Nordea's Mega-Bank Branches Set Off Regulatory Finger Pointing

(Bloomberg) -- When the biggest Nordic bank turned its subsidiaries into branches, regulators in Finland, Denmark and Norway complained they were left with too-big-to fail operations but no power to rein them in. Oversight was instead left to Sweden.

But the full consequences of Nordea Bank AB's decision to consolidate its Nordic operations are only gradually becoming clear.

In a step that's expected to be copied elsewhere in the European Union, Stockholm-based Nordea's restructuring was completed on Jan. 1 after long talks with the relevant Nordic authorities.

The Unexpected

Now, Sweden is telling the only global systemically important bank in the Nordic region that it will have to contribute more toward a resolution reserve than it would have paid had it stuck to its subsidiary structure. Analysts at Pareto estimate Nordea's contribution will soar more than three-fold because the branch set-up gives Nordea a much bigger Swedish balance sheet.

It's a requirement that will hurt profits, Pareto calculates. Nordea says Sweden's proposal is both surprising and unfair, and is trying to persuade lawmakers to back away from the plan. But regulators outside Sweden welcome any steps that help the country cope with risks stemming from the region's main financial behemoth.

Unique Model

Ann Viljugrein, acting deputy director general of Norway's FSA, says Sweden's ability to support Nordea in a crisis is “of importance for Norwegian customers and financial stability in Norway.”

Sweden also plans to lift a cap on its target for resolution reserves and to funnel the contributions it gets from banks into the state budget, rather than into a separate fund like Europe's Single Resolution Fund. Nordea says that model essentially forces customers in Norway, Denmark and Finland to contribute to Sweden's state finances.

“Non-Swedish customers are financing Swedish political reforms,” said Rodney Alfven, head of investor relations for Nordea. “When the non-Swedish officials realize that, they should react strongly in order to protect the customers in that country.”

Norway's FSA “is not in a position to address views on the financing mechanisms,” Viljugrein said. Finland's regulator says it trusts Sweden in its handling of resolution reserves.

The Tactics

Putting the reserves into the budget lets the government get the requirement through parliament without drafting a separate law. It's also worth noting that Sweden has stood out in the EU for its willingness to resort to state support in the event of a full-on banking crisis, something that ratings companies estimate helps keep bank funding costs low.

Sweden's debt office is in favor of including the resolution reserve in the state budget because it doesn't ear mark “specific funds with physical assets for all different purposes,” says Par Holmback, acting head of Swedish National Debt Office's financial stability department. The model “provides for more efficient management of the public sector's finances,” he said. The debt office also acts as Sweden's resolution authority.

In Finland, the only Nordic euro member, the main concern is that Sweden has the funds it needs. It sees no issue with the government's approach.

Nordea accounts for about one-third of banking in Finland and its regulator has previously voiced misgivings over its new branch structure. The Finnish FSA will only have a say when it comes to Nordea's local mortgage lending (the same holds for Denmark and Norway).

“I assume that in case of Sweden, all arrangements to ensure that the money is available are planned carefully,” said Tuija Taos, the director general of the Financial Stability Authority in Helsinki.

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.