Questions & answers

Published 2019-10-18

Under Chapter 4, Section 1 of the Resolution Act, MREL is a requirement governing the minimum size of a firm’s MREL eligible liabilities and own funds in relation to its total liabilities and own funds. An MREL eligible liability is that which
fulfils the requirements under Chapter 2, Section 2 of the Resolution Act (eligible
liability) and Chapter 2, Section 2 of the Debt Office’s Resolution Regulations
(RGKFS 2015:2) – (MREL eligible liability).

The Debt Office’s regulations include the stipulation that such a liability is eligible to meet MREL if the bond or other debt instrument to which the liability relates has been issued and fully paid up, the residual maturity of the bond or debt instrument is at least one year, and the liability does not relate to a derivative. Furthermore, Commission Implementing Regulation (EU) 2018/1624 defines structured notes as “debt obligations that contain an embedded derivative component, with returns linked to an underlying security or index”.

Thereby, in accordance with present legislation, structured notes may not be used to meet MREL because they relate to derivatives.

Published 2018-06-28

According to chapter 5, section 2 of the Resolution Act relevant capital instruments and eligible liabilities governed by the laws of a third country should contain certain special contractual terms. These terms should entail that the liability can be written down or converted and that the creditor accepts a possible reduction of the principal amount or the outstanding amount, or conversions or cancellations which can be the result of a resolution decision or a decision on write down or conversion. The purpose of setting requirements regarding contractual terms is to ensure that it is possible to write down or convert the liabilities in question.

Detailed requirements regarding the contents of the contractual terms are contained in Commission Delegated Act (EU) 2016/1075.  In addition to these general requirements, the SNDO has, according to chapter 2, section 3 of the SNDO’s Resolution Regulations (RGKFS 2015:2) the power to impose further requirements regarding liabilities governed by the laws of a third country if the liabilities are used to meet MREL. According to this regulation, the SNDO may request that a firm provides evidence which demonstrates that a decision to write down or convert a liability which is governed by the laws of a third country would be effective in that country.  If the firm does not provide such evidence the liability shall not be used to meet MREL.

In monitoring firms’ compliance with MREL the SNDO may, in respect of capital instruments and liabilities used to meet MREL, request evidence which demonstrates that a decision to write down or convert a liability would be effective under the laws of the third country (e.g. a legal opinion which demonstrates that the special contractual terms would be effective in the third country).  Firms which intend to partly or wholly meet MREL with liabilities which are governed by the laws of a third country must therefore be prepared to provide such evidence without delay if requested by the SNDO.

Published 2018-10-08

The SNDO has established a number of principles for how firms should meet MREL in order to be deemed resolvable, including that MREL should be met with a certain proportion of MREL liabilities (the liabilities proportion principle). (See section 5.2.1 in Application of the minimum requirement for own funds and eligible liabilities.)

The proportion of liabilities shall at all times correspond to the minimum capital requirement and the Pillar 2 requirement (nominal amount). The liabilities proportion principle is not applicable for firms deemed capable of being managed through normal bankruptcy or liquidation.

In monitoring firms’ compliance with MREL, the SNDO will assess whether firms have sufficient outstanding MREL-eligible liabilities in accordance with the liabilities proportion principle. The information regarding the minimum capital requirement and the Pillar 2 requirement that the Debt Office requires to make this determination will be obtained from Finansinspektionen (the Swedish FSA) on a quarterly basis. For the majority of the firms to which the liabilities proportion principle applies, this information is reported each quarter by Finansinspektionen in the publication “Capital requirements for Swedish banks”.

Published 2019-12-18

As set out in Chapter 4, Section 3 of the Resolution Act (2015:1016), decisions regarding MREL shall be taken in conjunction with resolution planning. Section 7 of the Resolution Ordinance (2015:1034) states that, as a general rule, the Debt Office shall update the resolution plans for firms each year. Accordingly, decisions regarding MREL shall also be updated annually. For institutions that the Debt Office determines are subject to what are referred to as simplified obligations, decisions about plans and MREL are generally made every other year.

