The design of the Swedish regulations for capital adequacy and crisis management is appropriate for reducing the risk of financial crises and ensuring effective management if a crisis were still to occur. This is the conclusion reached by Finansinspektionen (FI) and the Swedish National Debt Office in a joint report. The report emphasises that Sweden should safeguard national discretions in the framework of banking requirements in ongoing EU negotiations.
In the report, which was commissioned by the Government, the authorities describe both how the requirements for capital adequacy and liabilities eligible for bail-in function and how they interconnect. The report also reviews some of the proposals presented by the European Commission that could significantly alter the discretions for national authorities when applying these requirements. FI and the Debt Office show in the report that, from a Swedish perspective, the overall economic effect of the proposals would be primarily negative.
"We bear a joint responsibility to prevent and manage risks. The report shows that Sweden has a well-functioning regulatory framework that reduces the risk of financial crises," Finansinspektionen's Director General Erik Thedéen and the Debt Office's Director General Hans Lindblad agree.
Both FI and the Debt Office have a responsibility to maintain stability in the Swedish financial system. FI's capital requirements aim to ensure that banks are sufficiently resilient and thus prevent the occurrence of financial crises. If a crisis were to still occur, it is the Debt Office's assignment to manage the crisis-stricken bank through resolution. To facilitate this process, the Debt Office requires banks to hold a minimum amount of own funds and eligible liabilities (the MREL requirement).
The Swedish requirements are stricter than the minimum requirements set out in EU law due to Sweden's large and highly interconnected banking sector as well as its considerable dependence on market funding.
It is therefore important to preserve the flexibility for the authorities so national conditions can be reflected in the requirements. It is crucial to take this aspect into consideration during the ongoing EU negotiations regarding capital and MREL requirements.
Finansinspektionen (FI) and the Swedish National Debt Office (the Debt Office) were commissioned by the Government to write a report presenting the authorities' view on the requirements for capital adequacy and crisis management. The assessment of the authorities is that the design of the Swedish regulations and associated requirements is appropriate for reducing the risk of financial crises and ensuring effective management if a crisis were still to occur.
The report includes an analysis of the proposals from the European Commission that could significantly alter the conditions for the national framework of the regulations. The report shows that, from a Swedish perspective, the overall economic effect of the EU Commission's proposed amendments would primarily be negative.
FI and the Debt Office play important roles in maintaining financial stability in Sweden. FI is primarily tasked with ensuring that firms (the term "firms" in this report refers to banks, other credit institutions, investment firms and certain other financial institutions subject to the regulations on capital adequacy and resolution) are sufficiently resilient, thus preventing financial crises from occurring. The capital requirements that FI sets on firms are a central component in establishing this resilience. The Debt Office is primarily tasked with managing the financial crises that may still occur. This assignment includes ensuring that firms can be managed through a resolution procedure. This is achieved, for example, by the Debt Office requiring firms to hold a certain amount of own funds and eligible liabilities, i.e. the minimum requirement for own funds and eligible liabilities (the MREL requirement).
Even if capital requirements and MREL requirements fulfil different purposes, they are still closely interconnected. In order to achieve the goals of the overall regulation, it is necessary for the requirements to not only be appropriately designed and applied but also to complement one another (the term "overall regulation" in this report refers primarily to the legislation that regulates the design and application of the capital requirements and the MREL requirements).
FI and the Debt Office consider there to be certain fundamental principles that should guide the work in applying these frameworks:
- Capital requirements and MREL requirements should be designed to promote sound risk-taking by firms.
- The authorities should be transparent in how the requirements and any related regulations are applied.
- The design of the regulation and the requirements should provide the firms and their stakeholders with the opportunity to resolve problems on their own, provided that an effective outcome can be achieved.
- The requirements should be designed so the authorities have sufficient flexibility to take situation-specific measures.
- The requirements should take into account the financial system's features and functions.
- The requirements should be designed in such a way as to clearly distinguish between resources that are used to ensure resilience and those that are used to ensure resolvability.
FI and the Debt Office consider the existing capital requirements and MREL requirements to fulfil these principles and that the requirements interconnect in a way that contributes to the overall goal of financial stability. However, the analysis in the report shows that the proposed amendments to the current EU regulations overall would be negative for Sweden compared to the current framework.