“The risk of not having high capital coverage of the banks is that the risk increases for a financial crisis,” Financial Markets Minister Peter Norman said in an interview in Stockholm. Should the economic outlook deteriorate, then “it’s primarily fiscal and monetary policy that should be prioritized, not to keep dabbling with the capital coverage rules,” he said.

Sweden in November told its four biggest banks to target stricter capital rules than those set by the Basel Committee on Banking Supervision and to meet the deadline six years earlier than the group’s 2019 target. Since then, the government has more than halved its economic forecast for 2012 and some forecasters, including Danske Bank A/S, see a recession this year. The administration of Prime Minister Fredrik Reinfeldt last week said it plans no major fiscal boost to aid recovery.

Swedish output may contract as much as 0.5 percent this year after shrinking 1.1 percent in the fourth quarter, Danske Bank said April 4. Nordea Bank AB (NDA), the largest Nordic lender, in a March 27 forecast said Sweden’s economy will contract 0.3 percent this year amid an export slump. Unemployment (SWUERATE), which has risen as companies cut jobs to stay competitive, hovered close to 8 percent in February. Reinfeldt’s government is due to present its spring budget today.

“We could end up in a situation where we end up with a significant slowdown of the economy,” Norman said.

‘Difficult Question’

Finance Minister Anders Borg in February said the economy will probably grow 0.5 percent this year, compared with an earlier prediction for 1.3 percent expansion. Output expanded 3.9 percent in 2011.

The timing of the tougher bank rules is “a difficult question, but what we’re seeing now is after all a growing economy both in Sweden and internationally,” Norman said.

Sweden’s largest banks, Nordea, Svenska Handelsbanken AB (SHBA), SEB AB (SEBA) and Swedbank AB (SWEDA), need to target 10 percent core Tier 1 buffers of their risk-weighted assets from January and 12 percent from 2015. That compares with the Basel Committee’s core capital target of at least 7 percent. The European Banking Authority has set a temporary 9 percent target for some lenders.

While parts of Sweden’s bank industry have lashed out at the government, arguing more rigorous standards than elsewhere will distort competition, investors welcome its resolve to commit to stricter rules even as the economic outlook deteriorates.

‘Market Confidence’

“The Swedish economy is in a relatively decent condition so there’s no sense in changing the planned capital rules,” Fridtjof Berents, an Oslo-based analyst at Arctic Securities ASA, said in a phone interview. “The banks in Sweden are in a situation where having higher equity levels gives investors in the funding market confidence.”

Stockholm-based Nordea had a core Tier 1 capital buffer --a measure of financial strength -- of 11.2 percent of its risk- weighted assets at the end of last year. Nordea Chief Executive Officer Christian Clausen said last month Sweden may need to harmonize its capital standards down should the European Union reach a decision on requirements. The 12 percent ratio will be an “excessive burden on the economy,” Clausen said March 27.

While Norman said he “can’t exclude” that the government could reconsider the timing of stricter bank rules should the economy prove much weaker than its main forecast, criticism from the banks won’t provoke a watering down of the standards.

“There will always be tension between regulators and bankers,” he said. “Bankers want absolute minimum rules for everything and to be able to raise the bar to where they think it should be. We must always side with the taxpayers.”

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.

To contact the editor responsible for this story: Jonas Bergman in Stockholm at jbergman@bloomberg.net.

http://www.bloomberg.com/news/2012-04-15/swedish-banks-get-no-capital-respite-as-recession-looms.html

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