Regulatory and tax arbitrage is alive and well in banking—and one Nordic bank is taking advantage.
the only bank in the region on the global list of systemically important lenders, is switching its home base from Sweden, its biggest market by revenue, to Finland, its third-largest after Denmark. The immediate benefit will be to escape an increasingly punitive Swedish bank-rescue tax, which Nordea estimates could save it €1 billion ($1.19 billion) in the years ahead.
But the move could also let Nordea free excess capital of €3 billion to €6 billion, according to Berenberg analysts. A potential boon for investors that would leave rivals scowling.
The reason is simple: Finland is a member of the eurozone, where bank rules and capital requirements are set by the European Central Bank’s regulator. Sweden, an EU member outside the eurozone, like the U.K., sets its own, harsher capital rules.
Eurozone countries where banks rely more on sophisticated risk modeling to reduce the capital required for relatively safe assets such as mortgages, or other asset-backed loans, have been the focus of recent global efforts to tighten bank capital rules.
But eurozone politicians and bank executives have cried foul and the proposed changes are likely to be weaker than envisaged.
Nordea’s headquarters move is thus a snub to
governor of Sweden’s central bank, who as chair of the Basel Committee has been leading the attempt to reduce differences between the capital required for similar risks in different countries.
Sweden has some of the lowest capital requirements for mortgages anywhere in Europe. However, its regulators have forced Sweden’s banks to hold more capital on top of that suggested by risk models. The country also makes banks hold more capital to guard against systemic risks than other countries.
For Nordea, this means a minimum common equity capital ratio requirement of 17.4% for 2017: at
of France it is 8% this year rising to 10.25% in 2019.
Nordea says its main motivation is tax and that it is too early to estimate capital benefits. Indeed, some analysts, such as at
are skeptical about whether the ECB would allow such blatant arbitrage.
Nordea has a good argument for equality with eurozone rivals, but the ECB must be careful of the precedent it sets: regulatory arbitrage rarely works out well for anyone. It risks encouraging a race to the bottom.
Write to Paul J. Davies at firstname.lastname@example.org