## 1. Capital Buffers in Finland ## Source details **Canonical URL:** [1. Capital Buffers in Finland](https://www.imf.org/-/media/files/publications/cr/2019/cr1908.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/cr1908.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/cr1908.pdf.json) --- ### A. Introduction - Nordea relocated its headquarters from Sweden to Finland in October 2018 to seek a “level playing field”; Finland was the sole Nordic country already part of the banking union. - The relocation increases the size and complexity of the Finnish banking sector, placing increasing demands on supervision and crisis preparedness. - Nordea is now under the purview of euro area institutions, such as the Single Supervisory Mechanism and the Single Resolution Board. - Staff assessment: banking supervision in the euro area has improved significantly following creation of the SSM, which should mitigate potential risks from Nordea’s move; however, the banking union is not yet complete, details of the backstop for the Single Resolution Fund need to be finalized and a common euro area deposit insurance should be made fully operational. ### B. Nordea’s operations and financial position - Business model and scale: - Nordea formed in 2000 by merging Danish, Finnish, Norwegian and Swedish banks; provides personal, commercial, and wholesale banking, asset and wealth management, and economic research and analysis. - Listed on exchanges of Copenhagen, Helsinki and Stockholm; largest shareholder Sampo holds a 21 percent stake. - Balance sheet: €582 billion as of end 2017. - Previously classified by the FSB as one of the 30 G-SIBs but was dropped from that list in the classification published on 16 November 2018. - Loan and deposit market shares place Nordea among top three banking institutions in each of the four Nordic countries. - Lending by country (millions of euros; percent shares preserved): - Denmark: 804,972; Share of Total: 24.9; Share of Domestic GDP: 27.9 - Finland: 626,201; Share of Total: 19.4; Share of Domestic GDP: 28.0 - Norway: 563,911; Share of Total: 17.4; Share of Domestic GDP: 15.9 - Sweden: 1,154,483; Share of Total: 35.7; Share of Domestic GDP: 24.2 - Other: 85; Share of Total: 0.2 - Total: 323,546; Share of Total: 100.0 - Loan portfolio composition (millions of euros; percent): - Household mortgage: 132,477; Share of Total: 40.9 - Household consumer: 26,107; Share of Total: 8.1 - Corporate: 147,008; Share of Total: 45.4 - Public sector: 4,565; Share of Total: 1.4 - Central banks and credit institutions: 13,388; Share of Total: 4.1 - Total: 323,545; Share of Total: 100.0 - Liabilities (millions of euros; percent of total non-equity liabilities): - Deposits from credit institutions: 39,983; Share of Total: 7.3 - Deposits from the public: 172,434; Share of Total: 31.4 - Debt securities in issue: 179,114; Share of Total: 32.7 - Derivatives: 42,713; Share of Total: 7.8 - Other liabilities: 114,052; Share of Total: 20.8 - Total non-equity liabilities: 548,296; Share of Total: 100.0 - Debt securities in issue (millions of euros; percent of debt securities in issue): - Certificates of deposit: 10,743; 6.0 - Commercial paper: 24,441; 13.6 - Covered bonds: 111,701; 62.4 - Other bonds: 32,186; 18.0 - Other: 43; 0.0 - Total: 179,114; 100.0 - Market activity: - Interest-bearing securities: 13 percent of assets - Derivatives: 8 percent of assets - Shares and investments in unit trusts: 7 percent of assets - Capital, liquidity and performance metrics: - Tier 1 capital ratio (2017): 19.3 percent - Total capital ratio (2017): 24.6 percent - Leverage ratio: 5.2 percent - Net Stable Funding Ratio: 103.5 percent (Basel Committee recommendation: 100 percent) - Liquidity Coverage Ratio (LCR) averaged 147 percent through 2017 (measured using the Swedish FI’s LCR definition); LCR according to CRD definition was 174 percent through the same period. - 80 percent of liabilities have maturities above one year (most deposits by the public expected to be recovered within 12 months). - Return on equity (2017): 9.5 percent - Impaired loans (2017): 1.7 percent - Ratings: Aa3 from Moody’s; AA- from S&P and Fitch (reaffirmed after announcement of change in HQ location). - Resolvability: - 2017 Resolution College requirement: 7.1 percent of own funds and total liabilities, equaling 28.9 percent of total risk weighted assets. - Group met that requirement at the start of 2018 and issued senior non-preferred debt during 2018. - Stress test outcome: - EBA’s 2018 EU-wide stress