Martin Noréus: Current challenges facing the banking sector

• Date: 14/02/2018
• Speaker: Deputy Director General Martin Noréus
• Location: SvD Bank Summit 2018, Grand Hôtel, Stockholm

"FI is fundamentally positive about the technical development that is occurring in the financial sector and its potential to create better, and less expensive, financial services, even if the pressure on traditional business models also poses risks," noted Noréus.

He also spoke about FI's view on future capital requirements given the changes to the Basel and EU regulatory frameworks and Nordea's announcement that it will be moving its head office to Finland.

Good profitability may come under pressure

Noréus noted that the Swedish banking sector is strong compared to the European sector in terms of profitability, credit quality and capitalisation.

"This positive perception is to a large extent due to the fact Swedish banks are relatively cost-effective and that the favourable development of the Nordic economies. But part of the profitability is also explained by the fact that some segments – e.g. mortgages and asset management – have weaker competition and high margins. The combination of a change in regulations and technical development has created better conditions for newcomers, which could put pressure on profitability in traditional business models," said Noréus.

Technological innovations affect the conditions

"FI views the dynamics and competition created by technological development in a positive light. The potential for technological development to create better, and less expensive, financial services is quite large, but as with all change we also need to be aware of the risks that may arise for consumers and financial institutions. To meet this development, FI is now forming an innovation center to take a more unified approach to these issues and improve the information for and dialogue with firms with regard to financial innovation and regulation," said Noréus.

Proposed regulations regarding credit risk management

Noréus also spoke about the feedback on FI's proposed regulations regarding credit risk management.

"The consultation responses contain several relevant viewpoints that we will take into consideration when finalising the regulations. One of the criticisms has been that the proposal would introduce far-reaching and detailed regulations and risk reducing the supply of credit. I think this criticism is slightly exaggerated. The intention of the proposal is not to micro-regulate, but rather to give credit institutions the possibility to design and adapt their credit risk management based on their operations. Neither does the proposal introduce stricter requirements on the borrower's repayment capacity than the current regulations. However, it does clarify the requirements placed on the credit institutions' internal credit procedures and requires that the credit institutions have good control over their risks. In our opinion, these are rather natural features of sound banking operations," said Noréus.

Future capital requirements

Noréus concluded his comments by saying that FI will need to review the design of the Swedish capital requirements once the negotiations for the EU banking package have ended.

"Even if there are still a number of puzzle pieces that need to fall in place regarding the banking package and how the EU will implement the Basel Agreement, it is our assessment that the total effect in the long run will be an increase in the minimum requirements and a decrease in the Pillar 2 buffers," said Noréus. He also repeated FI's previous message that the intention is not to mechanically allow the capital requirements to increase as an effect of the new Basel standards. "The high percentage of requirements in the current capital requirements that are determined at the national level give us manoeuvrability to adapt the requirement to Swedish conditions," said Noréus.

Noréus emphasised that FI believes capital buffers in banks to be a key component in financial stability, and that there is a possibility that the capital levels in the Swedish banks may need to go up when the agreement is implemented. Noréus also noted that Nordea's intention to move its head office to Finland created an immediate need to review the design of the risk weight floor for mortgages.

"Since Nordea is a significant actor on the Swedish mortgage market, it is important both from a macroprudential perspective and to preserve a level playing field against other Swedish banks that Nordea's capital requirement continue to include the risk weight floor. We are now investigating how we can create conditions for this when Nordea becomes a Finnish bank under ECB's supervision, and we will return to this matter later in the spring," said Noréus.