Nordic banks' reliance on wholesale funding exposes them to risks, but these are not a major threat to their credit quality, Fitch Ratings says. The risks are mitigated by deep and liquid domestic debt capital markets, the banks' strong funding and liquidity management, and lengthening funding profiles. But the structural need for wholesale funding makes the Nordic banking systems more confidence sensitive than many other jurisdictions.
The high use of wholesale funding, particularly secured debt, is structural and reflects aspects of the mature Nordic capital markets. A savings culture of financial investment in domestic pension funds and insurance products, and tax incentives to borrow have widened the gap between deposits and loans. But Nordic banks benefit from the recycling of retail savings as domestic institutional investors and financial institutions need to invest in local-currency assets to match their liabilities. The relatively low level of government bonds in the region makes bank paper one of only a few relatively safe investment options.
Fixed-income investments from domestic institutional investors (mutual funds, insurers and banks) constituted 70%-90% of total outstanding sovereign and bank bonds in Sweden, Denmark and Norway at end-2013. This gives some idea of the potential domestic demand, although the investors also go abroad for diversification. It underpins our view that institutional support for Nordic bank debt is sustainable and reduces funding risk.
Nevertheless, Nordic banks are not immune to liquidity stress, especially as they tap international investors for funding to varying degrees. A weakening financial profile could lead to a negative spiral of reduced funding access leading to higher costs, lower profits and lower internal capital generation. A more extreme liquidity stress could lead to bank failure, particularly as pricing cannot be used to attract deposits due to the structural shortage. We believe this scenario is extremely unlikely, especially as the banks and regulators have focused on strengthening capitalisation and liquidity to maintain investor confidence and therefore access to debt capital markets.
Our high standalone Viability Ratings for the major Nordic banks (ranging from 'a' to 'aa-') incorporate our analysis of their ability to withstand extended dislocations in wholesale funding markets.
