Examining the Major Banking Organizations of Sweden

Banks are of central importance for economic growth, credit allocation, financial stability, and the competitiveness and development manufacturing and service firms. The structural features of Sweden banking systems have changed significantly over the past 20 years. The increased availability of credit has been the corollary of the dismantling of barriers of trade in Sweden financial services. Sweden banking and finance sector has undergone considerable change in recent years. This has created greater competition, not only among older banks but by the establishment of new Swedish and foreign financial institutes and the main features are Banking and finance has been liberalized and deregulated in Sweden, Banks have long experience in international business and International banks now highly active in Sweden. Before entering into the details of the above given reasons, we will be looking at the main structure of the Sweden banking system. In Sweden there are three different types of banks: commercial banks, i.e., limited liability banking companies, savings banks and a few cooperative banks. All these types of banks are entitled to engage in all types of banking activity. The number of banks has declined sharply as a result of mergers, a tendency that has been most marked among the savings banks. From some 450 savings banks of the 1950s, the number had decreased to 85 by the late 1990s. Since the middle of the 1980s, however, numerous new banks have been established in Sweden. The market structure can be described as two-tiered with five large banks (Handelsbanken, Skandinaviska Enskilda Banken, Nordbanken and Förenings Sparbanken as well as the Swedish subsidiary of a major Danish bank) having a combined market share of about 75-85 percent; the residual market is shared among around 100 smaller banks. The home market for Swedish banks has to a greater extent been seen to embrace not only the traditional Nordic area but the whole region surrounding the Baltic Sea.

The four major Swedish banks are very broadly held. The largest owners are the Swedish government (less than 20 percent in Nordea), the Wallenberg-led investment company Investor (some 10 percent in SEB), the employees' pension fund (some 10 percent

in Svenska Handelsbanken), and the former savings banks foundations (some 20 percent in

Swedbank, which was earlier a savings bank, which merged with a cooperative bank and became a commercial bank). Approximately one third of bank shares are held by non-Swedes. The medium and small-sized banks are generally held by one dominating owner, which in turn may have a widely spread ownership, such as Skandia. All savings banks are non-profit organizations and they are held by foundations. The Swedish Financial Supervisory Authority is a government authority responsible to the MoF. It exercises supervision over banks, credit market companies, and additionally e.g., insurance companies, insurance brokers and securities companies. The Central Bank Act assigns to the Riksbank the responsibility to ensure a stable and efficient payment system. It also assigns to the Riksbank the responsibility for monetary and exchange rate policy (including the management of the gold and currency reserves), as well as managing the issue of notes and coins, providing a clearing function for banks as well as accepting deposits from banks and granting them loans. The Central Bank also functions as lender of last resort providing financial aid to banks experiencing liquidity problems.

Early 1990s, Sweden was in the middle of the most serious economic crisis. Unemployment increased fourfold in the course of a few years and the central government finances deteriorated dramatically. This crisis has been attributed to deregulatory measures taken in 1985 which contributed to overly repaid credit expansion which led to a banking crisis followed by a currency crisis in 1990. The result of deregulation was obvious. In the course of just five years, the credit to GDP ratio for private sector moved up from 85 to 135 per cent (Governor Backstrom, 1997) Deregulations, on the one hand. Credit market deregulation in 1985, necessary in itself, meant that the monetary conditions became more expansionary. This coincided, moreover, with rising activity, relatively high inflation expectations, a tax system that favoured borrowing, and remaining exchange controls that restrained investment in foreign assets. In the absence of a more restrictive economic policy to parry all this, the freer credit market led to a rapidly growing stock of debt (Fig.). In the course of only five years the GDP ratio for private sector debt moved up from 85 to 135 per cent. The credit boom coincided with rising share and real estate prices. During the second half of the 1980s, real aggregate asset prices increased by a total of over 125 per cent. A speculative bubble had been generated. Step by step the Swedish economy became increasingly vulnerable to shocks. During 1990 matters came to a head. Competitiveness had been eroded by the relatively high inflation in the late 1980s, resulting in an overvalued currency. This caused exports to weaken and meant that the fixed exchange rate policy began to be questioned, leading to periods with relatively high nominal interest rates. Moreover, the tax system was reformed in order to reduce its harmful economic effects but this also contributed to higher post-tax interest rates. Asset prices began to fall and economic activity turned downwards. Between the summers of 1990 and 1993 GDP dropped by a total of 6 per cent. Aggregate unemployment shot up from 3 to 12 per cent of the labour force and the public sector deficit worsened to as much as 12 per cent of GDP. A tidal wave of bankruptcies was a heavy blow to the banking sector, which in this period had to make provisions for loan losses totalling the equivalent of 12 per cent of annual GDP. After this crisis when Basel II came into existence than Sweden's golden period starts as common international regulation and framework for the banking industry are of great importance for the reliability and development of financial systems and countries' economies. One such framework is Basel ll which was presented in 2004. It is based on Basel I which consisted of a credit risk measurement guideline and minimum capital requirement. Basel II consists of three pillars in which minimum capital requirement, the supervision process, and market discipline are regulated (Finansinspektionen 2002). The intention of Basel II is to lower banks capital requirement by offering banks the ability to choose a method that reflect their when calculating risk (BCBS, 2004).

