Nordics seek ‘polluter pays’ bank tax to fund crises

HELSINKI | COPENHAGEN: Sweden, Finland and Denmark are promoting a European Union-wide bank levy to force lenders to help share the clean-up costs of future banking crises.

“Making the polluter pay makes a lot of sense,” said Brian Mikkelsen, Danish economy minister, in an interview.
Former Federal Reserve chairman Alan Greenspan and New York University Professor Nouriel Roubini are among fans of how Sweden solved its banking crisis in the 1990s. Reforms introduced then helped inoculate the Nordic region from the sub-prime meltdown that cost the rest of Europe’s banks $585 billion in losses, making Scandinavia a source of inspiration as the EU tries to reach agreement on new financial regulations.

“If I should bet on something, I would say some time next year we will have some kind of pretty harmonised way to organise the bank levy,” Finnish Finance Minister Jyrki Katainen said in an interview. “They have a very good model for this in Sweden, we could copy that model on the European level.”

Sweden created a stability fund in October 2008 obliging its banks to contribute an annual fee equal to 0.036% of the value of their liabilities, excluding some subordinated debt. The Swedish fund, which the government estimates will swell to about 2.5% of gross domestic product by 2023, had accumulated 30.8 billion kronor ($4.59 billion) at the end of June, according to the National Debt Office, which manages the fund.

Risk Compensation

The European Commission is due to propose a package of crisis management measures, including regulatory reform, next month and European finance ministers are discussing the bank levy in Brussels today.

“We strongly believe that we should introduce a bank levy,” in the EU, Swedish Finance Minister Anders Borg said in an interview. “Bankers should pay for the risks they‘re adding to the economy.” He says the best model doesn’t “harm banks with strong equity levels,” by taking their equity into account when calculating contributions. Sweden’s government will generate a profit of about $750 million by 2015 as lenders contribute more to its fund than the state pays out, the debt office said on August 10.

In June, the UK government said banks with more than £20 billion ($32 billion) in assets face an annual £2 billion levy. In Germany, Chancellor Angela Merkel on August 25 approved a bailout fund into which banks must contribute E1.3 billion ($1.77 billion) a year. French Finance Minister Christine Lagarde said on July 4 her country wants to introduce a risk-weighted tax on lenders.

Funding Recovery

Detractors say a bank levy will make borrowing more costly and hamper economic recovery. “Banks that are trying to continue funding the real economy are being made to pay on all fronts,” said Florence Ranson, a spokeswoman at the Brussels-based European Banking Federation, an umbrella group for bankers’ associations in the EU. “We don’t favour the idea of a bank levy when banks already need to comply with strong capital requirements and many have reimbursed all state aid.”

Basel III will require lenders to have common equity equal to at least 7% of assets, weighted according to their risk, including a 2.5% buffer to withstand future stress.

“The global financial crisis was so massive and left such a deep scar that it’s understandable that there are a lot of political initiatives like this one,” said Piia-Noora Kauppi, managing director of the Federation of Finnish Financial Services, in an interview. Even so, “we don’t see a need for a bank levy.”

A tax on lenders “will increase the cost of financing to an extent,” said Bank of Finland board member Seppo Honkapohja in an interview. It also “would help to stabilise the banking system.”

Behaviour Modification

A bank levy could be used to change banks’ behaviour so as to prevent future crises, according to Sony Kapoor, a former Lehman Brothers Holdings investment banker who now runs a London-based advisory firm called Re-Define.

“Having any levy in place, even if it’s a small one, allows regulators and governments to change the structure, to induce behavioural change,” he said. “The longer the financial reform discussion goes on, the greater the opportunities for banks to use their lobbying power to water it down.” The Nordic region’s 1990s banking crisis cost Finland 5.3% of GDP, compared with 0.2% in Sweden, according to data compiled by Knut Sandal, director of Norges Bank’s payment systems department.

The largest Nordic lender, Nordea Bank, is the product of a merger pushed through by the Swedish government in 1993 between Nordbanken and Gota, two regional lenders that failed when the country’s real-estate bubble burst. Their toxic assets were thrown into a so-called bad bank. Nordea also absorbed Finland’s Merita Bank and Denmark’s Unibank.

“Transparency, recapitalisation of banks and an asset management entity were basic elements that were put in the toolbox in the 1990s Nordic banking crisis,” said Honkapohja. “The way the crisis was managed is considered exemplary.”