tests estimated Nordea’s CET1 ratio would decline from 19.3 percent at year-end 2017 to 16.2 percent at year-end 2019 under the severe stress scenario; Nordic country scenarios generally more severe than euro area average. ### C. Changes in legal structure and implications of the redomicile - Legal changes prior to relocation: - 2017 “branchification”: Nordea Bank Denmark A/S, Nordea Bank Finland Plc and Nordea Bank Norge ASA changed from subsidiaries to branches of Swedish parent Nordea Bank AB to align legal structure with centralized operations. - October 2017: Nordea’s Baltic operations merged with DNB Bank to create Luminor Bank; Nordea currently holds 56 percent of shares and 50 percent of voting rights of Luminor, with agreement to sell 60 percent. - As of 1 October 2018: - Nordea Bank AB (Sweden) became Nordea Bank Abp (Finland). - Most non-Finnish operations are conducted through branches; major branches in other Nordic countries and smaller branches in China, Estonia, Germany, Poland, Singapore, the UK, and the US. - Nordea retains mortgage bank subsidiaries in Denmark, Finland, Norway, and Sweden. - Business model and governance: - Move does not imply major changes to business model and governance; operations in Nordic home markets expected to remain largely unchanged. - Operations run via Nordea’s “one bank” approach; some group functions likely to move to Finland but governance not materially affected by parent company location. - Macroeconomic effects: - Limited direct macroeconomic impact: only a limited number of employees expected to transfer to Helsinki; profits are booked at national operations level so no expected increases in Finnish tax revenue from redomicile. - Size and systemic importance to Finland: - Assets of entities domiciled in Finland increased from €239 billion (before branchification) to around €427 billion after move. - Nordea’s move increases the size of the Finnish banking sector to around 3¾ times Finnish GDP (one of the largest in the euro area). - When accounting only for the part of Nordea directly under SSM supervision, total assets are 3.1 times GDP. - Nordea is the largest credit institution of banking union countries when measured as a proportion of the GDP of its home country. ### D. Supervisory, liquidity, resolution and deposit insurance implications - Supervision and capital requirements: - With the shift of headquarters to Finland, Nordea is now supervised through the SSM with the FIN-FSA actively involved. - As a large institution of significant importance to Finland, Nordea is supervised directly by the ECB. - Day-to-day supervision conducted through a Joint Supervisory Team (JST) consisting mainly of ECB and FIN-FSA staff. - SREP will be conducted according to the ECB methodology (covering Pillar 2 capital requirement). - Host supervisors of significant branches and subsidiaries outside Finland continue to participate and share information in the Supervisory College; the Memorandum of Understanding on supervision of significant branches still applies and provides enhanced information exchange. - Macroprudential decision-making power remains with national authorities; the Finnish Board of the FIN-FSA retains authority over Finnish systemic buffers (e.g., countercyclical capital buffer, Systemic Risk Buffer, G-SII buffer). Reciprocity of macroprudential tools across Nordic countries is secured by the MoU. - ECB may apply higher requirements for capital buffers than national competent authorities, including countercyclical and systemic risk buffer rates, or more stringent harmonized measures. - Liquidity: - Liquidity requirements based on harmonized EU regulations; Net Stable Funding Ratio similarly harmonized. - Nordea has access to Eurosystem monetary policy operations if it meets eligibility criteria and provides ECB-eligible collateral. - Emergency liquidity assistance (ELA) is responsibility of the Bank of Finland (BoF); the Governing Council of the ECB may object to ELA if it interferes with objectives of the ESCB. - The SSM does not have general requirements on LCR in specific currencies; can address on a case-by-case basis and requires bank liquid assets in a significant currency to be in line with net outflows in same currency. - Resolution: - Nordea is under the direct remit of the Single Resolution Board (SRB); day-to-day resolution planning through Internal Resolution Teams (IRT) with SRB and Finnish Financial Stability Authority (FFSA) staff. - Resolution authorities in host countries outside the