Six mid-sized systemically important institutions shall meet the Debt Office’s requirement with subordinated liabilities

18 June 2018

The Swedish National Debt Office today makes public that the principle of subordinated liabilities shall also apply to the six mid-sized institutions that are critical for the financial system. The principle means that all liabilities used by the institutions to meet the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) shall be subordinated and thus should be able to be written down before other liabilities and be converted into capital in a financial crisis.

In December 2017, the Debt Office decided on plans for how banks and other institutions should be managed in a financial crisis. The Debt Office’s judgement was that ten of the Swedish institutions have business activities that are critical to the financial system (systemically important) and therefore they should be managed via resolution. These institutions are the four major banks and the mid-sized institutions Landshypotek, Länsförsäkringar, SBAB, Skandiabanken, Sparbanken Skåne and The Swedish Export Credit Corporation. For these institutions, an MREL-requirement was established implying that there should be sufficient debt and capital to be absorbed and for the institutions to be recapitalized. Thus, the own funds of an institution in resolution can be rebuilt and the business is kept going.

Subordinated liabilities are a key component in financial crisis management

The Debt Office applies two principles for how MREL should be met and the characteristics of the debts (see the MREL framework): the liabilities proportion principle and the principle of subordinated liabilities. The liabilities proportion principle ensures that there are sufficient debt instruments that can be written down and converted into capital if an institution is in a crisis.

The principle of subordinated liabilities ensures a clearly defined order of priority between different types of liabilities on institutions' balance sheets. In a financial crisis, the subordinated liabilities are written down before other liabilities. Thus it becomes clear that shareholders and investors in subordinated liabilities are those who should bear the costs when an institution fails.

The Debt Office has previously made public that the liabilities proportion principle applies to all systemically important institutions and that the principle of subordinated liabilities shall apply to major banks. Today, the Debt Office clarifies that the principle of subordinated liabilities shall also apply to the medium-sized systemically important institutions.

The liabilities shall be subordinated in year 2022

All systemically important institutions must gradually build up the volume of subordinated liabilities required to meet the minimum requirement by 2022. During the transitional period, the Debt Office will monitor that volumes are being built up at a reasonable rate.

Contact

Robert Sennerdal, Press Secretary, +46 (0)8 613 46 94