Nordea Group is the leading financial services group in the Nordic market. It is the biggest bank by total assets in Sweden, Finland and Norway and the second in the Danish banking sector.
It was unexpected news when Nordea announced its strategic decision to re-domicile its parent company from Sweden to Finland. The economic impact of the move is significant: in 2016, the banking group recorded €615.7bn in total assets and €4.6bn in pre-tax profits. That year, it paid €859m in taxes.
To contextualize the significance of Nordea in the Nordic market, one can compare its size with the other biggest banks in Finland and Sweden. The Swedish banking sector has three major players other than Nordea. Svenska Handelsbanken, the second biggest bank in total assets, and SEB Group, the third player in the country, which recorded assets of €263.7bn and €262.3bn respectively. The other large bank is Swedbank with €215.2 in assets.
In contrast, in Finland, there are only two banks which have assets larger than €100bn. In 2016, the first player was Nordea Finland, a foreign-owned subsidiary of Nordea Group, and the second was OP Phjola Group. With the relocation of Nordea to Finland, a historical change has occurred in the Scandinavian banking market.
The EU Banking Union and Nordea’s Relocation
To understand the reasons why Nordea has chosen to move its legal headquarters, the different regulatory framework rules in Sweden and Finland need to be explored. In 2010, the EU established its banking union to integrate national banking systems more deeply. Any nation within the EU may join the EU’s banking union but – even though it is a member of the EU – Sweden has always refused to.
The country is also not part of the Eurozone, thus it enjoys its own national currency, monetary policy and central bank. On the contrary, Finland has entered the Eurozone since 1999 and is part of the banking union. The relocation of Nordea to Finland offers Nordea the opportunity to work under the regulatory framework of the union. First, considering costs and benefits, the European Central Bank’s Single Supervisory Mechanism requires lower regulatory capital ratios than Swedish rules, leaving Nordea with an excess equity. According to an article published by the Financial Times, Nordea would benefit from an excess equity of around €6.4bn.
In addition, Nordea would gain from savings related to resolution fees, deposit guarantees and other transitional effects. According to the figures released by Nordea, relocating to Finland may reduce costs by around €200m per year. Significantly, Nordea would exit the costly Swedish bank’s resolution scheme which is financed by Swedish banks and is used to bail out a bank in case of collapse.
Until 2016, the stability fund required any bank to pay an annual fee which was 0.09% of a base that consisted of the bulk of the institution’s debts. From 1 February 2016, the Swedish government created a new fund, the resolution reserve, which charges banks with higher fees. According to Reuters, with the new rules, from June 2016 the figure has increased from 0.09% to 0.125% until 2019.
After that year, the fees will be reduced before being cancelled in 2025. However, before planning its relocation, Nordea’s management complained that the new rules would have increased its fees significantly: from $500m in 2016 to $690m in 2019. Lastly, the Finnish corporate tax is 20%, compared to 22% in Sweden. Nordea will profit from paying fewer taxes over its annual performance.
The EU Banking Union and the Nordic Market
Nordea’s relocation has encouraged Sweden to reconsider its membership inside the EU banking union. However, the discussion over the banking union is also taking place in other countries within the Nordic market. In 2015, the Danish Central Bank published a report in which it illustrated why the Danish banking sector would benefit from a membership inside the union. However, if Denmark decides to participate in the union, it is unclear as to when this would happen.
As explained by the Danish Central Bank, countries may benefit from joining the banking union because it would improve national financial stability and supervision efficiency. A supranational supervision may improve the cost-effectiveness of managing cross-border externalities of international banks.
In addition, there is a share of risk. Thus, any bank, regardless its size, will be large enough to threaten the stability of the whole national banking system. Lastly, if banks operate under the same legal framework, there will be a fairer competition in the financial sector.
The opportunity to find a more accommodating legal environment drove Nordea to Finland. The bank will enjoy a regulatory framework which allows Nordea to significantly reduce its operating costs. The Finnish banking system, which works under the EU’s banking union, requires lower regulatory capital ratios and lower overall fees. However, Nordea is not the only bank in question. In the Nordic countries, there is an institutional discussion on whether being a member of the banking union would improve national financial stability and international competitiveness.
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