IMF - Sweden: Financial Sector Assessment Program—Technical Note on Crisis Management and Bank Resolution
My Financial Sector Assessment Program (FSAP) report, conducted on behalf of the International Monetary Fund, on the Swedish financial safety net, crisis management, and resolution arrangements for the financial sector, was published in May 2023.
The assessment concluded that the Swedish financial safety net and crisis management arrangements are built on solid foundations. Since the previous FSAP in 2016, legislative and policy reforms have strengthened these arrangements. Sweden has implemented the Banking Recovery and Resolution Directive (BRRD), establishing a well-developed statutory regime for early intervention, crisis management, and resolution supervision. Additionally, the government has enacted complementary Swedish legislation to adhere to new EU regulations on the recovery and resolution of CCPs. Furthermore, the new Riksbank Act will provide the central bank with an explicit statutory basis to offer liquidity support and prevent serious disruptions to the Swedish financial system.
However, it is important to note that the Swedish banking system is almost three times the size of the 2021 GDP, with the five largest banks responsible for over 75% of deposits and lending. This interconnectedness, both domestically and regionally, raises concerns regarding the historical use of public funds as a credible domestic crisis management strategy. The report also highlights that the resolution framework imposes legal limitations on the utilization of public funds for crisis management purposes.
The report emphasizes the need for further action to operationalize the new crisis management framework and ensure the prompt and confident utilization of resolution powers during a crisis:
Framework for bank failure: The Financial Institution (FI) should: (i) formalize its internal monitoring arrangements for identifying and intensifying supervision of banks at an increased risk of failure; and (ii) develop and share its framework for bank viability analysis with the Swedish National Debt Office (NDO) and the Riksbank. Sharing these methodologies improves coordination speed during a crisis. It is important to limit the Ministry of Finance's (MoF) role in approving NDO resolution decision-making that may have a "direct budgetary or systemic effect" to resolutions requiring funding from government budgets only. This limitation should be clearly communicated in public policy. Public funds should not be considered at risk when the NDO's preferred resolution strategy can be implemented in an orderly manner, such as through sufficient bail-in of "own funds and eligible liabilities" (MREL).
Preparing for future bank failure: Sweden should work to ensure that banks remove known barriers to resolvability and enhance reporting capabilities concerning (i) resolution valuation, (ii) funding in resolution, and (iii) operational services dependencies. The NDO, in coordination/consultation with other financial authorities, should develop fully operational bank-specific resolution plans and require banks to eliminate all known barriers to resolvability under the bail-in resolution strategy. Furthermore, the NDO should refine its minimum requirement for MREL policy and ensure that Swedish banks comply with its recently expanded resolvability expectations by the 2024 deadline. The NDO should also enhance its capacity to manage the failure of domestic CCPs by establishing resolvability expectations.
Regarding managing failed banks, the statutory resolution tools need to be usable, swift, and inspire confidence to impose losses on the banks' creditors through bail-in or transfer tools. The Swedish National Debt Office (SNDO) should develop its resolution mechanics to effectively utilize these resolution tools in supporting an effective crisis response involving failing systemic financial institutions. There should be a priority on further developing procedures and mechanisms to implement the recently published bail-in powers over time.
Liquidity in Resolution: The Riksbank should transparently communicate to the market that it is the lender of last resort in crisis response within the Swedish crisis management framework, including resolution, rather than the NDO. The NDO should not be considered a primary source of liquidity for bank resolution purposes. This clarification of roles will enable the Riksbank to invest in developing the necessary internal crisis lending and credit assessment capabilities. Within the scope of the resolution regime, the Riksbank needs to be capable of providing funding in resolution to banks recapitalized by the NDO's resolution action. Additionally, the Riksbank should establish ex-ante operational capacity to make swift, decisive, and well-communicated collateralized lending decisions in a crisis.
Financial crisis preparedness: Improvements are necessary to strengthen crisis management capacity within and between authorities, including bank resolution. The authorities should develop shared operational plans, processes, procedures, and internal capacity to quickly and confidently deploy crisis management and resolution tools in a coordinated manner. Continued close cross-border cooperation among Nordic-Baltic states and Banking Union authorities is crucial. In 2016, the NDO established resolution colleges for the four major Swedish banking groups. Swedish authorities should focus on developing crisis management capacity through their supervisory and resolution college arrangements, including actively playing a host authority role in the Nordea resolution college.
The FSAP report is the result of extensive discussions with officials and senior staff from the Swedish National Debt Office, Swedish Ministry of Finance, Riksbank, Finansinspektionen, as well as private-sector stakeholders, including domestic and foreign banks and the wider industry. It was a pleasure collaborating with all of them. I sincerely appreciate their excellent engagement, open dialogue, and warm hospitality throughout the FSAP process, which involved significant work for everyone over an 18-month period. These collective efforts have contributed significantly to producing this report and its accompanying recommendations.