Managing crisis-affected banks
In order to maintain financial stability, the Debt Office may take control of a bank or other financial institution in crisis through a procedure called resolution. This enables the state to take swift and decisive action in a financial crisis without jeopardising tax money.
In 2016, the Debt Office was appointed resolution authority under the EU Bank Recovery and Resolution Directive. The resolution regulations apply in all EU countries and were developed based on the lessons learned from the global financial crisis of 2008–2009, which resulted in considerable costs to society. The aim of the resolution regulations is to safeguard financial stability and mitigate the costs of any future crisis.
The central government takes control
A bank in crisis can now be managed in a more orderly manner than previously by the central government – the Debt Office – putting the institution in resolution. This entails that the bank’s shareholders and creditors will have to bear the costs of crisis management instead of the state having to resort to using tax money. While the resolution process is ongoing, the bank is kept open so that customers have access to their accounts and other services as usual.
Resolution also helps to reduce the risk of a financial crisis occurring, partly because lenders will be more cautious about lending to banks that take excessive risks.
Taxpayers do not have to bear the costs of a banking crisis.
Resolution requires planning and preparation
The Debt Office, in its role as the Swedish resolution authority, makes an annual assessment of which banks and financial institutions are systemically important, i.e. their significance for the financial system as a whole. Resolution applies only to banks and institutions that are systemically important. Other institutions may be placed in bankruptcy or liquidation because their potential failure is not deemed to have a major impact on other parts of the financial system. Currently, nine banks in Sweden are considered systemically important.
Each year, the Debt Office produces plans for how every individual bank and institution will be handled if a financial crisis occurs.
Deposit insurance always applies
Deposit insurance applies irrespective of how a crisis-affected institution is to be handled. The protection for depositors is the same regardless of whether the institution is placed in bankruptcy proceedings or put in resolution. The Debt Office’s responsibilities comprise everything from issuing information about the deposit insurance scheme to disbursing compensation if the scheme is activated.
Shared responsibility for the financial stability of Sweden
In Sweden, the Ministry of Finance, Finansinspektionen (the Swedish Financial Supervisory Authority), the Riksbank and the Swedish National Debt Office are together responsible for keeping the financial system stable. The authorities have different roles and responsibilities, but the interaction between them is central, for both financial crisis prevention and management.
There is also a Financial Stability Council, which has been established to promote cooperation on financial stability issues. In this forum, Swedish Government representatives and the agencies mentioned above regularly meet to discuss the status of financial stability and any need for preventive measures to counteract potential financial crises.