banking union remain involved via the Resolution College; SRB chairs the Resolution College for Nordea. - Nordea will contribute to the Single Resolution Fund (SRF), designed to provide financial backstop for SRB interventions in the banking union. - Nordea will stop paying resolution fees in Sweden. - The former Swedish National Debt Office (SNDO) now has fewer formal powers to influence SRB final decisions in Nordea’s distress due to Nordea’s branch operations in Sweden; SNDO and other host resolution authorities retain formal roles regarding subsidiaries in their countries. - SRF target: reach 1 percent of amount of covered deposits of all credit institutions within banking union by end of 2023; target level estimated about €55 billion. Between 2015-2018, €24.9 billion have been collected to the SRF. - Deposit insurance: - Nordea’s depositors are covered by the Finnish deposit guarantee scheme. - In event of insolvency (rather than resolution), the Finnish Deposit Guarantee Fund would be fully responsible for repaying Nordea’s covered depositors, including those of foreign branches, up to €100,000, per EU regulations. - With redomicile, amount of covered deposits within Finnish deposit guarantee scheme grew from around €51 billion to around €127 billion. - The Deposit Guarantee Fund is run by the Finnish resolution authority (FFSA) and is entirely funded by risk-based fees imposed annually on Finnish banks. ### E. Policy responses and readiness - Supervisory cooperation and preparedness: - Nordic authorities and the ECB have taken steps to ensure potential gaps and fragmentation across national jurisdictions are avoided (e.g., JST, MoU on supervision of significant branches, participation in Supervisory and Resolution Colleges). - Work on building crisis preparedness of euro area banks is still underway; the resolution framework is designed to prevent taxpayers having to bail out banks but remains fairly new. - Macroprudential tools and reciprocity: - National macroprudential authorities retain decision-making power; the MoU secures full reciprocity of capital-related macroprudential tools applied in different Nordic countries (reciprocity applies with respect to exposures in the imposing country). - Remaining gaps and completion priorities: - The banking union is not yet complete; details of the backstop for the Single Resolution Fund need to be finalized and a common euro area deposit insurance should be made fully operational. - Cross-border cooperation: - Continued cooperation between euro area and non-euro area institutions remains important given Nordea’s operations in non-euro area member states. ### Supervision, Capital, Liquidity, Resolution and Deposit Insurance — Key measures and timelines - Supervision: - FIN-FSA will adjust organizational structure and add up to 30 people during 2018 (of which 20 have been recruited). - FIN-FSA finances its activities 95 percent from levies and supervision fees; 5 percent is contributed from the Bank of Finland. - Capital requirements: - Minimum CET1 and minimum additional Tier 1 and Tier 2 capital requirements: 4.5 percent and 3.5 percent of risk-weighted assets (Pillar 1). - Capital conservation buffer: 2.5 percent. - FIN-FSA decisions on buffers: O-SII buffer of 2.0 percent to take effect January 2019; Systemic Risk Buffer of 3.0 percent to take effect July 1, 2019; G-SII/B buffer of 1 percent to take effect January 2020. - Nordea’s additional Pillar 1 requirements will be defined at the start of 2019 by the O-SII buffer of 2.0 percent and then, in July 2019, by the Systemic Risk Buffer of 3.0 percent. - Decisions remain regarding Pillar 2 assessments; Nordea continues to comply with the 2018 Supervisory College Joint Decision on Pillar 2 requirements until the ECB issues its 2019 SREP decisions. - Liquidity: - ECB can set additional bank-specific liquidity requirements through its SREP process; next decision will be made in 2019. - Importance of maintaining liquidity reserves in other currencies to match potential emergency needs. - Resolution: - SRB decisions on MREL for most banks under its remit at consolidated level; SRB to set binding targets on subordination and internal MREL in 2019. - Nordea plans to increase senior non-preferred debt issuance to meet expected MREL requirements. - SRF resources available in 2018 to support a possible resolution case in Finland: approximately €17 billion in 2018; SRF target estimated about €55 billion by end-2023. - Maximum SRF contribution would be 5 percent of