Decisions on resolution plans and MREL shall normally be taken in December and the requirements shall thereafter apply starting 1 January the following year. Regarding firms that are part of cross-border groups, the annual decisions on resolution plans and MREL involve other authorities in addition to the Swedish National Debt Office. For this reason, the timing of decisions for such firms may differ from that for other firms.

According to Chapter 4 Section 1 of the Resolution Act and Article 7.2 of Commission Delegated Regulation (EU) 2016/1450, the requirement shall be expressed as a percentage of the firm’s total liabilities and own funds.At the same time, in accordance with the same regulation, MREL shall be calculated on the basis of the firm’s risk-weighted capital requirements. The requirement presented in the decision is therefore calculated on the basis of applicable risk-weighted capital requirements and expressed in relation to total liabilities and own funds.

Published 2019-12-18

The MREL decision taken by the Debt Office covers only the size of the requirement. In addition to deciding on that requirement, the Debt Office applies a number of principles for meeting MREL, including that they are to:

1) be met entirely with subordinated liabilities (the subordination principle)

2) consist of a certain amount of liabilities (liabilities proportion principle). The principle is only applicable to those institutions that, according to plan, are subject to resolution measures. In cases where such an institution is part of a group, the principle only applies on a consolidated basis.

The subordination principle shall be met by 1 January 2024 at the latest, with exceptions for such subsidiaries as described below. For these, the Debt Office will announce individual phase-in dates.

For subsidiaries that are part of groups to be managed collectively in resolution through what is known as the Single Point of Entry strategy, whereby only the parent company of the group is put in resolution, the Debt Office applies an additional principle for meeting the requirement. For these firms – in addition to the subordination principle – the liabilities used to meet the individual requirement must be issued to the institution that is to be resolved (usually the parent company) within the group.

These principles represent the Debt Office’s outlook on how the firms must meet MREL in order to be considered resolvable. The principles are applied in the examination set out in Chapter 3 Section 10 or 11 of the Resolution Act, which is conducted to determine the extent to which it is feasible to restructure or wind up the institution and the group firms via bankruptcy, liquidation or resolution in a manner that would not cause a serious disturbance to the financial system in the EEA. Within the framework of this examination, the Debt Office evaluates the firm’s compliance with the principles. If the principles are not complied with, a more in-depth examination is initiated, which in the long term – if significant impediments to resolution are identified – may result in the process described in Chapter 3 Sections 12–24 of the Resolution Act (See Section 5.1 in the decision memorandum).

Published 2017-10-06

MREL for eligible liabilities shall be met with subordinated instruments no later than 1 January 2022. During the phasing-in period, the SNDO will continuously monitor to ensure that the build-up of subordinated liabilities occurs at a reasonable pace. The assessment of what constitutes a reasonable pace will be made on the basis of a firm’s individual circumstances and prevailing market conditions as well as with consideration of inter alia the following:

(i)  That the proposed build-up of subordinated liabilities takes account of the firm’s capacity to issue such liabilities (even under less favourable market conditions) and that the issue plans are drawn up in a manner which does not assume an increase in the firm’s overall leverage. The build-up should take place at an even rate, e.g. the firm shall avoid assigning a large proportion of the total issuance volume towards the end of the phasing-in period. Due to the impact of the coronavirus pandemic, the Debt Office decided in April 2020 to extend the phase-in period until 2024. In conjunction with this decision, it was communicated that the issuance of subordinated liabilities will not have to take place while the uncertainty from the pandemic remains, but that issuance should resume when conditions return to normal.

(ii) If firms intend to meet the requirement with statutorily subordinated liabilities, that – with regard to the uncertainty surrounding the timing of the introduction of statutory subordination – the issue plan includes a strategy for how the subordinated requirement shall be met if such an introduction takes place at a later point in time than that on which the firm based its plan.

(iii) If  firms intend, and consider that it is possible, to meet the subordination requirement by issuing a debt instruments which involve delayed subordination (i.e. become subordinated at a different point in time to that of the issue), that such an instrument is only use to manage contract restrictions in outstanding Tier 2 capital instruments.

