Sweden's central bank and macro-prudential regulator clash over leverage ratio

Sweden's central bank has called on the government to bring forward the introduction of leverage ratios on banks a day after the idea was dismissed by the country's chief financial regulator.

"Sweden should bring forward the introduction of the leverage ratio requirement that is planned for 2018 [under Basel III]," the Riksbank argues in a report published yesterday.

Sveriges Riksbank wants leverage ratios for the biggest Swedish banks to be introduced on January 1, 2016 – two years earlier than envisaged under Basel III.

It also wants to raise the minimum requirement from 3% to 4% initially, and then to 5% over the following two years. 

On Wednesday, the head of Sweden's Financial Supervisory Authority, Martin Andersson, dismissed such proposals during a conference in Stockholm, saying the country should not act ahead of schedule or "exceed the leverage ratio requirement" recommended under Basel III.

Andersson, who was re-appointed yesterday, also warned an excessive requirement may create incentives for banks to load up on riskier assets as they look for higher yields.

But according to the Riksbank, there are "particular reasons why Sweden should exceed the international minimum requirements for the leverage ratio" under Basel III.

These include the size and concentration of the country's banking sector. Sweden's four largest banks hold assets worth four times the country's GDP.

"Swedish banks are very big, closely connected and dependent on each other," said Stefan Ingves, the Riksbank governor, in a video posted on the bank's website.

Moreover, Swedish banks use internal models to calculate their risk exposures, and thus their own risk-based capital requirement.

"Partly as a consequence of this, the capital levels of the major banks in relation to their risk exposure amounts have increased," the Riksbank notes.

As a result, the major Swedish banks have relatively high capital levels in relation to their risk-weighted assets compared to most other European banks, it adds.

At the same time, however, capital in relation to total assets – the leverage ratio – has lagged behind.

"[Swedish banks] have relatively small equity buffers," said Ingves. He described stricter and swifter leverage ratios an "appropriate measure" for strengthening their resilience.

The Netherlands, Switzerland and the UK – countries with banking systems that are similar in size to Sweden in terms of GDP – have already introduced leverage ratio requirements for banks or are planning to do so ahead of the Basel III timeframe.