Nordea’s balance sheet under SSM supervision of about €450 billion, hence €22 billion. - Confirmation of the ESM in June 2018 as backstop for the SRF noted; important details about access and potential introduction before 2023 still need to be finalized. - Deposit insurance: - Depositors in other Nordic economies are protected up to similar amounts in euro terms. - Finnish fund target: 0.8 percent of covered deposits by 2024 (about €1 billion). - Funds collected since 2015 currently amount to €206 million. - Old Deposit Guarantee Fund (VTS Fund) holds approximately €870 million worth of contributions from banks; these funds would be at disposal of the FFSA. - European Commission proposal for EDIS to be fully implemented by 2024 has not yet been accepted by European governments. ### Box 1 — Capital Buffers in Finland (highlights) - FIN-FSA Board (June 2018) requirements for additional capital: - Systemic Risk Buffer may be up to 3 percent (or up to 5 percent under higher systemic risk conditions). - Systemic Risk Buffer set at 3 percent for Nordea. - G-SII/B buffer set at 1 percent for Nordea (to take effect January 2020). - O-SII buffer set at 2 percent for Nordea (to take effect January 2019). - New buffers are to be met by common equity Tier 1 capital. - Decision on the systemic risk buffer to enter into effect on 1 July 2019. - Calibration of SRB buffer rates for Finnish credit institutions: 3.0 percent for Nordea, 2.0 percent for OP Group, 1.5 percent for Municipality Finance, and 1.0 percent for all other Finnish credit institutions. ### Assessment and key conclusions - Authorities have responded to challenges of Nordea’s redomicile within their remits. - Relocation of Nordea’s headquarters to Finland does not intrinsically change Nordea’s riskiness—business model and governance remain largely unchanged. - Supervisory resources have increased; the SSM has prior experience supervising Nordea’s Finnish operations. - Continued cooperation across Nordic competent authorities will be facilitated through supervisory and resolution colleges and the MoU on supervision of significant branches. - Capital requirements will remain almost unchanged in nominal terms; Nordea’s capital requirements expressed in terms of risk-weighted assets will fall a little because SSM and Swedish FI use different forms and composition of capital requirements. - Overall liquidity risk remains largely unchanged. - Nordea’s size raises the question of whether Finnish authorities would need to use domestic resources in an extreme event to safeguard depositors across multiple countries, underscoring importance of resolution framework, loss-absorbing capacity, and backstops. *Prepared by Alasdair Scott (EUR) and Lucy Gornicka (MCM); December 17, 2018.* ### 1. Capital Buffers in Finland ___________________________________________________________ 10 ### 1. Capital Buffers in Finland ### A. Introduction - In October 2018, the Nordic banking group Nordea relocated its headquarters from Sweden to Finland to seek a “level playing field”—a common multinational regulatory framework—with Finland the choice of headquarters as the sole Nordic country already part of the banking union. - The relocation increases the size and complexity of the Finnish banking sector, placing increasing demands on supervision and crisis preparedness. - Nordea is now under the purview of euro area institutions, such as the Single Supervisory Mechanism and the Single Resolution Board. - Staff assessment: banking supervision in the euro area has improved significantly following creation of the SSM, which should mitigate potential risks from Nordea’s move; however, the banking union is not yet complete, details of the backstop for the Single Resolution Fund need to be finalized and a common euro area deposit insurance should be made fully operational. ### B. Nordea’s operations and financial position - Business model and scale: - Nordea is a financial services group formed in 2000 by merging Danish, Finnish, Norwegian and Swedish banks; provides personal, commercial, and wholesale banking, asset and wealth management, and economic research and analysis. - Listed on exchanges of Copenhagen, Helsinki and Stockholm; largest shareholder Sampo holds a 21 percent stake. - Balance sheet: €582 billion as of end 2017. - Nordea was previously classified by the FSB as one of the 30 G-SIBs but was dropped from that list in the classification published on 16 November 2018. - Nordea’s loan and deposit market shares place it among top