Will this vote of confidence encourage Sweden and Denmark to join the banking union?

Nordea has announced that its headquarters will move from Stockholm to Helsinki.

Also the United Kingdom and Switzerland, with potential fiscal costs above the hurdle rate of 8% of GDP, have adopted policies to downsize their banking system.

The bank’s activities are evenly spread across Scandinavia (see Figure 1 below).

So it could have chosen any of the four capitals: Copenhagen, Helsinki, Oslo and Stockholm.

Denmark would face the same problem as Sweden in providing a credible fiscal backstop to Nordea.

By contrast Finland, as member of the banking union, has indirect access to the European Stability Mechanism (ESM) in the case of a severe sovereign or banking crisis.

While senior management is rumoured to prefer the beautiful (and most southern located) city of Copenhagen, Nordea’s board has decided to move to Helsinki. The official reason given by Nordea is that it wants to enjoy the regulatory framework of the banking union and to facilitate comparisons with its peers in the wider banking union setting.

In that way, Nordea avoids the idiosyncrasies of country-level supervision in Sweden or Denmark.

Table 1 shows that the fiscal costs of a severe systemic crisis could amount to 11.8% of Swedish GDP, if the government needed to recapitalise the largest three banks.

In earlier work, we calculated an indicative hurdle rate for fiscal costs of 8% of GDP.

While the Single Resolution Fund is still being built up and the Council has not yet decided to provide a credit line from the ESM to the Single Resolution Fund, the ESM already provides for indirect recapitalisation of banks in case a country faces a banking crisis.

An improved fiscal backstop would suggest lower funding costs.

Given the cross-border banking linkages between EU member states, it is plausible that most, if not all, non-euro-area member states might join the banking union at some future stage.