Nordea’s risk-weighted assets are primed to jump €36 billion ($41 billion) in the final quarter of the year following a flurry of regulatory changes affecting its internal models. 

The Nordic bank has been on a de-risking spree in recent years, cutting RWAs to €121 billion at end-September from €147 billion three years earlier. But this progress will be reversed and then some as a series of supervisor-enforced changes to its internal ratings-based (IRB) models come into effect.

Around €10.5 billion of the anticipated increase will result from the Swedish regulator’s change to the risk-weight floor applied to Swedish mortgage exposures, scheduled to come into effect on December 31.

The rest will stem from a tweak to the risk-weight floor for some corporate loans, an adjustment to the bank’s market risk model, a shift in its IRB model parameters, and the migration of certain existing regulatory measures to Pillar I minimum capital requirements.

The RWAs rise will exert downward pressure on Nordea’s Common Equity Tier 1 (CET 1) capital ratio, which is anticipated to fall to 15.4% at the end of 2018 from 20.3% at end-September. 

What is it?

In October, Nordea moved its headquarters from Stockholm, Sweden, to Vallila, Finland, meaning it falls under the direct supervision of the European Central Bank.

This means its capital requirements will change. Nordea is currently voluntarily complying with the Swedish FSA’s Supervisory College Joint Decision of October 1, until the ECB establishes its own standards for the bank. Hence why the firm is adopting the changed risk weight floor for Swedish mortgages, despite moving out of the Swedish supervisor’s direct supervision. 

Why it matters

Nordea is well-braced for the shock of moving headquarters to Finland, as the health of its current CET1 ratio shows. The bank has also hurdled some of the more tricky obstacles in its way, too – for example, it has already won approval by the ECB to continue to use its internal models for capital calculations.

But a large rise in RWAs may deter the bank from lending to certain sectors, such as to Swedish mortgage-seekers. We'll delve into the effects of the risk-weight floors being moved up when the end-year Pillar 3 reports are released.  

Get in touch

Any thoughts on Nordea? Share them with us at alessandro.aimone@risk.net or tweet @aimoneale or @RiskQuantum.

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