The Banking Union and the European Financial System

- A Swedish Perspective

State Secretary Karolina Ekholm

Presented at the Peterson Institute for International Economics

Washington, DC October 9, 2014

No clear recovery in the euro area GDP, index, 2007 Q4 = 100

Sources: Bureau of economic analysis, Eurostat and Office for National Statistics

Weaknesses in European banking sector dampening factor Per cent

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2

4

6

8

10

12

14

16

06 07 08 09 10 11 12 13

Return on equity CET 1 capital ratio

Note. Median values based on 108 banks in the euro area that fall under the ECB's supervision, based on the criteria of total assets

Sources: SNL Financial and the Riksbank

AQR/stress tests opportunity to restore confidence

ECB has strong incentives to find weaknesses and deal with them in connection with the implementation of SSM.

According to survey by Goldman Sachs:

89 per cent view test as credible

9 banks expected to fail on average

50 bn euro in average expected capital short fall

Sweden: potentially large benefits from participating in banking union National banks’ and banking groups’ assets in relation to GDP, December 2013, per cent

Sources: ECB, the European Commission, the Swiss National Bank and the Riksbank Note. Switzerland as per december 2012.

But political obstacles to membership

Formally no proper influence over SSM decisions…

…and poor insurance protection from joint resolution fund.

Swedish banks will nevertheless fall under SSM via foreign subsidiaries Balance sheet (bn €)

Sources: Bank reports 2012 & the Riksbank

No 1 No 1 No 2 No 2 No 2 No 1

Complicated procedure for bank resolution…

…and fear that bail-in involves large contagion risks in the Swedish case

Note: Swedish banks’ total lending to the general public amounted to SEK 9000 billion at the end of the second quarter 2014. Data only covers banks’ business in Sweden

Handelsbanken

Nordea

SEB

Swedbank

Other Swedishbanks

Source: Statistics Sweden, financial markets statistics

In short…

• Strong banks are needed for economic recovery in Europe…

• …and a credible AQR is a precondition for regained confidence.

• Although the benefits from participating in a banking union in principle are high…

• …Sweden will likely stay outside for the time being…

• …but will still be affected.

• Bail-in can be a challenge (and resolution will be…).

Extra

Indicative cost for unsecured bank funding CDS-premia, basis points

Sources: Bloomberg and the Riksbank

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2011 2012 2013 2014

Germany Spain France Italy Netherlands Sweden

Indicative cost for secured bank funding Yield, percentage points

Sources: Barclays and Bloomberg

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2009 2010 2011 2012 2013 2014

Italy France Spain Germany Sweden Swap rate