Europe and the United States are likely to agree on regulations governing the amount of capital banks have to hold by the end of the year, Stefan Ingves, chair of the Basel Committee on Banking Regulations, told Handelsblatt.
Mr. Ingves, who is also head of the Swedish central bank, leans towards stricter regulations for banks. But he also believes in compromise and told Handelsblatt that he believed an agreement was possible, and that it is his job to make that happen.
His comments came ahead of the meetings on Monday and Tuesday in Santiago, Chile where committee members, central bank chiefs and regulators from 27 countries will address questions such as how to assess risk.
The question is divisive; in Europe there is significant resistance to introducing far stricter regulations and representatives from Germany who sit on the committee threatened they wouldn’t necessarily agree to all compromises.
Further, in the run-up to the meeting, there has been concern about whether the committee’s members from the United States would have sufficient backing to agree to any new rules. However, Mr. Ingves said it was early days, too soon to say whether the U.S. election will affect the committee’s work and explained why he is optimistic about its prospects.
Handelsblatt: Mr. Ingves, in Sweden, cash may soon be extinct. When will you abolish it completely?
Stefan Ingves: It depends upon who you ask. But some people already guess in five to ten years. We are one of the very few countries in the world where the nominal outstanding amount of money actually is going down – and this is happening quite quickly. The use of notes and coins dropped in five years by roughly 40 percent to about 60 billion kronor. This is almost completely a concept of technological change.
Isn’t that dangerous? If banks fail, people can protect their money by withdrawing it: a deposit is a loan to the bank – and therefore less protected.
That is absolutely correct. And that’s why we on the central bank side have to think really hard and carefully about whether we should or shouldn’t introduce an electronic form of cash which the general public can hold.
So money would be safe from bankruptcy?
So far only a bank can deposit money with us and therefore have a safe central bank money account. A normal citizen can have central bank money only as notes and coins. That will lead to a debate if the use of physical cash is shrinking rapidly and the public doesn’t have access to central bank money. This is the conceptual side to our E-Kronor project, it isn’t just about technology.
Some banks in Europe have severe problems which could have been fixed many, many years ago. But parts of Europe have persistently not wanted to do that. And now it's coming back to bite Europe as a whole.
Would negative interest rates affect this electronic central bank money as well?
That’s for the future to decide. But let me put it like this: This will take many years. Cash is not going to disappear, the use of cash will only go down.
Are you discussing with other central banks?
This is an issue all over the world. But the difference between us and many others is that we can’t wait.
You restructured the Swedish banking sector in the 1990s and fought the consequences of the global financial crisis. Has the world drawn the right conclusions from the crisis?
Broadly speaking we are going in the right direction. You can discuss back and forth how many years it has taken to reach the point where we are today. But basically the conclusions – that banks needed to improve the quality of their capital to increase the level of capital and that we needed to think more about liquidity and liquidity risks – have remained. I have chaired the Basel Committee for nearly five and a half years on these issues. Now we are approaching the point where all the bits and pieces are finalized so that they can function together.
Recently there’s been more opposition to too strict rules – the Vice President of the European Commission, Valdis Dombrovskis, threatened not to implement the new rules if the capital requirements for European banks would increase too much.
The Basel committee has been around since 1974. Of course, when there are different views, it can take a bit of time, but the end result has always been a consensus. And belonging to the club is voluntary. So right now, we’re trying to finish the Basel III reform package.
Why are Europeans so opposed to the reform proposals, can’t they afford new, stricter rules?
The shape of the European banking sector is a different topic. Some banks in Europe have severe problems which could have been fixed many, many years ago. But parts of Europe have persistently not wanted to do that. And now it’s coming back to bite Europe as a whole, particularly in an environment with low interest rates. The whole of Europe is paying for it.
Many households here got into their heads that it is okay to never pay back debt. That is a danger to the Swedish banking system and the economy.
Has the Basel Committee now got to agree on less strict rules because governments haven’t stabilized banks?