BCBS , the Basel committee on banking supervision ,presented a study called the fifth quantitative impact study (QIS 5) in 2006 that was based on data from the fall of 2005 (Finansinspektionen 2006 ). The purpose of the study was to examine how Basel II can be expected to affect bank with regard to their capital requirments. The study showed that the minimum capital requirement could be reduced with Basel II in comparison to Basel l. BCBS had not presented any other study after QIS 5 indicating how Basel II had affected the banking industry. This study aims to fill part of that gap by examining how capital ratio, the net credit loss level, and the degree, and the degree of disclosure have progressed for the four largest banks in Sweden during the implementation of Basel II as this has not previously been looked at. Hypothesis regarding the impact Basel ll has had on these variables will be presented based on these observation. To be able to make better hypothesis regarding the impact of Basel ll, the impact of the economic climate on these variable was investigated by creating a market indicator which consisted of the banks' average net profit.

The Swedish financial market and other factors

Efficient and reliable systems for saving, financing, mediating payments, and controlling risk are vital for the well-being of the Swedish economy. These systems are handled by banks and other credit institutions, insurance companies, securities companies and other types of enterprise in the financial sector. The financial industry account for just over four per cent of the country's total output, defined as its Gross Domestic Product (GDP). More than 90,000 people, about two per cent of the country's total working population, work in the Swedish financial industry. The financial sector has expanded rapidly during the past decade. Established companies have broadened the scope of their business, and many new companies have entered the market. One important change is that banks and insurance companies have moved into each other's areas, and as a consequence, all of Sweden's major banks are now involved in the life insurance business and some insurance companies own their own banks. Another change is that customers are banking more and more via the internet or the phone. These new channels of distribution have enabled the development of new services and intensified competition on the banking market through the establishment of new banks. Moreover, Swedes are investing increasingly in funds and insurance policies as they turn away from traditional bank saving. More than 85 per cent of the population have some of their savings in funds or equities, which by international standards is a very high proportion.

Deposits and lending

The core activity of a bank is to accept deposits and provide credit. At the end of 2002, bank deposits from the public (i.e. mainly households and non-financial enterprises) amounted to 1,242 billion kronor. The bulk of these deposits - approximately 42 per cent - come from Swedish households. Swedish companies account for around 32 per cent of total deposits and foreign depositors for some 22 per cent. Bank lending has increased in recent years, to reach 1,360 billion kronor by the end of 2002. 47 per cent of this lending to the public goes to the Swedish business sector, while households and foreign borrowers account for 21 per cent and 27 per cent respectively.

Interest rates

The interest rates banks set for their deposits and credit are largely dependent on the rates prevailing on the money market. Other factors that influence interest rates include the creditworthiness of the borrower, competition among credit institutions, and competition for different types of saving. The average rate of interest paid and charged by the banks has been declining steadily since the beginning of the 1990s. The interest spread - the gap between the average interest rate received on credits and that paid on deposits - has also tended to narrow during the same period.

Safe and efficient payment mechanism

Another important function of a bank is to provide a means of payment. The Swedish payment system, which includes the bank giro service and the postal giro, is technically rather advanced, and has a reputation for efficiency. This means that payments are transacted quickly, securely and at low cost.