three banking institutions in each of the four Nordic countries. - Lending by country (millions of euros; percent shares preserved): - Denmark: 804,972; Share of Total: 24.9; Share of Domestic GDP: 27.9 - Finland: 626,201; Share of Total: 19.4; Share of Domestic GDP: 28.0 - Norway: 563,911; Share of Total: 17.4; Share of Domestic GDP: 15.9 - Sweden: 1,154,483; Share of Total: 35.7; Share of Domestic GDP: 24.2 - Other: 85; Share of Total: 0.2 - Total: 3,235,46? (Note: table total shown as 323546; preserve as presented) Total: 323,546; Share of Total: 100.0 - Loan portfolio composition (millions of euros; percent): - Household mortgage: 132,477; Share of Total: 40.9 - Household consumer: 26,107; Share of Total: 8.1 - Corporate: 147,008; Share of Total: 45.4 - Public sector: 4,565; Share of Total: 1.4 - Central banks and credit institutions: 13,388; Share of Total: 4.1 - Total: 323,545; Share of Total: 100.0 - Liabilities (millions of euros; percent of total non-equity liabilities): - Deposits from credit institutions: 39,983; Share of Total: 7.3 - Deposits from the public: 172,434; Share of Total: 31.4 - Debt securities in issue: 179,114; Share of Total: 32.7 - Derivatives: 42,713; Share of Total: 7.8 - Other liabilities: 114,052; Share of Total: 20.8 - Total non-equity liabilities: 548,296; Share of Total: 100.0 - Debt securities in issue (millions of euros; percent of debt securities in issue): - Certificates of deposit: 10,743; 6.0 - Commercial paper: 24,441; 13.6 - Covered bonds: 111,701; 62.4 - Other bonds: 32,186; 18.0 - Other: 43; 0.0 - Total: 179,114; 100.0 - Market activity: - Interest-bearing securities: 13 percent of assets - Derivatives: 8 percent of assets - Shares and investments in unit trusts: 7 percent of assets - Capital, liquidity and performance metrics: - Tier 1 capital ratio (2017): 19.3 percent - Total capital ratio (2017): 24.6 percent - Leverage ratio: 5.2 percent - Net Stable Funding Ratio: 103.5 percent (Basel Committee recommendation: 100 percent) - Liquidity Coverage Ratio (LCR) averaged 147 percent through 2017 (measured using the Swedish FI’s LCR definition); LCR according to CRD definition was 174 percent through the same period. - 80 percent of liabilities have maturities above one year (most deposits by the public expected to be recovered within 12 months). - Return on equity (2017): 9.5 percent - Impaired loans (2017): 1.7 percent - Ratings: Aa3 from Moody’s; AA- from S&P and Fitch (reaffirmed after announcement of change in HQ location). - Resolvability: - In 2017, the Resolution College set a requirement for the group of 7.1 percent of own funds and total liabilities, equaling 28.9 percent of total risk weighted assets. - The group met that requirement at the start of 2018 and issued senior non-preferred debt during 2018. - Stress test outcome: - EBA’s 2018 EU-wide stress tests estimated Nordea’s CET1 ratio would decline from 19.3 percent at year-end 2017 to 16.2 percent at year-end 2019 under the severe stress scenario; Nordic country scenarios generally more severe than euro area average. ### C. Changes in legal structure and implications of the redomicile - Legal changes prior to relocation: - 2017 “branchification”: Nordea Bank Denmark A/S, Nordea Bank Finland Plc and Nordea Bank Norge ASA changed from subsidiaries to branches of Swedish parent Nordea Bank AB to align legal structure with centralized operations. - October 2017: Nordea’s Baltic operations merged with DNB Bank to create Luminor Bank; Nordea currently holds 56 percent of shares and 50 percent of voting rights of Luminor, with agreement to sell 60 percent. - As of 1 October 2018: - Nordea Bank AB (Sweden) became Nordea Bank Abp (Finland). - Most non-Finnish operations are conducted through branches; major branches in other Nordic countries and smaller branches in China, Estonia, Germany, Poland, Singapore, the UK, and the US. - Nordea retains mortgage bank subsidiaries in Denmark, Finland, Norway, and Sweden. - Business model and governance: - Move does not imply major changes to business model and governance; operations in Nordic home markets expected to remain largely unchanged. - Operations run via Nordea’s “one bank” approach; some group functions likely to move to Finland but governance not materially affected by parent company location. - Macroeconomic effects: - Limited direct macroeconomic impact: only a limited number of employees expected to transfer to Helsinki; profits are booked at national operations level so no expected increases in Finnish tax