The Swedish National Debt Office (SNDO) is today presenting the framework for the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) for banks and some other financial institutions. The framework makes it clear that the costs of a crisis will be borne by the bank’s shareholders and certain types of lenders, and not by the taxpayer. Banks that are important for stability in the financial system now need to replace a portion of their existing bond issuance with subordinated bonds.
(Correction from previous version: bond issuance instead of bond holdings in first paragraph above)
– In order for the SNDO to provide for effective crisis management for banks, we require them to have sufficient capital and eligible liabilities in their balance-sheets. Eligible liabilities used for the minimum requirement must also be of high enough quality to be used to effect a reorganisation of the bank. We have therefore decided that the minimum requirement may only be met with capital and subordinated liabilities, says SNDO Director Hans Lindblad.
Bail-in is the principal tool in the regulations on bank recovery and resolution that have been in force in Sweden since February 2016. Bail in means that liabilities in a bank can be written down to cover losses or converted into equity to restore a bank’s own funds in a crisis, in addition to ensuring that the bank’s critical functions can continue. Therefore any costs will be borne by the bank’s lenders and shareholders, rather than the taxpayer.
Liabilities used to meet the SNDO’s minimum requirement
The SNDO has now finalized the model for calculation of the Minimum Requirement for Own Funds and Eligible Liabilities (MREL), which determines how much own funds and eligible liabilities each bank has to have, what proportion should be debt and what type of liabilities may be used to meet the requirement. Amongst other consequences, this means that systemically important banks need to replace a portion of their existing bond holdings with subordinated bonds, i.e. liabilities that cover losses ahead of normal non-preferred debt such as deposits from large companies and bank bonds. 1 Going forward it will primarily be investors in subordinated liabilities together with shareholders that will bear the costs of resolution.
Banks that are not systemically important will always meet the SNDO’s minimum requirement provided that they comply with existing capital requirements. In a crisis, these banks will be declared bankrupt or placed in liquidation rather than resolution.
SNDO’s minimum requirement phased in over five years
The minimum requirement will take effect from 1 January 2018 onwards. Banks must progressively build up the volume of subordinated liabilities required to meet the minimum requirement by 2022. During the transitional period, the SNDO will monitor that volumes are being built up at a reasonable rate. The SNDO estimates that the four major banks will need to issue subordinated bonds to an amount of SEK 500 billion over the next five years in order to comply with the minimum requirement. This is deemed to be possible without banks needing to increase their level of debt.
1 Deposits that fall within the compensation amount of SEK 950,000 offered by the deposit guarantee may not be written down under any circumstances. Deposits from households and small and medium sized enterprises over this amount are preferred in insolvency, which means that they only cover any losses after all subordinated and non-preferred debt have been written down.
Resolution – new regime for bank crises management
Since 1 February 2016, Sweden has had new rules for handling crises in banks, other credit institutions and investment firms (collectively ‘firms’), which largely replace the bank support legislation from 2008. Under the new rules, the SNDO is the ‘resolution authority’ responsible for both crisis preparations and managing firms in crisis. Resolution is a special procedure whereby the SNDO takes control of a failing firm in order to restructure it or wind it up in an orderly manner. During the process, all or part of the firm is kept open so depositors and other customers have access to their accounts and other services, thus safeguarding financial stability. The costs of resolution are borne by shareholders and creditors, not by the taxpayers. The SNDO has been tasked with ensuring that banks and some other financial firms always have a certain amount of own funds and liabilities that can be written down in order to cover losses and reinstate the own funds (MREL).
Decision memorandum - Application of the minimum requirement for own funds and eligible liabilities
Robert Sennerdal, Press Secretary, +46 (0)8 613 46 94