Managing banking crises (resolution)

From 1 February 2016 Sweden has a new system for managing failing banks, other credit institutions and investment firms (institutions). The Debt Office is responsible for applying this new regulatory framework, which replaced much of the bank support legislation introduced in 2008.

The new rules establish a special procedure for handling a failing institution without putting it into bankruptcy and without taxpayers bearing the cost. This procedure is called resolution. It means that the government can take control of the institution and keep part or all of it open if necessary to avoid major disruption to the financial system.

Debt Office appointed resolution authority

The resolution regulations are based on the EU Bank Recovery and Resolution Directive, which was adopted in 2014. To a great extent, these new rules replace the bank support legislation introduced in Sweden during the financial crisis in 2008. Although these two regulatory frameworks differ in some respects, they have the same fundamental purpose: to safeguard financial stability.

The Debt Office is Sweden's resolution authority responsible for both crisis preparations and the management of failing institutions.

Shareholders and lenders will bear losses

Resolution means that the Debt Office can take control of failing institutions to restructure them or wind them up in an orderly way. During this process all or parts of the institution will be kept open so that depositors and other customers have access to their accounts and other services. The losses will be absorbed by the institution's shareholders and creditors having their holdings written down and/or converted into equity (called bail-in).

Doing so protects taxpayers, and it will instead be the owners and the investors who have lent money to the institution who will have to bear the losses, in the same way as in an ordinary bankruptcy. This means that lenders to an institution run a greater risk than has often been the case historically. In contrast, depositors who are covered by the deposit insurance scheme will not be affected by bail-in.

Planning work and new tools

The new regulatory framework will give Sweden what is, in many respects, a new system for dealing with failing institutions. In addition to dealing with crises that arise, the Debt Office will also conduct planning work to be prepared if an institution runs into problems. This includes producing a resolution plan for every institution and deciding on requirements concerning how much bail-inable liabilities the institution should have (minimum requirement for own funds and eligible liabilities, MREL).

The Debt Office will also levy special resolution fees on the institutions.

Based on global principles

The principles for resolution have been established at a global level and have then been negotiated in greater detail in the EU. The background is that during the financial crisis in 2008–2009 it became clear, especially after the failure of the investment bank Lehman Brothers, that a common framework was needed to deal with problematic institutions alongside ordinary insolvency procedures.