I just returned from Stockholm where I participated in a workshop on the Banking Union from a Nordic-Baltic Perspective. The banking union was established as reaction
to the Eurozone crisis and so far only Euro countries have been participating in the SSM and SRM. However, non-Euro EU member countries also have the option to join (once the ECB has vetted the regulatory and supervisory quality of the applicant). Sweden
is currently undertaking a public inquiry into whether or not it should join the banking union and in this context I was asked to prepare a report that I now presented, followed
by discussions from Professor Lars Calmfors and Steen Lohmann Poulsen from the Danish government (who is also considering joining the banking union). This was followed by a fascinating discussion among
Nordic-Baltic supervisors on the banking union, the special situation of Nordea and – not surprisingly – money laundering problems and how to address them.
The establishment of SSM and SRM has had an important impact not only
in the participating countries but also repercussions for non-Euro EU member countries. Rather than dealing with national supervisors they deal with the SSM in the case of significant institutions (118 banks in the Eurozone). Their rights as host country supervisors,
however, have been strengthened, especially in the cases of significant branches and with the European Banking Authority taking an important mediation role between supervisors (binding as long as it does not infringe on fiscal policy). This is especially
important since Nordea decided to move its headquarters from Stockholm to Helsinki last October and thus from Swedish supervision into the SSM perimeter, leaving its operations in Sweden in the form of a branch (and not a self-standing subsidiary)
Sweden’s banking system is closely interconnected with the rest of the Nordic-Baltic region. Four (since October three) of the six largest Nordic banks are headquartered in Sweden. Most of the cross-border banking activity in the Nordic region is
done by Nordic banks and banks from outside the region generally have low market shares. The four largest Swedish banks have presence – in the form of either branches or subsidiaries – in most neighbouring countries. In line with
my work with Wolf Wagner it is thus not surprising that the Nordic-Baltic countries have taken the lead in developing more intense forms of cross-border supervisory cooperation, starting
with the establishment of a supervisory college for Nordea, which emerged from a cross-border merger in 2001. This was followed by Memorandum of Understanding (MoU) on the "Management of a financial crisis with cross-border establishments" in 2003, thus
well before the Global Financial Crisis that saw the failure of several large cross-border banks in Europe. A Crisis Management Group for Nordea was established in 2012 after its designation as G-SIB (which also effectively replaces the resolution college,
mandated under the BRRD). Finally, in 2011, the Nordic-Baltic countries established the Nordic-Baltic Macroprudential Forum (NBMF) to complement bank-level supervisory cooperation with systemic stability cooperation, an informal forum with no formal decision
powers. Finally, there are arrangements between the central banks of Denmark, Norway and Sweden on utilisation of central bank deposits at one of the central banks as collateral for intraday liquidity lending in another of the three central banks (Scandinavian
Given this rather close cooperation within the region, would it make sense for Sweden to join the banking union? Four of the other countries are already in it – Finland and the Baltics – and Denmark is considering
it, too (as non-EU country, Norway will not be able to join). There are some arguments in favour. Sweden would gain a seat at the table and would benefit from scale and scope economies of the SSM and its enormous expertise. Joining the banking union would
also help avoid supervisory divergence from the Eurozone and would allow Sweden to more easily participate in the Single Market in banking, benefitting from its efficiency and competition.
However, there are also arguments against it.
There will certainly be a loss of independence, as rather than being part of the supervisory and resolution colleges for its main banks, Swedish supervisors would supervise these banks together with SSM staff in Joint Supervisory Teams. The major banks would
also become part of a Single Point of Entry resolution procedure in the case of failure, another bite into independent regulation. A second major argument is that while Sweden might have a seat at the table, its influence might not be as large as that
of larger and more important banking systems. Finally, it would never be a full-fledged member of the banking union: it would not have a vote in the Governing Council of the ECB that – in case of disagreement – can overrule decisions of the Supervisory
Board where Sweden would be a member. Sweden would also not be part of the lender of last resort component of the Eurozone financial safety net and it is not clear to which extent it would benefit from a backstop for the Single Resolution Fund from the ESM.
Most important for my final conclusion, however, is the fact that the banking union is still under construction. The insurance component, which might make the banking union attractive for smaller non-Euro countries has not been fully developed
yet, in the absence of deposit insurance. There is also the issue of legacy losses in Southern Europe still haunting the banking union and ultimately limiting a push towards full mutualisation of risks. Overall, there are lots of questions to be answered
that I assume would be part of a negotiation process if Sweden (perhaps together with Denmark) decides to explore more formally entering the banking union. Ultimately, my conclusion is that having the option to join the banking union is valuable; it
is less clear whether now is the optimal time to exercise this option, especially given the incomplete structure of the banking union. A wait-and-see approach might be preferable at this stage. Interestingly, this conclusion was support by Lars Calmfors (who
in the 1990s led a task force on the possible participation of Sweden in the Eurozone).
There was an interesting additional perspective from Denmark – on the one hand, the Danish financial system shows quite some particularities
that the Danish authorities fear might not be completely compatible with current banking union rules; on the other hand, there is an important political economy argument that – after Brexit – the club of non-Euro countries will lose influence and
it might be more helpful to be part of the club, even if only as a part-time member. A final complication is that possibly a Danish banking union participation might have to be approved in a referendum (which brings rather unpleasant memories to this
resident of the UK). Which brings me to the final point – one cannot ignore the political economy dimensions. Delegating the financial safety net to a supranational authority is an important step that requires proper democratic vetting and backing.