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Consultation response: Sweden should postpone decision to enter banking union
News 24 April 2020
The Swedish National Debt Office’s opinion is that Sweden should hold off on joining the banking union, as participation in the near future risks leading to transfer payments from Sweden for the crisis management of banks within the banking union. The fact that the banking union is not yet complete is also a reason to wait. The Debt Office states this in its consultation response to the report Sweden and the banking union (SOU 2019:52).
Given the great significance of the Swedish financial sector for the Swedish economy, the Debt Office is also of the opinion that Sweden should ensure equal treatment within the so-called Single Supervisory Mechanism before supervisory responsibility for Swedish institutions is transferred to the EU. Under the current decision-making procedure, Sweden will not have the same position as the euro area countries in making supervisory decisions.
On the other hand, the Debt Office notes that Sweden will be treated on equal terms with euro area countries when resolving banks. Nevertheless, equal treatment within the so-called Resolution Mechanism entails that Sweden will not always participate when resolution decisions for Swedish institutions are taken. This is because the Single Resolution Board, in the event of disagreement, makes decisions without the participation of national resolution authorities. Crisis management may also entail a need to re-evaluate the systemic importance of smaller institutions shortly before an imminent crisis. The process that then follows involves the banking union bodies and risks becoming complicated if resolution requires access to the European Resolution Fund. The banking union’s ongoing design of this area should be taken into account before participating.
A key idea with the banking union is for its members to share the cost of crisis management. Sweden has come further than other EU countries in certain respects and imposed stricter requirements on Swedish banks to build up barriers to protect against a potential crisis. European banks do not adhere to the same high standards. In addition, many major banks within the banking union are encumbered by significant non-performing loans. Altogether, this indicates that the insurance value for Sweden of sharing the risk of banking crises with Europe is limited, or in fact negative at present.
A further aspect to consider is that the banking union is not fully fledged. The European Resolution Fund and the backstop mechanism are likely insufficient for dealing with liquidity problems for major European banking groups in resolution. Sweden should monitor how these issues develop before deciding to enter the banking union.
In the light of these considerations, the Debt Office recommends that Sweden currently refrain from participation in the banking union.