IMF Survey : Conference Probes Links Between Nordic-Baltic Banks

IMF News, December 19, 2013

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The central banks of Estonia and Sweden and the IMF hosted a conference on “Nordic-Baltic Financial Linkages and Challenges” in Tallinn, Estonia, to examine financial integration and cross-border collaboration in light of the euro area’s nascent banking union.
IMF Deputy Managing Director Nemat Shafik noted the importance of “long-standing Nordic-Baltic collaboration on cross-border banking supervision” for regional financial stability and market confidence.
Key messages:
- Euro area banking union will have impact on Nordic-Baltic banks.
- Nordic-Baltic banking sector is large and highly integrated.
- Financial stability has been supported by joint supervisory vigilance and well-capitalized banks.

The eight Nordic-Baltic countries are Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden.
The region has a regionally integrated financial market and often similar philosophies on economic, monetary, and financial policies.
The region’s banks are well capitalized and highly rated, and “for the most part, have weathered the recent crisis better than most.”
Concentration:
- Assets of the six largest banks (Danske Bank, DnB, Handelsbanken, Nordea, SEB, and Swedbank) comprise roughly 90 percent of the total assets of all of the region’s publicly-listed banks.
- Most of those banks’ business is concentrated within the Nordic-Baltic region.
- Banking assets in Denmark and Sweden amount to approximately 400 percent of GDP in each country.
Baltic countries’ banking characteristics:
- In Estonia and Lithuania, the banking systems are more than 90 percent foreign owned.
- Baltic banks remain heavily dependent on funding from their Nordic parent banks, albeit to a much lesser extent than before the crisis.
Spillover risks:
- Strong ties across the region make the Nordic-Baltic countries subject to spillovers from within the region and to global shocks because of high trade and financial openness.

The crisis demonstrated that national supervisory mandates are not equipped to handle cross-border challenges.
Although collaboration and cooperation have been essential for financial stability, a stronger institutional framework is needed going forward.
The advent of the euro area banking union may increase the challenges of collaboration and will likely require a new approach to cooperation.

Shafik: “the banking union is critical to ensure recovery from the crisis, to break the bank-sovereign nexus, and to restart credit in the economy.”
Importance of enticing countries outside the euro area to join was emphasized.
Membership and timing noted:
- Finland and Estonia will be joined in the euro area by Latvia in January 2014 and thus automatically qualify for full membership in the banking union.
- Lithuania is seeking euro adoption in 2015.
Structural concern:
- Countries with largely foreign-owned banking sectors will automatically join the banking union while parent banks (located mainly in Denmark, Norway, and Sweden) will remain outside.
- This raises how existing Nordic-Baltic supervisory arrangements will be augmented or replaced once regional supervisors’ composition changes.
Opportunities and coordination:
- The European Central Bank intends to promote smooth interaction between jurisdictions within the single supervisory mechanism and those outside, as well as between euro area countries and those opting in to the single supervisory mechanism.
- The challenge is to create a structure that ensures coherence and integration between the banking union and the supervisory structure already in place in the region.

In 2014, a Baltic Cluster Report will accompany the IMF’s Article IV consultations with the individual Baltic countries.
The Baltic Cluster Report will build partly on the Nordic Regional Report, which analyzed the Nordic countries’ strengths and weaknesses and recommended strong national financial policies and regional cooperation to mitigate common challenges and shared risks.
The Baltic Cluster Report is intended to provide greater insight into the nature of Baltic linkages and to understand how these three countries remained resilient during the recent European downturn.

IMF Survey, December 19, 2013.