With capital now required for government bond holdings in Sweden, The Banker looks at the sovereign debt exposure at the country’s top four banks.

The Swedish Financial Supervisory Authority has decided to break the status quo on capital allocations for sovereign risk by requiring its largest banks to impose risk weights on their holdings of government debt.

Under the current bank capital rules formulated by the Basel Committee on Banking Supervision, all government bonds are treated as equally safe, even though yields, and risk profiles, vary drastically. While the Greek government entices investors with a yield in excess of 7%, Germany and many other eurozone countries offer yields that barely stay above zero. The Basel Committee is reviewing this approach, but Sweden has decided to break ranks early on this issue.

The four largest Swedish banks by Tier 1 capital – Nordea, SEB, Handelsbanken and Swedbank – will now have to assign realistic loss probabilities for the sovereign debt on their balance sheets.

Thanks to stringent local regulation, the four banks already count among the best capitalised in the world. All four have Tier 1 capital ratios well in excess of international minimum standards, with Swedbank's as high as 22.4% (see chart one).

Chart one

With a strong retail focus, the four banks also have relatively low risk-weighted asset (RWA) ratios. SEB holds the most RWAs, which amount to 23.34% of its balance sheet. At Nordea, the country’s largest bank, the RWA ratio is 21.73%. At the two other banks, RWAs are below 20% of total assets.  

Government securities are the closest a bank can get to a bulwark of stability and so their appeal is obvious in traditional banking.  It is therefore no surprise that they are often the largest single segment of assets in a bank’s portfolio. At Handelsbanken, which has an RWA ratio of 17.06%, nearly half of the bank’s bond portfolio is composed of sovereign debt (see chart two).

Chart two 2

This number is significantly lower at Swedbank, where RWAs are only slightly larger. Government and municipal bonds amount to only 27% of the bond portfolio, with the rest of the portfolio comprised primarily of debt from financial institutions. Additionally, in 2014 the bank completely cleansed its balance sheet of bonds of the so-called PIIGS – Portugal, Ireland, Italy, Greece and Spain.

The two other banks, Nordea and SEB, have similarly composed debt portfolios. At SEB, sovereign and municipal debt accounts for 29.07% of the securities held for trading, but the bank’s exposure to the riskier countries is once again minimal. The bank’s single largest holding is German debt – German bunds constitute 24.5% of the overall fixed income portfolio. Bonds from the riskier, peripheral eurozone countries, which would be assigned higher risk weights, amount to only 0.1% of the portfolio’s total. At Nordea, the exposure is slightly higher at 32.71%. The bank primarily holds debt issued by mortgage institutions and other financial firms.

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