New requirement for banks to ensure effective crisis management

26 April 2016 - Press release

The Swedish National Debt Office has today published a proposal on how the minimum requirement for own funds and eligible liabilities (MREL) should be applied to banks and certain other financial institutions. The purpose of the requirement is to ensure that banks have sufficient capital and liabilities which can be written down or converted in a crisis. This is a pre-requisite for ensuring taxpayers do not have to meet the costs of future financial crises.

– Given the large bank sector Sweden has, it is of the utmost importance that we are well prepared to be able to handle financial crises. The proposals we are outlining regarding the size of MREL and how it should be complied with ensure that a crisis stricken bank can be safely and effectively managed. We have to be able to preserve the bank’s socially important functions and maintain financial stability without taxpayers having to foot the bill, said the Debt Office General Director Hans Lindblad.

A new framework for management of banking crises came into force in Sweden on 1 February 2016. The new framework means that the Debt Office can take control over a crisis stricken bank by means of process known as resolution, if such action is required to preserve financial stability. In a resolution the shareholders and lenders will be exposed to the bank's losses, not taxpayers. The lenders’ liabilities will, in simple terms, be written down in the same way as in insolvency, albeit with certain exceptions. Debt write down (also known as “bail-in”) will therefore become the central tool for handling bank crises.

In order to execute a resolution, banks must always have a certain amount of own funds and liabilities which can be written down in order to cover losses or reinstate the bank’s capital base. The introduction of MREL is a key part of the EU Bank Recovery and Resolution Directive which was implemented in Sweden in the Resolution Act. The Debt Office, as designated Resolution Authority, will make decisions on the specificities of MREL.

The Debt Office’s proposal includes, amongst other things, the following points:

  • MREL will be set at a level which is deemed to ensure safe and effective crisis management. MREL shall comprise of the sum of a loss absorption amount and a recapitalisation amount. Both amounts shall be based on the applicable capital requirements for banks.
    • The loss absorption amount shall be equivalent to the bank’s total capital requirements, excluding the combined buffer requirement and the Pillar 2 systemic risk component.
    • The recapitalisation amount shall be equivalent to the bank’s total capital requirements so that the capital base can be restored in full after resolution. The recapitalisation amount shall be zero for banks which are not considered to be systemically significant and are therefore deemed capable of being resolved through insolvency.
  • MREL should be met with a set amount of liabilities. Banks which are considered to be systemically significant and are expected to be managed via resolution in a crisis should have liabilities eligible for bail-in equivalent to the recapitalisation amount. 

  • In the Debt Office’s view liabilities which are used to meet MREL should, in due course, be subordinated. However, the Debt Office does not propose to implement a subordination requirement at this time. This stance is due partly to ongoing international regulatory activity which may affect how subordination is implemented and, additionally, the need for further impact assessment analysis.

In accordance with the proposal, MREL requirements will be set for every bank on the basis of the first two points above during autumn 2017. Until that point, MREL will be set at a level equal to the banks’ currently applicable capital requirements.

Regarding subordination, the Debt Office’s intention is to publish further information at the start of 2017 regarding the nature, extent and implementation timetable for such a requirement.

Summary of the Debt Office’s consultation paper on MREL, pdf

More on managing banking crises (resolution)

Contact

Linda Rudberg, Press Officer, +46 (0)8 613 45 38