2014 Bank capital report: Sweden

Author: | Published: 12 Dec 2014
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1. BANK SUPERVISION


The Swedish Financial Supervisory Authority (Finansinspektionen, SFSA) is in charge of supervising credit institutions in the context of Basel III/CRD IV. Sweden is not a member of the European monetary union or the Single Supervisory Mechanism (SSM) and consequently the ECB does not have direct supervision over Swedish significant credit institutions. As of November 20 2014 Sweden has not opted to become a SSM member.

If the proposed Swedish BRRD implementation comes into force as currently drafted, the Swedish National Debt Office (Riksgäldskontoret) will become the competent national resolution authority and be responsible for resolution actions.

2. BANK RECOVERY/BAIL-IN


The BRRD has not yet been transposed into Swedish law. The final report of the Financial Crisis Committee (a government appointed commission of inquiry), published in June 2014, includes draft BRRD implementing regulation, but so far no subsequent legislative proposal has been presented. The official position of the Ministry of Finance is that the BRRD shall be fully implemented and that implementing legislation will come into force on January 1 2015. However, as no bill has been presented to date or any indication given of when this might happen our assessment is that the implementing legislation will not come into force as expected and that the implementation most likely will be delayed.

Under the BRRD, the Swedish government shall designate one or more authorities responsible for resolution, and empower such authorities to apply the resolution tools and exercise the resolution powers under the BRRD. According to the current draft implementing regulation, the Swedish government will designate the Swedish National Debt Office as the Swedish resolution authority, but delegation of some resolution powers to the SFSA is also proposed (the latter primarily with regard to crisis prevention). As Sweden is not a member of the SSM, the responsibility for resolution under Swedish law will not subsequently be taken over by the European resolution authority.

Prior to implementation of the BRRD Swedish law does not provide for a unilateral bail-in tool. Following transposition of the BRRD into Swedish law, institutions will need to meet minimum requirements for own funds and eligible liabilities to ensure feasibility of a bail-in.

Swedish authorities have not issued guidance on the valuation of banks and their assets at PONV.

3. BUFFERS


The SFSA is the supervisory authority with regard to the rules on the various capital buffers.

Capital conservation buffer

The capital conservation buffer has been implemented in accordance with the CRD IV framework. The buffer is set at 2.5%.

There is no phase-in with regard to the capital conservation buffer and the obligation to hold a capital conservation buffer has been in force since August 2 2014.

Countercyclical buffer

The countercyclical buffer has been implemented in accordance with the CRD IV framework. The buffer is currently set at 1% and shall be applied by the institutions as from September 13 2015. The SFSA publishes the countercyclical buffer rate used to calculate the countercyclical buffer on a quarterly basis.

Small and mid-cap investment firms, fund companies and AIF managers (with up to 250 employees and a balance sheet total not exceeding €43 million) are exempt from the countercyclical buffer requirement.

G-SII buffer

The G-SII buffer has been implemented in accordance with the CRD IV framework. The buffer will be phased-in from 2016 to 2019 and will be set between 1% and 3.5% on an individual basis.

In 2016, G-SIIs only need to fulfil 25% of their individual G-SII buffer requirement. This increases to 50% in 2017, 75% in 2018 and 100% from 2019.

The SFSA has not yet published which banks have been identified as G-SIIs.

O-SII buffer

The O-SII buffer has been implemented in accordance with the CRD IV framework. The buffer is capped at 2% and will be set on an individual, consolidated or sub-consolidated basis. The O-SII buffer applies from January 1 2016.

The SFSA has not yet published which banks have been identified as O-SIIs.

Systemic risk buffer

The systemic risk buffer has been implemented in accordance with the CRD IV framework. The buffer of at least 1% is applicable today already. The buffer is not capped, although the EU needs to get involved in the decision-making process if the SFSA intends to raise the buffer above 3%.

In line with the so-called November Accord (an agreement dated November 2011 between the Ministry of Finance, the Swedish Central Bank (Riksbank) and the SFSA regarding higher capital requirements for systemically important banks) the four major Swedish banks Nordea, Svenska Handelsbanken, Skandinaviska Enskilda Banken, and Swedbank are required to hold a systemic risk buffer of 3% CET1 from January 1 2015.

4. CALL OPTIONS


Sweden has not issued any additional national rules with regard to regulatory or tax calls in addition to article 78 of the CRR.

5. COUPON PAYMENT


The rules on maximum distributable amount (MDA) calculation in case of buffer breaches follow CRD IV and are implemented in the Capital Buffers Act (2014:966) and Regulations FFFS 2014:12 on supervision requirements and capital buffers issued by the SFSA.