Mortgage market

In Sweden, mortgage loans are usually provided by specialist credit market companies known as mortgage credit institutions. The total volume of outstanding loans of these institutions amounted to SEK 1,200 billion at the end of 2002. For many years now, lending by mortgage credit institutions has exceeded the volume of bank lending in Sweden. The mortgage credit institutions provide credit primarily for residential property, but also for commercial and office buildings and municipalities.

Mortgage loans are secured by collateral, normally in the form of a mortgage on the property. The lending consists of a first mortgage, which involves pledging the property for up to 70-80 percent of its value. Additional credit is then often provided in the form of a second mortgage by the bank that owns the mortgage institution or by another bank with which the institution co-operates. Mortgage institutions offer a wide range of credit facilities at variable or fixed interest rates.

Internet banking

Swedish banks are among the most advanced in internet banking services. All major banks in

Sweden offer online status on accounts and other assets, online payments, and the possibility to buy and sell units in funds and shares. Corporate customers have been able to bank via the internet for many years. At the end of 2009, there were a total of around 50, 00000 internet banking users and approximately 15million internet payments. Internet surveys show that customers are very pleased with the Bank's online service. This was confirmed by IBM and Interbred, which ranked FSB as number one in Europe and number two in the World (Swedbank AnnualReport, 2009).

Monetary policy update

The Swedish economy is performing well, and GDP grew by almost 7 per cent in the third quarter of this year, compared with the same quarter last year. The strength of the Swedish economy is also reflected in the labour market statistics. The labour market has been recovering throughout 2010 and indicators point to a continuing rapid improvement. The world economy is expected to grow by a good 4 per cent a year in the coming years. Economic activity remains good in the emerging economies in Asia and Latin America. In both the United States and the Eurozone, economic prospects look slightly better in the short run than was forecast in the October Monetary Policy Report. At the same time, the global imbalances remain and concern over public finance in several countries has increased. Despite the relatively divided international outlook, the indicators for the Swedish economy point to continued strong growth in the coming period. GDP growth is expected to amount to 5.5 per cent in 2010 and to over 4 per cent in 2011, and then to decline. The recovery has been relatively rapid and Sweden is also expected to experience higher growth than many other countries in 2011.

Resource utilisation is currently lower than normal, but is expected to be normal or slightly above normal towards the end of the forecast period. Underlying Inflation measured as the CPIF was 1.9 per cent in November. It is expected to fall at the end of 2011 and then rise again towards 2 per cent. Higher mortgage rates will lead to the CPI rising slightly faster than the CPIF and it is expected to exceed 2.5 per cent in 2013. In the longer run, when the repo rate stabilises, the two measures of Inflation will coincide. To stabilise Inflation close to the target of 2 per cent and avoid resource utilisation becoming too high, there is a need to gradually raise the repo rate towards more normal levels. The repo rate is therefore being raised to 1.25 per cent. The forecast for the repo rate remains largely unchanged in relation to the forecast in the October Monetary Policy Report.

Environmental factors in Sweden banking

Sweden is a democratic monarchy. It is the largest Scandinavia country with over 9 million inhabitants. Sweden has been known for its neutrality and policy of non-alignment with either NATO or the Warsaw Pact. It is a member of most international organizations (UN, UNESCO, WHO etc). Sweden has been a member of the European Union since 1995 but decided not to join EMU. A referendum in 2003 rejected the euro by a decisive margin - against the advice of the government and the wishes of business. The Prime Minister stated it was unlikely there would be a new referendum before 2010.

Key economic indicators for 2008 estimates (Source: Central Intelligence Agency Country Profiles) 

69.6% of the economy is in the services sector, 28.9% industrial and 1.5% agriculture. 

Population: 9,045,389 

GDP: USD 358.4 billion 

Per capita GDP: USD 39,600 

Real GDP growth: 0.9% 

Unemployment: 6.2% 

Public debt/GDP: 36.5%

Cash Management Features

Activity is highly automated with major activity inside the Bankgirot and Plusgirot systems. Rather than hold accounts in both and maintain liquidity in both, it is possible to hold accounts just at the Nordea group, into which the Plusgirot has been subsumed. 

