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Finland welcomes banking giant Nordea but move holds risks
September 11, 2017 / 4:54 PM / 3 months ago

Finland welcomes banking giant Nordea but move holds risks

HELSINKI (Reuters) - Banking giant Nordea’s (NDA.ST) decision to move its headquarters to Helsinki is being heralded in Finland as the ultimate endorsement that a long-lasting economic downturn is finally coming to an end.

FILE PHOTO: Casper von Koskull, CEO and president of Nordea Bank, the Nordic region's biggest financial group who announced on Wednesday evening that it'd move its headquarters from Stockholm to Helsinki, speaks during a news conference in Helsinki, Finland, September 7, 2017. Lehtikuva/Vesa Moilanen via REUTERS/File Photo

The Nordics’ biggest bank is set to become the largest company run out of Finland when it moves next year, overtaking fallen telecom giant Nokia (NOKIA.HE) in market value.

“There will be a lot of potential. We could get new players to the industry as we have a large bank that aims to grow internationally,” Finance Minister Petteri Orpo told Reuters.

“I think this has a big symbolic significance for all of us.”

But the move also has dangers.

It will make Finland the smallest country in the world to host a bank classed by regulators as systemically important globally and bring with it a balance sheet of more around 600 billion euros ($719.04 billion)- close to triple Finland’s annual economic output.

That leaves Finland at risk of a major economic hit if the government were ever called on to backstop its deposits or - in an extreme situation - bail it out.

“This is a very big bank for a relatively small country,” said Nicolas Veron, an economist at Brussels-based think tank Bruegel. “This creates additional risks for Finnish deposit guarantees.”

Moving to Finland brings Nordea into the regulatory sphere of the European Central Bank (ECB) and out from under what it said were unduly tough requirements from regulators in Sweden.

The ECB will be responsible for enforcing how much capital Nordea should hold and setting other requirements aimed to ensure that taxpayer money will not be used if it runs into difficulties.

But it will be the Finnish government that is responsible for making sure the first 100,000 euros held by Nordea depositors are guaranteed, and the Finnish taxpayers will be the ultimate backstop if a rescue were ever to be required.

That means the government must ensure its deposit protection scheme can safeguard additional bank deposits of around 90 billion euros following Nordea’s move - almost tripling the amount it currently has to backstop to around 140 billion euros.

Sweden’s central bank governor Stefan Ingves stressed that risk when he was quizzed by the media on Thursday.

“We will certainly see a discussion about to what extent the economy can cope with a banking system of that size if things go badly,” Ingves said.

“There must be enough money in that system, in an economy which is half the size of the Swedish economy.”

FILE PHOTO: Casper von Koskull, CEO and president of Nordea Bank, the Nordic region's biggest financial group, who announced on Wednesday evening that it'd move its headquarters from Stockholm to Helsinki, speaks during a news conference in Helsinki, Finland, on September 7, 2017. Lehtikuva/Vesa Moilanen via REUTERS/File Photo

A SOUND BANK

The euro zone’s regulatory framework has been transformed since the 2008 financial crisis to build in more safeguards and mechanisms for ensuring taxpayer money is not used to rescue banks.

Exceptions are still made, however. Italy deployed around 20 billion euros this year to shore up three of its banks.

Proposals have been made for a common European Union deposits scheme - meaning banks across the bloc would pay into a common fund - but they have stalled due to German opposition.

Tuija Taos, head of Finland’s Financial Stability Authority (FSA), told Reuters the risk that Nordea would ever require state money is very small.

    “First, this is financially a very sound bank,” she said. “In a rare bail-in situation, deposit guarantee fund could also be used. But that is extremely unlikely.”

    Shareholders and bondholders would be required to absorb any losses before any deposits or taxpayer funds were tapped, she said.

    Further, the Finnish banking sector, which also includes the privately-owned OP Financial Group and Denmark’s Danske Bank (DANSKE.CO), had an overall strong capital position as of end-March, according to the FSA.

    Eurosceptic Finnish politicians have blamed euro zone membership for the country’s economic woes in recent years. The economy fell into recession after the financial crisis in 2008 due to a series of problems, including declines in Nokia’s phone business, rigid labor markets and a slump in Russia, a major trading partner.

    Output is still below pre-crisis levels, but the economy is now recovering, with GDP expected to grow around 3 percent this year.

    Finance minister Orpo noted it was Finland’s membership in the euro zone that lured Nordea, which said in its announcement that it wanted to cut the costs of compliance in Sweden, which is not a euro member, and achieve a level playing field with ECB-supervised rivals.

    “This will strengthen the (banking) sector,” Orpo said.

    Still, the shift doesn’t promise many immediate economic benefits. The bank has said “quite a limited number” of jobs will move, and additional tax revenue will be limited.

    Economist Valtteri Ahti from Evli Bank said the main hope is that it help Helsinki’s financial sector compete in the Nordic region.

    “Nordic capital markets have consolidated and significant know-how has migrated to Stockholm and Copenhagen, and banks have deployed operations such as trading and research into these hubs,” he said.

    “The headquarters of major firms may attract complementary auxiliary services such as law and consultancy services. Nordea HQ brings some of that critical mass to Helsinki, perhaps encouraging new players into the financial sector.”

    Reporting by Jussi Rosendahl; Additional reporting by Simon Johnson, Helena Soderpalm and Niklas Pollard in Stockholm; Editing by Sonya Hepinstall

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