The importance of a prepared strategy for managing a bank in crisis

19 December 2018

The Swedish National Debt Office has reviewed plans for how every bank and other institutions in Sweden are to be managed in the event of a crisis. “Financial crises are among the most costly events a society can experience. Having a thoroughly prepared plan allows us to immediately begin implementing crisis management measures. Taxpayers and depositors shall always be protected,” says Johanna Fager Wettergren, department head at the Debt Office.

At the end of each year, the Debt Office establishes resolution plans. Since as recently as three years ago, a new framework for resolution has been in place in the EU and thereby also in Sweden. The new arrangement entails that the Debt Office can intervene and take control of a bank or other institution in crisis that is no longer deemed viable. During this time, the bank is kept open so that customers have access to their accounts and other services. This was not previously possible. Instead, governments had to use tax funds to prevent a bankruptcy that risked affecting the stability of the financial system.

“Now we are able to manage a bank in crisis in a more orderly way, in which the bank’s shareholders and creditors foot the bill. This new system benefits all citizens, because we ensure that our society’s financial stability is maintained without jeopardising tax funds,” says Johanna Fager Wettergren, Head of Financial Stability and Consumer Protection at the Debt Office.

Johanna Fager Wettergren, department head at the Debt Office

Johanna Fager Wettergren, department head at the Debt Office.

Certain banks are systemically important

As part of the work in drawing up a resolution plan for every bank, the Debt Office assesses whether the banks are systemically important, i.e. their level of importance to the financial system.

“We look at whether the bank has critical functions such as large volumes of deposits and lending. The failure of such a bank could have significant consequences for the financial system.”

In this year’s decision, published today, nine such institutions made the list. Last year there were ten.

“This year, Nordea is no longer on the list because its headquarters were recently moved to Finland. Nordea, of course, remains a systemically important major bank, but we no longer hold the primary responsibility for its resolution measures. That responsibility has been transferred to the EU Banking Union.”

How are banks affected by being classified as systemically important? Above all, they are subject to new requirements, and the Debt Office may require action if there are significant barriers to implementing resolution measures.

“Banks must have liabilities of a certain type that can be written down to cover losses and restore capital in a crisis. In this way, the state can maintain the bank’s operations without using tax funds.”

The requirement is called the minimum requirement for own funds and eligible liabilities, or MREL.

The deposit guarantee always applies

Over 150 banks and other institutions are deemed non-systemically important. These have a small impact on financial stability and can be put into bankruptcy or liquidation. For these banks, which are not managed through resolution, the Debt Office draws up simplified resolution plans.

“It is important to remember that the deposit guarantee always applies regardless of whether we deem them systemically important. This means that depositors’ money is protected up to SEK 950,000 per person and institution.”

An ongoing effort

Johanna Fager Wettergren emphasises one challenge above all – that resolution is new to everyone.

“There is not much experience or many examples to draw from yet, so cooperation and the exchange of knowledge between countries is especially important. Spain has had a major case in which a bank was put into resolution. We have, of course, followed that case closely.”

Resolution planning is an ongoing effort at the Debt Office.

“Thorough assessments need to be made requiring extensive analysis. Sweden is one of the first countries to establish decisions for all institutions. It is very gratifying that we have come so far. We now have the fundamentals in place, but we will continue to develop this work for many years to come.”

Read more

Press release: Annual decisions taken on planning for crisis management of banks

Managing banking crises (resolution)