revenue from redomicile. - Size and systemic importance to Finland: - Assets of entities domiciled in Finland increased from €239 billion (before branchification) to around €427 billion after move. - Nordea’s move increases the size of the Finnish banking sector to around 3¾ times Finnish GDP (one of the largest in the euro area). - When accounting only for the part of Nordea directly under SSM supervision, total assets are 3.1 times GDP. - Nordea is the largest credit institution of banking union countries when measured as a proportion of the GDP of its home country. ### D. Supervisory, liquidity, resolution and deposit insurance implications - Supervision and capital requirements: - With the shift of headquarters to Finland, Nordea is now supervised through the SSM with the FIN-FSA actively involved. - As a large institution of significant importance to Finland, Nordea is supervised directly by the ECB. - Day-to-day supervision conducted through a Joint Supervisory Team (JST) consisting mainly of ECB and FIN-FSA staff. - Supervisory review and evaluation process (SREP) will be conducted according to the ECB methodology (covering Pillar 2 capital requirement). - Host supervisors of significant branches and subsidiaries outside Finland continue to participate and share information in the Supervisory College; the Memorandum of Understanding on supervision of significant branches still applies and provides enhanced information exchange. - Macroprudential decision-making power remains with national authorities; the Finnish Board of the FIN-FSA retains authority over Finnish systemic buffers (e.g., countercyclical capital buffer, Systemic Risk Buffer, G-SII buffer). Reciprocity of macroprudential tools across Nordic countries is secured by the MoU. - ECB may apply higher requirements for capital buffers than national competent authorities, including countercyclical and systemic risk buffer rates, or more stringent harmonized measures. - Liquidity: - Liquidity requirements based on harmonized EU regulations; Net Stable Funding Ratio similarly harmonized. - Nordea has access to Eurosystem monetary policy operations if it meets eligibility criteria and provides ECB-eligible collateral. - Emergency liquidity assistance (ELA) is responsibility of the Bank of Finland (BoF); the Governing Council of the ECB may object to ELA if it interferes with objectives of the ESCB. - The SSM does not have general requirements on LCR in specific currencies; can address on a case-by-case basis and requires bank liquid assets in a significant currency to be in line with net outflows in same currency. - Resolution: - Nordea is under the direct remit of the Single Resolution Board (SRB); day-to-day resolution planning through Internal Resolution Teams (IRT) with SRB and Finnish Financial Stability Authority (FFSA) staff. - Resolution authorities in host countries outside the banking union remain involved via the Resolution College; SRB chairs the Resolution College for Nordea. - Nordea will contribute to the Single Resolution Fund (SRF), designed to provide financial backstop for SRB interventions in the banking union. - Nordea will stop paying resolution fees in Sweden. - The former Swedish National Debt Office (SNDO) now has fewer formal powers to influence SRB final decisions in Nordea’s distress due to Nordea’s branch operations in Sweden; SNDO and other host resolution authorities retain formal roles regarding subsidiaries in their countries. - SRF target: reach 1 percent of amount of covered deposits of all credit institutions within banking union by end of 2023; target level estimated about €55 billion. Between 2015-2018, €24.9 billion have been collected to the SRF. - Deposit insurance: - Nordea’s depositors are covered by the Finnish deposit guarantee scheme. - In event of insolvency (rather than resolution), the Finnish Deposit Guarantee Fund would be fully responsible for repaying Nordea’s covered depositors, including those of foreign branches, up to €100,000, per EU regulations. - With redomicile, amount of covered deposits within Finnish deposit guarantee scheme grew from around €51 billion to around €127 billion. - The Deposit Guarantee Fund is run by the Finnish resolution authority (FFSA) and is entirely funded by risk-based fees imposed annually on Finnish banks. ### E. Policy responses and readiness - Supervisory cooperation and preparedness: - Nordic authorities and the ECB have taken steps to ensure potential gaps and fragmentation across national jurisdictions