Again, this is important, these are two different things. There is the work of the Basel Committee, which is working on a global minimum standard for banks – and let’s hope that we will achieve that. Dealing with a banking sector in trouble is a different thing. That can really cost money. But if you don’t fix your banking system, then you get a problem with the real economy. That hampers growth. There are losses a society never can recover from. So you have to avoid this kind of problem.
But the battle lines in the Committee between the U.S. and Europe seem to be hardened – are you optimistic that you achieve a consensus as planned by year end?
I truly hope so, and it is my job to make that happen. We have made a great effort to organize the work in a way that the work can be concluded.
Is the result of the U.S. elections influencing your work?
It is way too early to tell that. But you should keep in mind the composition of the Basel Committee, it’s an expert committee; there are mostly central bankers and supervisors.
Sure, but at the end of the day, someone has to implement the rules.
That is correct. But compared to the past we’re now looking at the implementation of our rules in different jurisdictions and countries. We did that successfully with capital requirements. We are literally talking about member countries making hundreds of adjustments to our rules domestically.
There’s a clear position of the Basel Committee that completing the Basel reform shall not increase the capital requirements “significantly”. How do you define “not significantly”?
What is understood is the fact that the present system that banks use to calculate risk weights based on the bank’s own models lost credibility during and after the financial crisis. So we want to identify the outlier banks. If two banks have roughly the same portfolio, but the risks and therefore the capital requirements they are calculating is very different, then we have to reduce this variability, so that the system as a whole remains credible.
Europeans say their banks suffer much more than U.S. banks. Can a whole regions be an outlier?
The Basel Committee’s focus is the whole world. So I have a global and not a regional perspective. But at the same time it seems that some people are arguing that things are supposed to change but at the same time, nothing is supposed to change. That just doesn’t add up.
As a Swedish regulator, can you tell us why Swedish banks seem to be far more stable than many of their European peers?
We had a very serious banking crisis in the early 1990s. That banking crisis caused substantial structural changes in our banking sector which have been resisted in many other places. Especially the cost structure has been lowered drastically. The cost-income ratio is about 45 percent. Look at some of the big German banks, they have 90 or 95 percent. The fixed cost base of many European banks is way too high in relation to what they earn.
What could German banks learn from their Swedish peers?
I am not an expert on the German banking sector. But in Sweden we allowed a very large structural change in the savings and cooperative banks sector, for example. Almost all of our savings banks, of all sizes, were merged into Swedbank in the early 1990s. And all the farmers’ cooperative banks were also merged into Swedbank. That process didn’t happen in many other countries.
But the saving banks and the cooperative banks in particular did fine.
For now. But one way or the other, you have to deal with the cost structure.
But you are not completely happy about the situation in Sweden either. You’re concerned about the high debt levels of private households, right?
Absolutely. Our housing-market is dysfunctional. For years, our private households have borrowed too much and they continue to do so. Different to Germany, where it is common to amortize a loan continuously, many households here got into their heads that it is okay to never pay back debt. That is a danger to the Swedish banking system and the economy. But so far, on the political side there has been a great unwillingness to deal with this. That increases the dangers in our system by the day. Because our banks are roughly 3.5 times GDP.
You think that politicians will ever listen to you?
Recently I spoke in the Swedish parliament and this was one of the first times when my sense was that everybody in the room accepted that this is a problem. And that’s a step forward. But we are very far from having solved the problem.
You are contributing to the willingness to get into debt because of your negative interest rates.
That is correct. But the problem is: If we increase interest rates significantly, it would become even more difficult to increase inflation to our inflation-target of two percent. Our currency would most likely appreciate substantially and that would probably lead to lower growth and increasing unemployment. And at the same time we have this problem with our housing-market. So the best solution would be if politicians would take the necessary measures against over-heating of the housing market, for example, by allowing the supervisors to say no to certain lending practices.
How are Swedish banks handling the negative interest rates?
The return on equity of Swedish banks is about 12 percent. They have a low cost base and are profitable. They have more fee-based business, because they sell mutual funds to customers. Therefore it is not an issue. And we don’t have the debate about people using very much cash.
Yasmin Osman writes about banking and finance from Frankfurt for Handelsblatt. To contact the author: firstname.lastname@example.org