Italy's Bank Mess Shows One EU Ruleset Can't Work, Sweden Says

(Bloomberg) -- The European Union's vision that one rule book is enough for the whole region is ultimately untenable, according to Sweden's Financial Supervisory Authority.

In an argument that goes to the heart of the EU's unity, the Swedish regulator says there must be allowances for the considerable differences that exist between countries across the region.

“Everyone sees the need for harmonization, and everyone sees the value of having a single market for financial services,” Martin Noreus, deputy director general for banking at the FSA in Stockholm, said in an interview. “But there are also various other things you need to trade off against, like financial stability: for example, the economic and financial situation is very different in Italy and in Sweden at the moment.”

Read more: ECB weighs in on Italian bank solvency

Sweden has allowed its banks to actively use internal models to decide how risky their assets are (and ultimately determine their capital requirement). It's also forced its banks to hold more capital than minimum European requirements dictate. 

But now the EU wants to curb national authorities' ability to use so-called Pillar 2 requirements, as part of a larger effort to harmonize supervision across the region. That comes on top of efforts by global regulators to set a standardized minimum requirement, or floor, that doesn't take internal assessments into account.

“There is not a right level globally because the banks look extremely different,” Noreus said. But Sweden is in “a tricky position.”

Other EU countries have also voiced skepticism toward the desire to impose floors that set minimum risk weights on bank assets, including Germany. But that opposition is splintering as Sweden seeks further exemptions. The country wants the freedom to selectively impose floors, a model it already uses for mortgage assets.

“Some of our European colleagues don't want a global output floor and they don't want them nationally either,” he said. “We have a booming housing market, the Italians don't. We may need to have different measures.”

Sweden's desire to keep national control of its bank rules has put it on a collision course with Nordea Bank AB, the only global systemically important bank in the Nordic region. Chief Executive Officer Casper von Koskull says the lack of a level playing field and what he characterizes as an unpredictable regulatory environment are a threat to his business. He's taken the extreme step of threatening to move Nordea's headquarters from Stockholm if the government doesn't reduce the cost of banking in Sweden.

Read more: Nordea is wooed by other Nordic governments amid HQ spat

Anders Ogren, an associate professor of economic history at Lund and editor of “The Swedish Financial Revolution,” says more than 100 years of history show financial firms in the largest Nordic country, where bank assets are about four times GDP, have done well pushing their agenda in the past.

“They're quite resilient to regulation because they're very influential,” Ogren said.

Swedish banks have arguably benefited from the country's tougher approach. They enjoy some of the world's highest credit ratings and lowest funding costs.

“Nordea refers to the need for a level playing field, they want it to be the same,” Noreus said. “But the fact is that EU regulation, on many things, is the same. But there are still many areas where it is not. You can't harmonize everything. You need to have rules that provide room for judgment by national authorities.”

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net.

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net.