Nordea, Deutsche Bank, Monte dei Paschi and the easing of planned bank capital requirements

You may not have noticed a recent comment from Mr. Dombrovskis, a vice president in the European Commission who is developing proposals to deepen the Economic and Monetary Union. He said recently mentioned (reported in FT 29.9.2016) that he is prepared to reject plans to toughen bank capital requirements in a growing rift between US and European banks and regulators.

There is a huge reliance on risk-weighted capital requirements and this is problematic because the big banks assess their own risks and have an incentive to understate them. Naturally the regulators are watching but that will always be after the fact. Regulators are always the last to know…

The changes proposed by the Basel Committee are not a new departure for post-crisis regulation. They are an attempt to stop banks playing games with the rules that have already been put in place.

Two huge banks, Deutsche Bank and Monte dei Paschi, are facing a substantial fine and substantial losses respectively, and many other European banks are weakened by negative interest rates and poor profitability. This is not a good time to be considering helping out banks more than we should. The assistance and support by the European Central Bank for the big banks in the Euro Area is already huge. These same banks are already connected with the other European banks outside the Euro Area and the risks of contagion are significant in both directions.

Nordea is a good example of fishing for the best deal within Europe and that should ring warning bells. First they start out by merging banks in 4 countries. Then they planned to move their head office to Stockholm, something I still do not understand why because the Swedes have a higher demand on bank capital requirements than the Finns. Some commentators stated that it was smart of Nordea to move their business outside of the Eurozone:

Kauppalehti (13.2.2016) said “When Nordea becomes a Swedish bank it turns its back on EU’s joint and several liabilities for banks. Nordea’s money does not end up with German and Greek banks.”

Now, just a month ago, it turns up that Nordea has been trying to buy ABN Amro, and possibly move its HQ to Amsterdam, a heavy weight member of the EuroClub. If they really saw advantages to leave the Eurozone when they moved from Helsinki to Stockholm, can you then explain the desire to return again after one year?

As we have stated before, banks are probably more valuable when they are broken up and who needs to buy another language and another nationality, when having 4 languages and nationalities (Swedish, Norwegian, Danish and Finnish) is already stretching things.

There should be no reason to move a head office from one country to another within Europe if the reason is related to benefits from easier capital requirements, taxation or some other easier regulatory benefit. Europe cannot afford to allow such cherry picking and we certainly should not be agreeing to easier capital requirements for banks, even if that is the undisclosed wishes of Merkel, Hollande and Renzi. Such a situation is certainly not beyond belief when we see that these three now have their hands firmly on the steering wheel of Europe’s future.

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