Nordea's Move Into Bank Union Raises Stakes on Deposit Insurance

(Bloomberg) -- As it prepares to welcome a bank that will dwarf its $256 billion economy, Finland is eager to end a two-year logjam in talks over a common deposit-insurance system in the euro zone.

The Nordic country -- a staunch opponent of asset pooling during Europe’s debt crisis -- is now actively pushing to share deposit safeguards with its fellow Europeans. In the way stands Germany, the main opponent to the European Deposit Insurance Scheme.

While they both agree mutualization can only happen once the poor state of bank health in parts of southern Europe improves, Finland has come up with a tool to show just that, according to Tuomas Saarenheimo, a top official at the Finnish finance ministry and the country’s representative in the euro working group. It’s drafted a set of four criteria to assess when risks in the European banking industry have diminished enough that member states can begin to consider pooling protections.

“Our criteria are meant to influence the European debate,” Saarenheimo said in an interview in Helsinki. The indicators point to “a significant improvement” over the last year in the health of banks in Europe.

Bank of Finland Says Nordea Move Adds to Regulatory Pressures

“If this continues, in the next few years we will be in a much better situation,” he said. “Maybe then it will be possible to genuinely begin the political talks on the common deposit insurance scheme.”

Finland, which is about to be saddled with the risks lying in Nordea Bank AB’s $730 billion balance sheet has toned down its reservations to the common deposit scheme. Nordea will become the euro area’s newest global systemically important bank, joining eight others, if shareholders approve a plan to move its headquarters to Helsinki from Stockholm.

Read more on the sovereign risk Nordea is bringing to the euro area

The euro area’s banking union project began in 2012, in response to a crisis that culminated in five nations resorting to bailouts. The plans called for a three-pronged approach of common supervision, common bank resolution and common deposit insurance. Five years later, only the first two are up and running. Little progress has taken place over the past two years in combining deposit safeguards. Two months ago, the European Commission sought to reinvigorate the talks with a proposal for a gradual introduction of EDIS.

The fundamental point that risk reduction and risk sharing should move ahead in parallel, voiced again just a few weeks ago by European Central Bank President Mario Draghi, remains intact in the Finnish proposal.

At the moment, EU members, the ECB’s banking supervisor and the Commission all use various criteria to assess how banks are faring, Finland’s Saarenheimo said. Adopting uniform standards within a few months would help advance the debate, he said.

Germany has advocated restricting banks’ holdings of their governments’ bonds. Finland says that’s not necessarily needed -- the key is to ensure that banks can withstand the actual risks stemming from the debt.

Finland’s four criteria:

• The reduction of banks’ exposure to the risks stemming from the home sovereign
  • Home-sovereign risk should be looked at in relation to banks’ own equity levels
• The reduction of risk from non-performing loans on bank solvency
  • NPLs’ share of total loan stock
  • NPLs’ accounting treatment (IFRS 9)
  • Appropriateness of provisions and write-downs made on NPLs
  • Adequacy and actual availability of collateral backing NPLs
• Ensuring crisis-resolution functions appropriately
  • Minimum requirements for own funds and eligible liabilities, or MREL, requirements included in national legislation
  • Regulations over banks’ loss-absorption capacity are included in bank-specific requirements and banks fulfill the requirements
• Ending any temporary easing of banking regulations that were brought in during the crisis years

--With assistance from Alexander Weber Boris Groendahl and Richard Bravo

To contact the reporter on this story: Raine Tiessalo in Helsinki at rtiessalo@bloomberg.net.

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net, Kati Pohjanpalo

©2017 Bloomberg L.P.