## cr17306

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### EXECUTIVE SUMMARY — Background and recent reforms
- Since the 2011 FSAP, Sweden has:
  - enacted new legislation,
  - introduced a resolution regime for credit institutions and certain investment firms,
  - established a national resolution authority and a Financial Stability Council (FSC),
  - held financial crisis simulation exercises,
  - revised its deposit insurance system (DIS) allowing it to fund resolution measures.
- The DIS Fund stands at 35.2 billion SEK, which represents 2.3 percent of insured deposits; this will decrease to approximately 1.8 percent after Nordea Bank’s branchification—when NDO will also need to cover depositors in the new branches—yet it remains close to thrice the EU target level.
- Sweden’s financial oversight architecture ensures—consistent with EU rules—functional separation between resolution, supervision, and lender-of-last-resort (LOLR) functions.
- Sweden is home to one global systemically important bank (G-SIB) and three other major cross-border banks, creating significant home-country responsibilities.

### Sound Swedish foundations and outstanding needs
- Implemented tools and arrangements:
  - Full resolution toolkit, including recovery and resolution planning (RRP).
  - Recovery and resolution planning (RRP) framework in place; NDO designated as Swedish resolution authority; new Resolution Act (2015:1016) and Precautionary Government Support to Credit Institutions Act (PGS Act, 2015:1017) enacted.
- Identified needs:
  - Further investments to strengthen safety net and crisis management frameworks to ensure operational capacity to rapidly deploy recovery and resolution tools.
  - Under an expanded FSC mandate (to include crisis preparedness), ensure agency-specific and national financial crisis preparedness, including a national crisis management plan and regular single- and multi-agency financial crisis simulation exercises.
  - Revamp the Nordic-Baltic Stability Group (NBSG) to fulfill a regional role under strengthened Swedish leadership.
  - Define strategies for liquidity assistance to banks in resolution and develop a formal framework for solvency and viability assessment of institutions that need emergency liquidity assistance (ELA).
  - Conclude ongoing discussions to increase staffing to ensure adequate and sustainable financial and human resources for RRP commensurate with the size and complexity of Sweden’s financial sector and home-country responsibilities.

### Riksbank operational and legal clarifications (ELA, capital, and autonomy)
- Recommended amendments to the Riksbank Act:
  - Confirm the Riksbank’s ELA power as a component of its financial stability mandate.
  - Provide explicit statutory authority to extend ELA for financial stability purposes to individual banks and to the financial system as a whole.
  - Prescribe coverage by the state of a shortfall in the Riksbank’s capital and general reserve.
- Consider complementing state coverage with ex ante indemnification and guarantee arrangements for ELA losses if incurred by the Riksbank to promote financial and operational autonomy.
- Seek swap-agreements with central banks in jurisdictions where Swedish banks operate through branches to ensure availability of ELA in their currencies.
- Riksbank balance-sheet and capital context:
  - Riksbank reserve fund rule: when reserve fund is less than "SEK 500 million," "10 percent of the annual profits—if any is made—will be allocated to the reserve fund until it has reached said threshold."
  - Proposed elements from a Commission of Inquiry:
    - Riksbank’s inflation-protected capital to be "SEK 75 billion," including "SEK 30 billion in equity capital";
    - losses smaller than "SEK 10 billion" would be compensated by withholding profits until equity capital is restored;
    - larger losses would require restoration by injection of new equity capital.
  - End-2015 balance-sheet numbers: capital "SEK 1 billion," reserves "SEK 51.197 billion," total equity "SEK 52.197 billion;" when revaluation reserves are added, equity totals approximately "SEK 97 billion."
- Available guarantee capacity and statutory limits:
  - NDO authorized to guarantee up to SEK 750 billion through the Stability Fund and SEK 200 billion through the Resolution Reserve (without further parliamentary involvement).

### Recovery and Resolution Planning (RRP), inter-agency arrangements, and timing
- Priorities to expedite:
  - Recovery and resolution planning for credit institutions that will be subject to full or comprehensive plans.
  - Development of the Resolution Handbook.
  - Update of the Early Intervention Manual, supported with a cooperation agreement between the agencies to smoothly transition from early intervention to resolution.
- Coordination and legal protection:
  - Strengthen legal and operational framework for legal protection for officials, staff, and agents of all financial oversight agencies by:
    - Complementing current protection as civil servants with specific clauses in financial sector legislation, including indemnification for legal costs—consistent with international standards.
    - Establishing agency-specific internal arrangements to ensure legal aid, liability indemnification, and protection against self-incrimination.
- Mission view on resolution strategy for large cross-border banks:
  - Single point of entry resolution with open-bank bail-in seems the most appropriate resolution strategy for the four cross-border banks.
- NDO timeline and targets:
  - NDO expects to finalize the first resolution plans for the large banks by "end-2016," then turn to mid-size banks.
  - NDO aims to adopt its MREL policy in the "first quarter of 2017" (after consultation with FI).
- FI planning and categorization for recovery planning:
  - Full plans for approximately "the ten largest";
  - Partially simplified plans for banks that need less comprehensive plans;
  - Fully simplified plans for the overwhelming majority of the "200 banks and investment firms."