are avoided (e.g., JST, MoU on supervision of significant branches, participation in Supervisory and Resolution Colleges). - Work on building crisis preparedness of euro area banks is still underway; the resolution framework is designed to prevent taxpayers having to bail out banks but remains fairly new. - Macroprudential tools and reciprocity: - National macroprudential authorities retain decision-making power; the MoU secures full reciprocity of capital-related macroprudential tools applied in different Nordic countries (reciprocity applies with respect to exposures in the imposing country). - Remaining gaps and completion priorities: - The banking union is not yet complete; details of the backstop for the Single Resolution Fund need to be finalized and a common euro area deposit insurance should be made fully operational. - Cross-border cooperation: - Continued cooperation between euro area and non-euro area institutions remains important given Nordea’s operations in non-euro area member states. *Prepared by Alasdair Scott (EUR) and Lucy Gornicka (MCM); December 17, 2018.* ### 15. Nordea’s redomicile to Finland has generated several changes in terms of supervision, ### 15. Nordea’s redomicile to Finland has generated several changes in terms of supervision, ### Supervision - To strengthen the capacity to supervise Nordea, the FIN-FSA will adjust its organizational structure. - Budget has been approved to add up to 30 people during 2018 (of which 20 have been recruited). - The FIN-FSA will work to facilitate supervisory cooperation with the ECB and other Nordic financial authorities. - The FIN-FSA finances its activities 95 percent from levies and supervision fees; 5 percent is contributed from the Bank of Finland. ### Capital requirements - Nordea must satisfy both minimum capital requirements (Pillar 1) and supervisory review (Pillar 2). - Under the EU’s Capital Requirements Regulation, Nordea already faces the minimum CET1 and minimum additional Tier 1 and Tier 2 capital requirements of 4.5 percent and 3.5 percent of risk-weighted assets. - Banks in Finland are also required to meet the capital conservation buffer of 2.5 percent. - The Board of the FIN-FSA has published decisions on the Systemic Risk, Global Systemically-Important Institution, and Other Systemically-Important Institution buffers; only the highest of the three buffer rates applies. - Nordea’s additional Pillar 1 requirements will be defined at the start of 2019 by the O-SII buffer of 2.0 percent and then, in July 2019, by the Systemic Risk Buffer of 3.0 percent. - Decisions remain regarding Pillar 2 assessments. In the meantime, Nordea continues to comply with the 2018 Supervisory College Joint Decision on Pillar 2 requirements, until the ECB has issued its decisions on prudential requirements as a result of the 2019 Supervisory Review Evaluation Process. ### Liquidity - The ECB can set additional bank-specific liquidity requirements through its SREP process; the next decision will be made in 2019. - It will be important for Nordea to maintain liquidity reserves in other currencies sufficient to match potential emergency needs. ### Resolution - Progress has been made on resolution planning as outlined in the Bank Recovery and Resolution Directive (BRRD). - The SNDO-led Resolution College of Nordea laid out a resolution strategy building on the “single point of entry” approach; no change to this strategy is foreseen. - The SRB has made decisions on minimum own funds and eligible liabilities (MREL) requirements for most banks under its direct remit at the consolidated level. - The SRB is working on policies related to subordination and internal (i.e. intragroup) MREL, with the aim of setting binding targets in 2019. - Nordea has plans to further increase the amount of senior non-preferred debt in issuance to increase its loss-absorbing capacity and meet expected MREL requirements. - The SRF will not be at target capacity until the end of 2023, but more than half of the resources that would be available to support Nordea’s resolution are already available in 2018. - Approximately €17 billion would be available from the SRF in 2018 to support a possible resolution case in Finland, with the amount growing steeply with each year until 2024. - The maximum contribution of the SRF would be 5 percent of Nordea’s balance sheet under SSM supervision of about €450 billion, hence €22 billion, or about €5 billion more than currently available. - The confirmation of the ESM in June 2018 as backstop for