Effective financial crisis management requires extensive planning and preparation. The Debt Office produces annual plans for how every individual bank or financial institution in Sweden is to be handled if a crisis would arise.
Resolution planning is a continual effort at the Debt Office. We conduct assessments and analyses for every bank and institution in Sweden and then develop a resolution plan specific to each one.
This ensures that we are prepared to handle a potential financial crisis in the most efficient way possible.
Significance to the financial system is the deciding factor
We conduct crisis planning for all banks and financial institutions regardless of whether they are critical to the functioning of the financial system in Sweden or not. However, the planning for a systemically important institution is much more extensive than that for an institution not deemed to have a significant impact on the system. The effects of a systemically important institution’s failure could spread to other parts of the financial system and result in major consequences. To prevent that from happening, systemically important banks and institutions can be put into resolution.
The resolution plan includes, among other things, the following assessments:
- Does the bank or institution have critical operations such as large volumes of deposits and lending?
- Which resolution tools and measures shall be applied? If the institution is part of a group, in what part of the group are the measures to be implemented? Examples of such measures include the Debt Office selling all or part of the operations, or that liabilities are written down or converted into new equity.
- What level of resources in the form of capital and eligible liabilities is the bank required to hold? We set a requirement for the volume of such resources that each bank must hold. This is called MREL (minimum requirement for own funds and eligible liabilities). It is to ensure that the bank has sufficient resources to enable the Debt Office, if needed, to perform a bail-in, which is one of the resolution tools.
Having a well-thought-out strategy in advance means that we can begin crisis management straight away. Taxpayers shall always be protected.
Simplified obligations for smaller institutions
Most banks and institutions are not considered systemically important. They are judged to have a minor impact on financial stability and can therefore be placed in bankruptcy or liquidation. For these institutions, the Debt Office produces simplified resolution plans with lower requirements.
The Debt Office conducts the evaluation of simplified obligations in accordance with the European Commission Delegated Regulation on simplified obligations. The process is as follows:
- First, a quantitative assessment is carried out based on the O-SII score that Finansinspektionen (the Swedish Financial Supervisory Authority) calculates as part of its system for assessing an institution’s importance to the functioning of the financial system.
- The Debt Office has set a threshold for direct qualification for full obligations at 105 O-SII points, to which an exception can be made for development banks.
- For institutions with O-SII points that fall below the threshold, a qualitative assessment is made for how an institution in crisis would affect financial markets, other institutions, financial conditions or the economy as a whole. The Debt Office makes an overall assessment of the criteria contained in the European Commission Delegated Regulation. Among other things, we assess the extent to which an institution has critical operations in Sweden or another EU member state.
Banks and institutions report information
In order for the Debt Office to prepare for effective crisis management and develop resolution plans, certain information is required from the banks and institutions. All banks and institutions that are subject to the regulations, including those that are not systemically important, are required to submit the information we need to draft resolution plans.
List of banks and institutions in scope
Finansinspektionen (the Swedish Financial Supervisory Authority) provides a list of the companies covered by the Resolution Act (2015:1016). The list comprises a wide range of business categories. However, only financial institutions on the list, e.g. joint-stock banks such as savings banks, membership banks, credit market companies and investment firms are affected by the obligation to report.