Published 2017-10-06

According to chapter 4 section 1 of the Resolution Act, MREL is a requirement which determines how large a firm’s MREL eligible liabilities and own funds must be, as a minimum, in relation to the firm’s total liabilities and own funds. An MREL eligible liability is a liability which meet the conditions in chapter 2, section 2 of the Resolution Act (eligible liabilities) and chapter 2, section 2 of the SNDO’s Resolution Regulations (RGKFS 2015:2) (MREL eligible liabilities).

Liabilities in the form of instruments which previously wholly or partially qualified for inclusion in an institution’s own funds may be used to meet MREL provided that these conditions are met.  Tier 2 instruments do not constitute eligible liabilities according to chapter 2, section 2 of the Resolution Act. Thus any portion of such instruments subject to amortisation according to article 64 CRR may not be used to meet MREL (Regulation (EU) No 575/2013 of The European Parliament and of The Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012).

Published 2019-12-18

The Swedish National Debt Office sets MREL requirements on an individual basis for all credit institutions and investment firms that shall receive such a decision under the Resolution Act (2015:1016). In addition, the Debt Office makes MREL decisions on a consolidated basis (group level).

Published 2019-12-18

For systemically important institutions, Pillar 2 requirements will only be taken into account if they have been set by Finansinpektionen in the overall capital assessment that the agency conducts for the firm as part of the Supervisory Review and Evaluation Process (SREP). Regarding institutions for which no overall capital assessment has been made, the loss absorption amount (LAA), and if applicable the recapitalisation amount (RCA), will consist only of the minimum capital requirement in Pillar 1. The same applies to non-systemically important institutions for which an SREP has been conducted.

Pillar 2 requirements that are entirely motivated by macroprudential reasons (systemic risk add-on in Pillar 2 and systemically critical securitisation transactions) are completely excluded from the calculation of the LAA.

For Pillar 2 requirements that are calculated by Finansinspektionen using a method entailing that parts of the requirements indirectly reflect macroprudential risks, the LAA is reduced by an amount corresponding to such risks. 

However, no comparable reductions are made to the RCA, as the calculation of RCA is not dependent on whether the Pillar 2 requirements have been set on the grounds of macroprudential risks, but rather on an assessment of which capital requirements are deemed applicable following resolution (See Section 3.2 of the Debt Office’s decision memorandum).

Example: PD (probability of default) adjustments for corporate risk weights

The Pillar 2 add-on concerning the PD adjustments for a firm’s risk weights are calculated by multiplying the adjusted risk-weighted exposure amount by the minimum capital requirement, the capital conservation buffer, the institution-specific countercyclical buffer – and, if necessary, the systemic risk add-on in Pillar 2 and the systemic risk buffer. The last three of these capital requirement components are motivated by macroprudential reasons. The part of the add-on that corresponds to these requirements is reduced in the LAA.

Published 2019-12-18

The calculation of MREL is based on information about the institutions’ 1) capital requirements and 2) total liabilities and own funds.

CAPITAL REQUIREMENT INFORMATION

In accordance with Article 1.2 of Commission Delegated Regulation (EU) 2016/1450, the Debt Office is to base the MREL requirement on the capital requirements that are currently applicable for an institution.

For institutions for which Finansinspektionen (the Swedish Financial Supervisory Authority) has conducted a Supervisory Review and Evaluation Process (SREP) within the last year, all capital requirement information (not forecast values) is generally obtained from the overall capital assessment resulting from the SREP. As a general rule, this assessment is based on data from 31 December of the most recent year.

For those institutions for which Finansinspektionen has not completed an SREP within in the last year, the data regarding Pillar 2 requirements is obtained from the latest available SREP (actual or forecast). Other capital requirement data for these institutions, and those for which an SREP has not been conducted, have been obtained by the Debt Office directly from the institutions. This information is based, in accordance with the above, on data from 31 December of the most recent year.

Information on which Pillar 2 requirements directly or indirectly reflect macroprudential risks and how much of the requirement corresponds to such risks, i.e. the amounts that are reduced in the LAA (Loss Absorption Amount), is obtained from Finansinspektionen (see also the question on how Pillar 2 requirements are taken into account regarding MREL).

INFORMATION ON TOTAL LIABILITIES AND OWN FUNDS

Information on total liabilities and own funds is generally obtained from the institutions within the framework of the annual reporting for the resolution planning. This information is based on data from 31 December of the most recent year.