In case of a breach of MDAs the SFSA can use its intervention powers set forth in each legal framework governing the credit institutions' business, such as the Banking and Financing Business Act (2004:297). The interventions available to the SFSA include to issue an order to limit or preclude the full payment of dividends or interest, issue an injunction against executing resolutions, or issue an adverse remark. Where the infringement is serious, the credit institution's licence can be revoked or, where sufficient, a warning can be issued.

The SFSA also has intervention powers when it is likely that, within 12 months, a credit institution will no longer be able to fulfil its obligations under the relevant act or other statutory instruments which govern the institution's operations.

6. CREDIT DEFAULT SWAP CONTRACTS


Sweden has not issued any additional rules with regard to the use of credit default swaps or other tools to mitigate credit risk in addition to CRR.

7. DISCLOSURE & REPORTING


CRR disclosure and reporting rules apply. Banks are required to quarterly disclose information on their capital ratio and capital buffers, until December 31 2017 in accordance with column (A), rows 61-68 of annex VI of Commission Implementing Regulation (EU) No 1423/2013. As of January 1 2018, disclosure follows annex IV of Commission Implementing Regulation (EU) No 1423/2013. The information must be published on the credit institution's website.

8. LEVERAGE RATIO AND LIQUIDITY COVERAGE RATIO


There are no leverage ratio requirements under Swedish law. There are no announced plans to implement leverage ratio rules earlier than what follows from Basel III/CRD IV. However, the Swedish Central Bank stated in its most recent Financial Stability Report that Sweden should consider imposing a leverage ratio requirement on the four major Swedish banks of 4% from 2016 and 5% from 2018 at group level.

The SFSA allows for credit institutions to apply for authorisation to calculate end-of-quarter leverage ratios during the period from January 1 2014 to December 31 2017.

With regard to the liquidity coverage ratio, credit institution's weighted liquid assets must never fall below the institution's weighted net cash outflow in the next 30 calendar days. This rule already existed prior to CRD IV implementation, see Finansinspektionens Regulations FFFS 2012:6 regarding requirements for a liquidity coverage ratio and reporting of liquid assets and cash flows.

The SFSA is currently evaluating the national liquidity coverage requirements as a result of the liquidity coverage ratio regulations in the CRR/CRD IV. The SFSA has however stated that no national regulations will be implemented prior to the forthcoming final definition of the liquidity coverage as implemented in the Commission Delegated Regulation as published in the EU Official Journal.

9. LOSS ABSORPTION FEATURES


Loss absorbency features of AT1 and tier 2 follow the CRR. Only AT1 provides for going-concern loss absorption while tier 2 provides for gone-concern loss absorption.

According to the BRRD draft implementing regulation, shareholders and other instruments of ownership (including preference shares, which is a national deviation from the BRRD) shall bear the first losses and will be the first stakeholders to contribute to the resolution by means of a mandatory write-down/cancellation/conversion of their instruments, taking account of the ranking of these instruments in an insolvency proceeding. Creditors will bear losses after the shareholders.

The 'no creditor worse-off than under normal insolvency proceedings' principle will apply.

10. MINIMUM CAPITAL


Sweden complies with CRR requirements. With regard to the period January 1 2014 to December 31 2014, Sweden has issued supplemental rules in accordance with Article 465(2) CRR. According to chapter 3, section 2 of Regulations FFFS 2014:12 the levels of CET1 and tier 1 capital ratios are at the highest level within the explicit ranges set out in Article 465(1) CRR and as follows:

Min CET1 ratio: 4.5%

Min tier 1 ratio: 6%

Sweden has chosen not to adopt any phase-in regulations regarding own funds requirements. The set percentages will continue to apply as from January 1 2015 and onwards.

11. PILLAR 2


Sweden had pillar 2 requirements regulations already prior to CRD IV implementation and based on article 136.2 of Directive 2006/48/EC. The main rules on pillar 2 are set out in chapter 2 of the Credit Institutions and Investment Firms (Special Supervision) Act. As of November 20 2014, the SFSA has imposed a 2% CET1 capital requirement within the pillar 2 framework on the four major Swedish banks.

The SFSA has issued guidance on certain areas pertaining to pillar 2 requirements, such as types of capital. As a rule, banks must fulfil pillar 2 basic requirements using the same quality of capital used to meet pillar 1 capital requirements, including static buffer requirements (capital conservation buffer, systemic risk buffer and buffers for other and global systemically important institutions). Divergences from the main rule can be made for specific risk types. Where this is the case the SFSA will state it when publishing the method for assessing those types of risk.

