“FI should immediately initiate an investigation of Nordea,” it says in the preamble of the memorandum is dated 16 March this year. The author is working on FI Nations department of internal models just reviewing banks’ risk assessment.
SvD Business is talked to the expert, but he would not comment but refers to FI’s press department.
According to information openly available online, he has worked fifteen years in the financial industry including as an equity analyst on the US big bank Morgan Stanley in London.
Since SvD Business on Monday evening published the first article of the memorandum, agency management, as well as Nordea, made every effort to play down the importance of it.
When SvD Business earlier this week interviewed Fi’s Deputy Director General Martin Noréus he said this:
– the memo contains no assessment of capital or lack of capital in Nordea. It would in no way help the market get better information.
SvD Business can to show that the statement is not true.
FI chosen to classify the entire memorandum. But SvD can today publish the document.
The memorandum is one long argument, and advanced calculations at the equity gap in Nordea, which amounts to huge amounts.
To enter the FI’s experts in the memorandum.
“a rough calculation shows that if the bank would adjust their PD estimate to a reasonable level of exposure class companies would capital requirements increase by approximately SEK 50-80 billion.”
the text is worded complex financial language but can be translated into plain Swedish.
PD is short for probability of default, which means the probability of Nordea’s corporate collapses within a year.
this is the core of the lack of Nordea is revealed in the document from the FI. It’s about Nordea systematically underestimated the risks when they lent money to the company.
Thus, they have also put in too little capital to act as an air bag in a financial crisis.
what airbag will be partly determined by the banks themselves, and depends on how risky they think their lending.
This is known as risk-weighted capital requirements. The logic is simple: the higher risk of lending the more capital is required.
Banks may count on the risks themselves with the help of so-called internal models. These must be approved by the FI.
One of the main ingredients of these models is the likelihood that business customers will go out of business.
Here you can download the document in its whole.
the rules clearly say that there should be a conservative calculations, the bank should thus be more pessimistic about the future compared to how it had happened before.
the one who had ten corporate bankruptcies per year will count on more than that when the forecasts to be formulated.
the memorandum from the FI, which SvD now publishes, displays black and white that Nordea stands out properly compared with other major banks.
“Nordea PD estimates for corporate exposures are on average at half the level of outcomes, ie PD estimates would need to be doubled just to get up to the level of outcomes, this notwithstanding the margin of safety regulations prescribe. “
Translated, this means Nordea consistently been too optimistic about the risks of lending to companies.
According to the memorandum, this large impact on the size of Nordea’s airbag, ie how much capital Nordea will have to meet the regulations.
Nordea believes that the bank will only have half the number of bankruptcies in its loan portfolio compared to how it looked historic. No safety margins at all, in other words.
expert on FI compares with two other large banks in Sweden. They count instead of far more bankruptcies than they had before, the numbers 86 and 45 percent more bankruptcies than before, according to the memorandum.
Another bank with a 10 percent margin has been reprimanded by the FI and it has also started an enforcement case against the bank in question that is still ongoing. The aim is to get the bank to increase margins.
In the memorandum, the author shows the impact on Nordea’s capital buffer if they could instead use a safety margin of between 40 and 80 per cent, ie the same as the banks above.
This would mean that capital requirement rises dramatically. The range lands at 54-78 billion. It is this which is the main conclusion of the memorandum and that is also why FI urged to act quickly.
The calculation indicates that Nordea would likely have to make an immediate rights issue to meet the requirements of the FI.
When SvD Business earlier this week asked the Financial Supervisory Authority Deputy Director General Martin Noréus Nordea meet capital requirements, he replied:
– Yes, if a bank does not meet the capital requirements, we can not sit still, then we must act.
Nordea refuted strongly data in SvD Enterprise’s first publication of the memorandum.
Nordea’s CEO Casper von Koskull said to Dagens Industri that the figures appear “completely devoid of basis in reality.”
He also denied that the bank underestimate their historical credit losses.
“We are comfortable with our models. It is clear that they are not misleading, absolutely not, “he told DI.