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Banks Warned Not to Hurt Nordic Risk Case With Complex New Swap 

September 14, 2016

Frances Schwartzkopff, Bloomberg

The head of Denmark’s financial watchdog is urging banks to think twice before resorting to capital relief instruments, or risk weakening Nordic efforts to fight global regulators eager to enforce more standardized models for predicting losses.

The instrument in question is a synthetic securitization, in which a bank transfers credit risk in its loan portfolio to investors, who in turn get a cash flow. Nordea Bank AB in August became the Nordic region’s first lender to complete a deal. But efforts to cut capital requirements using such instruments risk sending the wrong signal to global regulators, according to Jesper Berg, director general of the Financial Supervisory Authority in Copenhagen.

Nordic banks and regulators are fighting a proposal by the Basel Committee on Banking Supervision to introduce so-called capital floors, or minimum levels below which capital mustn’t fall. The region argues that such models don’t take into account the strengths of its markets in the same way that the current internal risk-based models do.

Denmark’s banks estimate Basel’s approach will add about $20 billion to their capital costs. In Sweden, the industry says the cost will be more than twice that. Read more

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