A basic premise of banking crisis management is that the banks’ shareholders and lenders, as opposed to taxpayers, will be responsible for bearing the direct costs that may arise. In order to further ensure this, special funds and reserves have been set up that are funded by the financial sector. These are gradually built up before crises occur through annual fees charged by the Debt Office.
The management of banks and institutions in crisis shall primarily be funded by shareholders and creditors covering the costs. However, in extraordinary circumstances, external financing may be required. For this reason, there are various reserves and funds that are built up using fees from the banks and institutions, which the central government can use if financial stability is threatened and the institutions’ have insufficient resources of their own.
Sweden has the following:
- the resolution reserve
- the deposit insurance fund
- the stability fund
The resolution reserve may be used for a bank or institution in resolution, for example to provide temporary financing or contribute to the recapitalisation of the institution under certain circumstances. However, this assumes that shareholders and creditors have first covered a substantial part of the costs.
Each year, the banks and institutions pay a fee to the resolution reserve. The fee shall be paid as long as the balance in the resolution reserve is less than three per cent of the total guaranteed deposits of the banks and institutions. The resolution fee was collected for the first time in 2016.
A standardised model is used to set the fees for smaller institutions, while larger institutions pay a fee in proportion to the risk that their potential failure poses to the financial system. Fees are determined in accordance with an EU regulation on resolution fees.
The resolution reserve in figures:
- For 2019, 179 institutions paid resolution fees. Most of them – 124 institutions – paid a standardised flat-rate fee. For the remaining 55 institutions, the fee was risk-adjusted.
- A total of approximately SEK 5.8 billion was charged in resolution fees for 2019. The larger institutions that pay a risk-adjusted fee account for almost the entire amount. The total flat-rate fees for smaller institutions amounted to approximately SEK 5 million.
- The total fees collected in 2019 amounted to 0.09 per cent of the overall fee base. In accordance with Swedish law, total fees from 2020 onwards must correspond to 0.05 per cent of the fee base each year until the target level of the resolution reserve is reached.
The resolution reserve totalled SEK 43.5 billion at the end of 2019. This represents just over 2.7 per cent of total guaranteed deposits.
The deposit insurance fund
Deposit insurance is a form of consumer protection to ensure that depositors feel secure even in times of financial instability. Under the deposit insurance scheme, the state will compensate depositors up to a maximum of SEK 950,000 per person if their bank or institution fails.
As with the resolution reserve, all banks and institutions that are members of the deposit insurance scheme pay an annual fee to the Debt Office. The fees are then transferred to the deposit insurance fund, which is managed by the Legal, Financial and Administrative Services Agency (Kammarkollegiet). If assets in the fund are insufficient to pay compensation, there is a possibility to borrow from the Swedish state. Such loans shall be repaid by the subsequent collection of additional fees from institutions.
The deposit insurance fund’s value amounted to SEK 44.3 billion at the end of 2019.
The stability fund
The stability fund was set up in the context of the global financial crisis of 2008 to finance support measures for the financial system. The banks and institutions paid annual fees to the fund until 2016, when the stability fee was replaced by the resolution fee. Part of the stability fund’s assets were then also transferred to the resolution reserve. The stability fund remains in place to finance precautionary government support measures by the Debt Office.
The stability fund’s value amounted to approximately SEK 40 billion at the end of 2019.