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Capital adequacy

On February 1 2007 a new Capital Adequacy and Large Exposures Act (lag om kapitaltäckning och stora exponeringar) entered into force in Sweden. The Act is based on and implements the EC Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions and the EC Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions, based on the Basel II agreement. The Act replaces the former Swedish legislation on Capital Adequacy and Large Exposures.

The Act constitutes a framework legislation which includes powers for the Swedish Financial Supervisory Authority (Finansinspektionen, SFSA) to issue regulations and recommendations under the Act. The SFSA has issued several regulations and recommendations complementing the Act, for example regarding reporting of liquidity risks (FFFS 2007:3) and disclosure of information relating to capital requirements and risk management (FFFS 2007:5).

As contemplated by the Basel II agreement, the Act gives, among other things, institutions a possibility to choose between different methods when measuring credit, market and operative risks when the relevant capital requirement is calculated. The obligation to measure operative risks is a novelty in Sweden as well as the methods for measuring such risks – the standard method and the internal method. The actual calculations under the methods are laid down in a SFSA regulation, Capital Adequacy and Large Exposures (FFFS 2007:1).

Additionally, the Act provides that institutions must maintain an effective risk management system in order to be able to survey all relevant risks. Institutions governed by the Act must also disclose information regarding their capital adequacy and risk management to such an extent that it renders an assessment of an institution's financial position possible.

The provisions regarding the capital base and the assets which may be contained in the capital base are identical to the former legislation.

By Lina Williamsson

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