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Swedish Chamber of Commerce / Stockholm School of Economicsin Riga Open LectureGlobal Banking Crisis: focus SwedenUldis [email protected] 8, 2009
2
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
3
Reports documenting causes and solutions
Turner review (UK FSA)
De Laroisière (on request of COM)
”Geneva report”
ECOFIN roadmap
G20 conclusions
4
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
5
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
15
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
16
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
19
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
20
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.
21
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.
22
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
23
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
24
Phase 2: recession and credit losses
Recession
Low interest rates
Lower profits
Credit losses
Migrations in IRB models
25
Thank you!
26