Pillar 2 requirements are subject to the disclosure rules on publishing quarterly reports on own funds and the institution's internal capital adequacy assessment.

12. QUALIFYING CAPITAL


The SFSA is authorised to issue additional local rules supplementing the CRR in relation to, for instance, the calculation of own funds and own funds requirements. The SFSA has no authority to issue local rules on what instruments qualify as CET1, AT1 or tier 2. In this respect, standard CRR rules apply. According to EBA's list of capital instruments qualifying as CET1 instruments, any financial instrument representing the share capital of a Swedish limited liability company (i.e. shares) qualify as CET1 in Sweden, as well as member certificates issued by so called membership banks.

Deferred tax assets

In chapter 3, sections 5-6 of Regulations FFFS 2014:12 the SFSA has issued supplemental rules in accordance with article 478(3) CRR. The supplemental rules set out that no phase-out will apply in relation to deferred tax assets (DTAs) in the context of calculating CET1. This means that with regard to article 478(1) and (2) CRR institutions have to apply a percentage of 100% from August 2 2014 up to and including December 31 2017.

Available-for-sale securities

In chapter 3, section 3 of Regulations FFFS 2014:12 the SFSA has issued supplemental rules in line with article 467(3) CRR. The supplemental rules set out that an institution shall apply a percentage of 100% from August 2 2014 up to and including December 31 2017.

Grandfathering

Chapter 3, section 11 of Regulations FFFS 2014:12 deals with supplemental rules as required under article 486(6) CRR on grandfathering and phase-in provisions in relation to CRR rules on own funds requirements. The following percentages have been determined:

  • 80% up to and including December 31 2014;
  • 70% during the period from January 1 2015 to December 31 2015;
  • 60% during the period from January 1 2016 to December 31 2016;
  • 40% during the period from January 1 2017 to December 31 2017; and
  • 20% during the period from January 1 2018 to December 31 2018.

13. REGULATORY INTERVENTION


Regulatory intervention powers introduced in November 2008 under the Government Support to Credit Institutions Act (2008:814) (lag (2008:814) om statligt stöd till kreditinstitut) are untested. The intervention tools under this act are fairly limited and consist solely of a right, in certain cases, for the Swedish government for compulsory redemption of shares in the credit institution.

In October 2008 the National Debt Office took over ownership of Carnegie Investment Bank, which had lost its banking license and also had serious financial problems. The bank was subsequently sold to a large Swedish private equity house.

14. STRESS TESTS


The four major Swedish banks participated in the 2014 EBA stress test, which they all passed. The SFSA worked with the EBA/ECB on the stress test.

The SFSA also executes annual national stress tests of the four major Swedish banks within the framework of its supervisory measures. The result of these stress tests are normally published in a memo and, in parts, in SFSA's annual Risk Report.

15. SIFIS


The SFSA has not yet taken a position on the implementation of the buffer for global systemically important institutions. However, the SFSA will decide which firms will be required to hold a capital buffer for global systemically important institutions (G-SIIs) or other systemically important institutions (O-SIIs) respectively before the provisions on such buffers come into effect on January 1 2016.

The SFSA has identified the four major Swedish banks Nordea, Svenska Handelsbanken, Skandinaviska Enskilda Banken, and Swedbank as sifis.

No other additional rules in relation to sifis has been issued.

Author
  Magnus Lindstedt
Partner

Email: magnus.lindstedt@cederquist.se
Phone: +46 8 522 065 32

Magnus Lindstedt has extensive experience advising on matters related to financial market regulations and equity capital markets. Many of his clients are leading Swedish and international financial institutions that are subject to the BRRD, CRR and CRD IV and under the supervision of the Swedish Financial Supervisory Authority. He also has extensive experience in advising Swedish and international clients on takeover offers and other M&A transactions, IPOs, mergers between listed companies, and other public transactions. Magnus Lindstedt joined Cederquist in 1998.

Author
  Annika Walin
Senior Associate

Email: annika.walin@cederquist.se
Phone: +46 8 522 065 57

Annika is a senior specialist in Cederquist’s Financial Market Regulation group advising leading Swedish and international financial institutions in any matter related to financial market regulations such as licence requirements and compliance with and adaptation of new rules and regulations, such as BRRD, CRR and CRD IV. Annika Walin joined Cederquist in 2009 after having worked at large Swedish banking and asset management institutions.

Author
  Michela Hallberg Westin
Associate

Email: michela.westin@cederquist.se
Phone: +46 8 522 065 18

Michela Hallberg Westin is an associate in Cederquist's Transactions group. Her areas of practice include financial market regulations. Michela Hallberg Westin joined Cederquist in 2014.

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