809101112 Foreign currencySEK The major Swedish banks’ market funding via Swedish parent companies and subsidiaries, 1998-2011 (quarter 1), SEK billions Sources: Statistics Sweden and the Riksbank

12 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% SEBHandels- banken NordeaSwedbankMean, European banks 0,0 0,5 1,0 1,5 2,0 2,5 SwedbankNordea Handels- banken SEBMean, European banks

13 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

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

15 Resilience is needed in uncertain times Loan losses and provisions 2007-2010 Example: Similarly large loan losses in the next few years Common Equity Tier 1 2010 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

16 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

17 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

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

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