Resolution - Managing banks in crisis
In order to maintain financial stability, the Debt Office may assume control of a bank or other financial institution in crisis through a procedure called resolution. This enables the central government to take swift and decisive action to manage a financial crisis without jeopardising taxpayer funds.
Instead of letting a bank in crisis go bankrupt, the state – via the Debt Office – can take control and manage it through a particular procedure called resolution. Resolution is a way to manage banks without their operations having to abruptly shut down. Instead, an orderly restructuring or winding up of the bank is conducted in order to mitigate the adverse impact on the bank’s customers, financial stability, and the economy as a whole. While the resolution process is ongoing, the bank is kept open so that customers have access to their accounts and other services as usual.
Resolution can be conducted in various ways. Within the framework of resolution, a crisis-stricken bank may, for example, be sold to another bank or be recapitalised by certain creditors having their liabilities written down or converted into shares. What these different approaches have in common is that the costs of the crisis management shall first and foremost be borne by the bank’s own shareholders and lenders. This is so that taxpayers will not have to bear those costs – which was often the case in previous banking crises.
Taxpayers shall not have to bear the costs of a banking crisis.
Resolution requires planning and preparation
Resolution is a considerable intervention and is therefore only to be used for banks that are deemed systemically important. Other institutions can be managed through normal insolvency procedures, i.e. bankruptcy or liquidation.
The assessment of which institutions must be managed through resolution is a component of the continual planning conducted by the Debt Office. As part of this planning work, the Debt Office also establishes strategies for how resolution should be implemented for every one of the institutions deemed systemically important. The Debt Office also makes an assessment of the conditions for being able to effectively carry out resolution for the institution in question – called an assessment of resolvability.
Deposit insurance always applies
The deposit guarantee applies irrespective of the way in which an institution in crisis is managed. The protection for depositors is the same regardless of whether the institution is put into bankruptcy or resolution.
Shared responsibility for the financial stability of Sweden
In Sweden, the Ministry of Finance, Finansinspektionen (the Swedish Financial Supervisory Authority), the Riksbank and the Swedish National Debt Office are together responsible for keeping the financial system stable. The authorities have different roles and responsibilities, but the interaction between them is central, for both financial crisis prevention and management.
There is also a Financial Stability Council, which has been established to promote cooperation on financial stability issues. In this forum, Swedish Government representatives and the agencies mentioned above regularly meet to discuss the status of financial stability and any need for preventive measures to counteract potential financial crises.