The Development of the Swedish Banking Industry during the Implementation of Basel II - A study of the development of capital ratio, net credit loss level, and degree of disclosure for the four largest banks in Sweden

Abstract: Common international regulations and frameworks for the banking industry are of great importance for the reliability and development of financial systems and countries’ economies. One such framework is Basel II which was presented in 2004. It is based on Basel I which consisted of a credit risk measurement guideline and minimum capital requirements. Basel II consists of three pillars in which minimum capital requirement, the supervision process, and market discipline are regulated (Finansinspektionen, 2002). The intention of Basel II is to lower banks’ capital requirements by offering banks the ability to choose a method that reflects their reality when calculating risk (BCBS, 2004). BCBS, the Basel Committee on Banking Supervision, presented a study called the fifth Quantitative Impact Study (QIS 5) in 2006 that was based on data from the fall of 2005 (Finansinspektionen, 2006). The purpose of the study was to examine how Basel II can be expected to affect banks with regard to their capital requirements. The study showed that the minimum capital requirement could be reduced with Basel II in comparison to Basel I. BCBS had not presented any other study after QIS 5 indicating how Basel II had affected the banking industry. This study aims to fill part of that gap by examining how capital ratio, the net credit loss level, and the degree of disclosure have progressed for the four largest banks in Sweden during the implementation of Basel II as this has not previously been looked at. Hypotheses regarding the impact Basel II has had on these variables will be presented based on these observations. To be able to make better hypotheses regarding the impact of Basel II, the impact of the economic climate on these variables was investigated by creating a market indicator which consisted of the banks’ average net profit index. No clear tendencies between all years could be observed for the variables for all banks. Specific developments for certain years were however observed. Regarding the capital ratio, no clear tendency could be seen throughout the whole studied time period but all banks showed a clear increase in their capital ratio during the last years of the studied time period. This was also true for the net credit loss level where all banks experienced a clear increase in the net credit loss level from 2007 and onwards. Regarding the degree of disclosure, even though variations between specific years exist, what was evident was that this variable had increased overall during the studied time period. According to our analyses, we believe that the introduction of Basel II has affected the four major banks in Sweden regarding their capital ratio, net credit loss level, and degree of disclosure. We believe the progression of the banks’ capital ratio to be a combination of Basel II and the development of the economic climate. In the case of the banks’ net credit loss levels, we believe that Basel II has had an impact even though we believe that the economic climate also has had a large role to play. The size of the banks’ annual reports has steadily increased during the examined time period with a few exceptions. According to our analysis, we believe that the introduction of new regulations, standards, and norms has an impact on the size of the annual reports. After the introduction of Basel II, the size of the annual reports has increased among all four banks, which indicates an impact.