The Implementationof the CRR/CRD IV: An Analysis of the risk and capital requirements for the Swedish Systemically Important Financial Institutions

Alexandra Takman

Student thesis: Master thesis

Abstract

The aim of the thesis is to investigate the robustness of the four Swedish Systemically Important Financial Institutions (SIFIs) and whether it is related to CRR/CRD IV. The financial crisis of 2008 revealed vulnerabilities in the regulation and supervision of the banking system at a global level. One of the main problems was found in the insufficient quality and level of the capital base among financial institutions which posed threats to their loss absorbing capacity. The prevalent regulation under Basel II allowed banks to use unconventional methods to effectively hide debt and hold less loss-absorbing capital. To address the problems, the Basel committee updated its capital adequacy framework. The implementation of the Basel III agreement in the EU is commonly referred to as CRR/CRD IV. The resilience of the banking sector is highly prioritized among policy makers due the society┬┤s dependence on financial institutions. Due to the special features of the Swedish financial sector, which makes it particularly vulnerable in times of distress, it was decided that the implementation of the capital requirements under CRR/CRD IV should be stricter in Sweden. To address the research problem, the author has analyzed the capital ratios of the four Swedish SIFIs with focus on the risk exposure amount. In addition, the liquidity risk is analyzed. The data is retrieved from the Pillar 3 reports of risk and capital management. The analysis considers the period of the four years prior the first year of implementation (2010-2013) as well as the first year of implementation (2014) of the CRR/CRD IV. The conclusion of the research is that the reduction in risk perceived by the market during the analyzed period is only partly attributable to the CRR/CRD IV. The loss absorbing capacity has increased for all four banks during the period. The total capital ratio has increased with an average of 6,9 percentage points and the CET1-ratio has increased with an average of 5,9 percentage points. The first year of the implementation coincide with the first year where increased capital ratios were mainly attributable to increases in capital for three of the four banks. However, during the period prior the first year of implementation, the increased capital ratios were mainly due to external factors through decreased Risk Weights (RWs) applied to the calculations of the risk exposure amount in the credit portfolio. The RWs show a similar trend for all four banks with the largest decrease attributable to the corporate exposure. Low risk premiums in the interbank market and record low levels of the federal funds rate indicate 2 that some of the risk reduction during the period prior the first year of implementation is attributable to the transmission mechanism of monetary policy. The results of the research support the existing theory regarding the difficulty of assessing the total risk in the financial system and highlight the importance of being critical to the prevalent models. It illustrates the quandary that policy makers face in their work of developing efficient financial regulation and questions whether there is a best practice to reach soundness in the financial system.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages106