Nordea move shows Wahlroos is not all bark

Europe’s next financial centre? Not Frankfurt, Amsterdam or even Dublin – but Helsinki.

The Finnish capital will suddenly go from housing one of the eurozone’s smaller banking sectors as a proportion of its national economy to perhaps the biggest, and entirely because of Nordea’s decision to shift its headquarters there from Stockholm.

In dollar terms, Nordea will be three times bigger than Finnish GDP.

In Sweden, the debate about the new domicile appeared as a clash between Wahlroos and social democrat finance minister Magdalena Andersson. While Andersson is hiking charges on banks and others, Wahlroos is older and more conservative, having built a fortune in finance.

“He likes to provoke,” says a banker who knows him.

Wahlroos might then have relished the pressure on the government when in March Nordea said it was considering moving because of Sweden’s regulatory environment. To some, it looked like a threat and that Andersson was calling Wahlroos’ bluff when the minister highlighted the contingent-liability benefits of Nordea’s move.

But the business incentive for the move remains real, not least due to Sweden’s rising bank resolution fees. Nordea’s Swedish resolution burden would have been even bigger after it changed its legal structure this year, turning its various country operations into group branches.

In the eurozone, of which Finland but not Sweden is part, resolution and deposit guarantee fees are far less onerous – to the extent that Nordea will gain €1.1 billion from moving to Helsinki, according to the bank. Sweden’s proposed resolution fees on Nordea would have risen to about eight-times higher than the European Central Bank’s (ECB) suggested levels, according to Berenberg.

While it would have seemed logical to base Scandinavia’s biggest bank in its biggest economy and biggest city, Helsinki is a valid alternative to Stockholm. Due to the relative strengths of the banks which merged to create Nordea in the 1990s, its biggest national market share is in Finland.

Partly because it books derivative transactions there, Nordea already accounts for two-thirds of Finnish banking assets, according to the IMF.

Stockholm happened to be home to Hans Dalborg, who led Nordea’s regional mergers starting with the 1997 fusion of Merita and the Swedish lender he managed, Nordbanken.

However, Wahlroos is from Finland, where he owns a sprawling country estate near Helsinki. He is chairman and third largest shareholder in Finnish insurance group Sampo, which is today Nordea’s largest shareholder, with 21%. Nordea’s CEO of the past two years, Casper von Koskull, is also Finnish.

Changing domicile is therefore relatively easy in practical terms. The group will simply merge with a newly created Finnish subsidiary. Central functions such as finance and operations are already spread across Stockholm, Copenhagen and Helsinki.

Although more people might base themselves in Helsinki over time, senior bankers at Nordea say there will be few immediate relocations.

Magdalena Andersson

The Finnish government has portrayed the bank’s decision, announced on Wednesday, as proof of its attractiveness as a business destination. This looks bad for Andersson. No finance minister wants to see one of their biggest companies exit – although as KBW points out, there may be reputational costs for Nordea’s Swedish clients as well.

The whole debacle shows some of the flash points of bank regulation, in Scandinavia and beyond. Sweden emerged relatively unscathed in 2008 and today has many of Europe’s strongest banks, although financial contagion happens easily in these tight-knit economies.

Indeed, Nordbanken itself had been the main recipient of the bail-out after Sweden’s 1990s-banking crisis, and the state only sold its last Nordea shares in 2013.

If Sweden did not want Stockholm to be a financial centre, it would have then been easy to prevent Nordea’s international mergers, but Nordea is now so big that Sweden might not be the only potential domicile inclined to ratchet up resolution charges to safeguard against the danger of its collapse.

For example, the Netherlands – another economy with a proportionally very large financial sector – has also frustrated local bankers with a sector-specific levy.

No doubt Wahlroos has more friends in Helsinki than in Stockholm, although the bank says it has sought no special favours: Finland simply offers fairer and more predictable regulation, as the only Nordic part of the eurozone and therefore of the banking union.

In a gesture largely seen to have Nordea in mind, financial markets minister Per Bolund said this summer that Sweden would look into joining the banking union. Denmark, which also said it would welcome Nordea’s headquarters, has made similar remarks.

However, this was all uncertain for Nordea, given Sweden’s shaky coalition government and 2018 elections.

While Nordea has plumped for basing its headquarters inside the eurozone, it should remember that the banking union itself is uncertain. The key plank, bail in, clearly does not work uniformly well, especially when there is potential for systemic damage.

After Italy’s bank bail-outs this summer, Nordea’s insistence that only investors are on the hook is not entirely convincing. If Finland cannot afford to bail out Nordea, would the French, Germans and Italians instead? Bankrupting Finland would be sweet revenge for the southern Europeans, given the hard-line it has taken with Germany in the sovereign debt crisis.

Even if it is a remote danger, Nordea’s collapse would be such a disaster for all of Scandinavia, let alone Finland, that the ECB might be wary of allowing risk weights as low as they were under Swedish regulation, research from Citi suggests.

Perhaps a relatively high Pillar 2 requirement might also offset some of the benefits of moving.