EXCEPTIONS

As a general rule, MREL decisions are based on the above description, and on data from 31 December of the most recent year.

If warranted, due to circumstances that significantly affect the MREL requirement (for example, significant operational changes or adjusted capital requirements), a decision can be based on information and capital requirements and total liabilities and own funds on another reference date than presented above. In such cases, information that the institutions report to the Debt Office is used. However, data on the institution’s Pillar 2 requirements are, as a general rule, still based on the most recent SREP (actual or forecast).

One cannot say whether it is right or wrong to borrow. But it is good to have the opportunity to do so when necessary. Generally speaking, it is not good to borrow in the long term for consumption, but it can be good in the short term in order to stimulate the economy. Loans to investments can be good since they lead to increased revenues in the future.

The central government debt varies over time, but it has remained between SEK 1,100 billion and SEK 1,400 billion over the last ten years. Measured as a proportion of gross domestic product (GDP), the central government debt has decreased from over 70 per cent in the mid-1990s to below 30 per cent. What is known as the Maastricht Debt, which comprises the entire public sector, is at around 40 per cent of GDP. The Debt Office reports the outcome of the central government debt once a month, which can be monitored here.

There are no political ambitions to pay off the entire central government debt in Sweden. Nor is there any future time when the debts have to be paid off. An important difference between an individual who borrows and a government is that the government is expected to continue to exist while an individual sooner or later must die. 

There is no saving objective for the central government but rather for the general government of the public sector: central government, local government and the pension system. The objective is that the saving (net lending) should be 1 per cent of GDP on average per year. 

The interest payments for the central government debt are financed through the central government budget. Loans that expire are paid for by taking out new loans. The Government’s biggest asset is future tax revenues. The most important thing for payment capacity is that the tax revenues are sufficient for all the Government’s obligations, both for expenditure and debts.

Today most people think that Sweden’s government finances are stable. However, during the early the 1990s Sweden’s government finances were very weak and the central government debt increased rapidly. Stability is important. A rapidly increasing central government debt can create a fear that the Government will not be able to pay for its obligations, and this in turn has negative effects on the country’s entire economy. Interest rates increase since the risk increases for lenders.

The statistics are compiled in Statistics Sweden’s financial accounts. Historically, insurance companies, pension institutions, and foreign investors have owned the majority of the securities issued by the Swedish state. Since 2015, the Riksbank has purchased government bonds for monetary policy purposes and thereby become the largest owner. In 2020, the Riksbank held on average around one-third of the central government debt. In pace with the Riksbank purchasing bonds, foreign investors have reduced their ownership. Ownership by insurance companies and pension institutions has been relatively stable and amounts to just over 20 per cent. The banks’ holdings of government securities have stayed at approximately 1–4 per cent over the last four years.

Even with a well-functioning financial market, there may be challenges in financing environmental investments involving loans with long maturities.

To be eligible for a guarantee, a loan must amount to at least SEK 500 million.

The central government shares the risk with the lender and guarantees up to 80 per cent of the loan.

Credit institutions can apply for risk coverage for loans to both Swedish and foreign companies. The crucial factor is that the industrial investment must be in Sweden and the investment itself must meet the specified criteria.

The industrial investment must be in Sweden and the investment itself must meet the criteria specified in the Regulation (2021:524) on state credit guarantees for green investments.

The Debt Office will post an application form on its website soon. Until then, lenders can submit an expression of interest.

The borrower pays interest to the lender as usual. The lender in turn pays a guarantee fee to the Debt Office based on the borrower’s creditworthiness.

Guarantee fees are set in accordance with Regulation (2021:524) on state credit guarantees for green investments. This means that the guarantee fee must be market-based.

The companies making the investment will be evaluated on three areas: integrity, creditworthiness, and the environmental evaluation of the investment in question.

The EU’s taxonomy forms the initial basis for the Debt Office’s environmental evaluation. Refer to the report about the environmental evaluation (in Swedish), which has been produced in collaboration with the Swedish Environmental Protection Agency.

The Debt Office will not set any general requirements in this regard, as it is not stipulated by Regulation (2021:524) on state credit guarantees for green investments or the assignment.