New capital rules and their impact on Swedbank
On 20 July the EU Commission published a new proposal on capital requirements, which is expected to be adopted in 2012. The proposal conforms to the previously published Basel 3 regulation. Swedbank believes the new rules in place from 2013 will negatively affect Swedbank’s core Tier 1 capital ratio by approximately 1.0 percentage points and the proposed leverage ratio requirement will not restrict its capital planning.
Changes in the calculation of Swedbank’s core Tier 1 capital primarily related to non-controlling interests, investments in shares in unconsolidated financial institutions and deferred tax assets are expected to reduce core Tier 1 capital by slightly over 2 per cent. Swedbank’s risk weighted amount is expected to rise by slightly below 5 per cent under Basel 3 compared with Basel 2 due to the increased capital requirements for credit risks and because certain asset items that are currently deducted from the capital base will be risk weighted going forward. The new rules contain some uncertainty, however, as to their ultimate impact once in place. This applies, for example, to the credit risk in OTC derivatives, or more specifically the Credit Value Adjustment (CVA), where the reported effect of the new rules on the risk-weighted amount is based on today’s exposure and does not account for the fact that a larger share of derivative transactions going forward will be settled through clearing institutions. Consequently, the ultimate effect owing to CVA is expected to be less than reported above.
Supervisory authorities in Sweden and at the European level have made note of the major differences between the average risk weights institutions use for credit risks in the IRB, especially as regards mortgage lending within the retail exposure class. The authorities are therefore planning to review risk weights in 2012. The final outcome is uncertain, an increase in Swedbank’s average risk weights for mortgage lending in Sweden to a level of 10–15 per cent would negatively affect Swedbank’s core Tier 1 capital ratio by 1.0-1.9 percentage points. Swedbank already allocates additional capital to its mortgage business and therefore expects that a possible increase in capital requirements for mortgage lending will not significantly affect its internal allocation of capital between business units.
Swedbank is in the process of introducing an advanced method to calculate credit risks according to the IRB approach for corporate exposures. Approval by the Financial Supervisory Authority is expected in 2013 at the earliest. Swedbank considers it likely that the risk-weighted amount for credit risks will be reduced due to the implementation of the advanced IRB method and some model updates regarding SMEs, which would somewhat offset the negative effect of the higher risk weights on mortgage lending.
Amendments to the accounting standard IAS 19 are expected to be implemented as of 2013, which will affect the bank’s reported pension obligations. The elimination of the so-called corridor rules means that actuarial losses, which under current rules do not have to be fully recognised in the balance sheet, will fully affect equity. Today, Swedbank estimates that the amendment could represent a negative one-time effect on equity of approximately SEK 2bn as of 31 December 2011, which corresponds to a negative effect of 0.4 percentage points on the core Tier 1 capital ratio. Further, the elimination of the corridor rules will increase future volatility in equity, and hence in core Tier 1 capital. The effect of the anticipated changes in IAS19 has been incorporated into Swedbank’s capital planning.
During the fourth quarter the EU agreed to require banks to maintain a so-called core Tier 1 capital ratio of at least 9 per cent after the revaluation of sovereign exposures. The banks in question will have to meet this requirement by 30 June 2012 at the latest. Swedbank already meets the new capital requirement by a wide margin and therefore does not expect any restriction on its capital planning.
On 25 November the Ministry of Finance, the Riksbank and the Swedish Financial Supervisory Authority announced at a joint press conference that the government will propose higher capital adequacy requirements for systemically important banks in order to strengthen the stability of the Swedish banking system and reduce the vulnerability of the Swedish economy. The proposal means that the banks must have core Tier 1 capital corresponding to at least 10 per cent of their risk-weighted assets by 2013 and 12 per cent of risk-weighted assets by 2015.