The EUR has emerged as a parallel domestic currency for business, notwithstanding Sweden's rejection in 2003 of EUR membership. The old E-RIX system that was connected to TARGET and used to settle domestic EUR trade has been abolished. EBA is now used to settle EUR transactions. Group account (Balance netting) is the preferred Liquidity Management technique domestically, and can be used for both single and multi-currency. Zero balancing is also available domestically and is getting more common than earlier due to multinational corporate customer

Payment infrastructure in Sweden 

Most Swedish companies have a business account in a Swedish bank. The majority of domestic non-cash payments are affected through the two giro systems, PlusGirot and Bankgirot.

PlusGirot -: The PlusGiro system is a part of Nordea. Thus, Nordea is the only bank in Sweden that can provide a connection to both PlusGirot and Bankgirot in SEK or EUR, meaning an all-in-one account for all the payments regardless if they are routed through the PlusGiro or the Bankgiro system. 

Bankgiro -: The Bankgiro system is operated by Bankgirocentralen AB (BGC), a bank-owned subcontractor of payment processing services. All banks in Sweden participate in the Bankgiro system. It functions as an automated clearing house (ACH). Payments can be made in SEK or EUR.

 Payment Instruments

The vast majority of activity clears electronically: there is a high degree of automation. This is supported by very high usage of internet for payment initiation. There is still a form of paper-based credit transfer but the clear growth is in electronic initiation. This extends to electronic bill presentment, where the debtor can initiate a credit transfer in their electronic banking by clicking through form the bill itself. In terms of volume, credit transfers and debit cards are the most used, whilst in terms of value it is credit transfers. Sweden has a high density of ATMs and EFTPOS, and this is the part of the payments market that is growing most dynamically.

Cheques

Electronic payment ( The RTGS system in Sweden is operated by the Riksbank)

Cards

Internet banking

These all are the factors in the Sweden banking environment which make the Sweden banking system much stronger than any other banking system. Sweden is capable of providing all the facilities to its consumers and its partners domestically and internationally and Sweden is having the biggest usage of internet banking amongst all other countries and more advance at this moment.

Future Activities in 2011

The Riksbank's financial stability works in 2011 was largely characterised by the financial crisis and its aftermath. After having stabilised in the winter of 2010/11, unease again increased in the financial market in springs 2010 as consequence of the state of the public finances of several countries in the southern Europe. The unease became acute in May in connection with the downgrading of the Greek government's credit rating. The aftermath of the financial crisis is the extensive work continued of reforming national and international regulatory codes and improving supervision of the financial crisis. An important part of this work in Sweden is to clarify the Riksbank's responsibility for financial stability.

New international regulatory frame work

A large part of the Riksbank's stability work was focused during the year , as in 2010, on studying and influencing the framing of the future financial regulatory framework of future financial regulatory framework and supervision .since Swedish banks and financial institution are governed by law framed at EU level, which in turn to a great extent are based on guideline drawn up by other international bodies, the Riksbank participated in continued discussions both at EU level and within the bank of international settlement (BIS). During the year a new regulatory framework for financial institution called Basel III was established.

Increased cross-border work

The financial crisis has shown that there are great differences in the legislation at national level. Because of these differences, during the crisis it was difficult to handle problem in banks that operates in several different countries. Consequently several international projects are in progress that, address how banks with cross border operations are to be dealt with (For Example, First Deputy Governor of the Riksbank Svanté Oberg). In 2010 the Riksbank also took part in the preparatory work ahead of the start-up of the new European system risk board (ESRB) in 2011.

A coherent regulatory framework and cleaner division of roles between authorities in Sweden

In view of the lessons learned from the financial crisis and the extensive regulatory work that is in progress in the international arena, the Riksbank believes that it is important to carry out a thorough overhaul of the financial regulatory framework in Sweden as well. The general Council of the riksbank and the executive board of the riksbank and the executive board of the Riksbank accordingly proposed in a joint submission to the Riksdag that one or several inquiries should be set up to review the regulatory framework in the financial sector.

The Swedish banks' resilience continued to improve in the second half of the year as a result of the economic recovery the situation of the Swedish bank continued to improve. The economic recovery had become stronger than previously expected. Consequently, the Swedish banks loans loss continue to fall and according to Riksbank forecast in the financial stability report in December they were lower than the Riksbank had expected in June.

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