the Single Resolution Fund is noted as a significant step toward ensuring market confidence that the SRB would have sufficient funds for any resolution; important details about access to the backstop and potential introduction before 2023 still need to be finalized. ### Deposit insurance - Depositors in other Nordic economies are protected up to similar amounts in euro terms. - The target for the Finnish fund is 0.8 percent of covered deposits by 2024 (about €1 billion). - Funds collected since 2015 currently amount to €206 million. - The Old Deposit Guarantee Fund (the VTS Fund) holds approximately €870 million worth of contributions from banks. These funds would be at the disposal of the FFSA. - The “third pillar” of the banking union, common deposit insurance across countries, has not yet been implemented. - The European Commission has proposed a framework for EDIS, to be fully implemented by 2024, but so far this has not been accepted by European governments. ### Box 1. Capital Buffers in Finland - In June 2018, the Board of the FIN-FSA laid out its requirements for additional capital requirements for several Finnish financial institutions. - The new Systemic Risk Buffer aims to prevent long-term risks not covered by other measures. - Under Finnish law the Systemic Risk Buffer may be up to 3 percent of the total risk exposure if the systemic risk is higher than in other EU countries and higher than 3 percent and up to 5 percent if that risk is clearly higher than in other EU countries, or clearly higher than the long-term Finnish average. - The buffer has been set by the Board of the FIN-FSA at 3 percent for Nordea, the highest among Finnish financial institutions, on the grounds that structural systemic risks are higher for Finland than the EU average. - The Board of the FIN-FSA has set Nordea a G-SII/B buffer of 1 percent, to take effect in January 2020. - The Board of the FIN-FSA also set Nordea’s O-SII buffer to 2 percent, to take effect in January 2019. - The level of the Systemic Risk Buffer will be reviewed and set annually, in June, by the Board of the FIN-FSA, in conjunction with the Bank of Finland and the Ministry of Finance; consulting the Ministry of Social Affairs and Health, which will also inform the EC of its decision (from which it would require permission for requirements greater than 3 percent). - The new buffers are to be met by common equity Tier 1 capital. The decision of the Board on the systemic risk buffer will enter into effect on 1 July 2019. - The calibration of SRB buffer rates for Finnish credit institutions: 3.0 percent for Nordea, 2.0 percent for OP Group, 1.5 percent for Municipality Finance, and 1.0 percent for all other Finnish credit institutions. ### Assessment - Staff’s assessment is that the responsible authorities have responded to the challenges of Nordea’s redomicile within the bounds of their remits. - The relocation of Nordea’s headquarters to Finland does not intrinsically change the riskiness of Nordea—its business model and governance remains largely unchanged. - Supervisory resources have increased. The Single Supervisory Mechanism has been functioning for some time, and the ECB has already had experience supervising Nordea in Finland from when Nordea’s Finnish operations were configured as a subsidiary (and later as a branch). - Continued cooperation across Nordic competent authorities will be facilitated through the supervisory and resolution college, and the previous MoU on supervision of significant branches still applies. - Capital requirements will remain almost unchanged in nominal terms. Because the form and composition of the capital requirements used by the SSM differ from those used by the Swedish FI, Nordea’s capital requirements expressed in terms of risk-weighted assets will fall a little. - The assessment of the Swedish and Finnish authorities and the ECB is that Nordea's capital requirement, taking into account the recent decisions by the Board of the FIN-FSA over capital buffers, remains qualitatively unchanged. - Overall liquidity risk remains largely unchanged. - Nordea’s size raises the question of whether, in the case of an extreme event, the Finnish authorities would have to use domestic resources to safeguard Nordea’s depositors across its operations in multiple countries. This highlights the importance of the resolution framework and of ensuring sufficient loss-absorbing capacity and backstops. *IMF staff report content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1908.pdf_