### Operational capacity and staffing (Box 1)
- FI staffing and needs:
  - For the four cross-border banks’ full recovery planning, FI has allocated "4 full-time equivalents (FTEs)."
  - No decision on staffing for several banks that will require partially simplified recovery plans, and the close to "200 institutions" for which fully simplified plans will need to be adopted.
  - FI’s "2017-2019 Planning (FI DNR 16-1909)" notes that "20 FTEs" are needed in ‘Large Bank Supervision’ to execute new tasks, including BRRD-related responsibilities.
  - Fee-based funding introduced for supervisory assessments of recovery plans.
- NDO staffing and legal support:
  - NDO allocated "10 FTE" for resolution planning, including "2 FTE" for policy development and international relations.
  - Resolution staff is supported by "1 FTE" from the legal department (out of a total of "5 FTE" legal staff).
- Legal protection and indemnification gaps:
  - Tort Law protection may not clearly extend to agents (lawyers, accountants, auditors, IT experts) engaged by agencies, nor to the agencies themselves.
  - Tort Law silent on indemnification for legal costs; none of the agencies has pertinent internal rules, policies, and procedures in place.
  - Liability insurance provided by FI covers claims up to "10 million SEK," which is unlikely to be sufficient.
- Recommended agency operational arrangements:
  - Choice and timing of payment of legal representation;
  - Protection against self-incrimination during internal investigations;
  - Liability and legal aid insurance covering realistic monetary amounts given high financial stakes.

### Early Intervention Framework (Appendix III)
- Role and principles:
  - Early intervention critical to prevent failure and to enable orderly resolution if viability cannot be restored.
  - Framework should provide a ladder of powers without requiring mechanical application of less intrusive measures before more intrusive ones.
- Components and powers:
  - Clear triggers for timely exercise of powers;
  - Broad range of effective powers to restore weak banks;
  - Clear path to orderly resolution when institution appears unlikely to return to viability.
- Examples of progressive measures:
  - Direct institution to change business strategy or implement recovery plan when prudential requirements are breached or likely to be breached.
  - Remove or replace members of senior management if earlier powers insufficient.
  - Appoint a ‘temporary administrator’ to carry out management functions where removal/replacement is insufficient.
- Write-down and conversion powers:
  - FI may require write-down or conversion of relevant capital instruments (CET1, additional Tier 1, Tier 2) when:
    - (1) the competent authority determines the bank/group will no longer be viable unless exercised; or
    - (2) extraordinary public financial support (other than support to mitigate a systemic crisis) is required.
  - Write-down/conversion power may also be used in combination with resolution.

### Deposit Insurance, least-cost criteria, and EU advocacy points
- DIS funding and coverage:
  - DIS Fund: 35.2 billion SEK; 2.3 percent of insured deposits (will decrease to approximately 1.8 percent after Nordea branchification).
  - NDO has access to an unlimited credit facility on the government.
- Issues with BRRD least-cost criteria and Article 109:
  - Article 109 states: “in all cases the liability of the deposit guarantee shall not be greater than the amount of losses that it would have had to bear had the institution been wound up under normal insolvency proceedings.”
  - Strict interpretation could prevent DIS from providing upfront support greater than its estimated net liquidation cost, constraining effective use of DIS to fund resolution.
  - Mission recommended reconsideration to allow DIS to disburse greater funds up front if estimated eventual cost to the DIS, net of recoveries, would be lower than its estimated net liquidation costs.
- Pari passu treatment and BRRD interpretation:
  - BRRD explicitly allows departures from pari passu for the bail-in tool, but not explicitly for sale of business and bridge institution tools.
  - Mission recommends Sweden advocate within the European Union:
    - (1) legal certainty that the BRRD allows for departure from pari passu treatment of creditors with respect to all resolution tools;
    - (2) a less restrictive interpretation of the least-cost criteria to allow a more effective use of deposit insurance to fund resolution tools.
  - Clarifications to BRRD interpretation and application may be necessary at the EU level because Swedish authorities cannot unilaterally change EU directives and regulations.
- Authorities’ stance and next steps:
  - Swedish authorities appear to support a less strict interpretation of Article 109; clarification by the EBA as part of the single rulebook Q&A process was pending.

### Cross-border cooperation and Nordic-Baltic arrangements
- Sweden should assume active leadership in a revamped Nordic-Baltic Stability Group (NBSG) to:
  - strengthen crisis preparedness and management regionally,
  - support development of bi- and multilateral MoUs,
  - organize regular cross-border crisis simulation exercises (CSEs),
  - develop general policies for treatment of systemic branches.
- Cross-border arrangements needed because Sweden is home to one G-SIB and three other major cross-border banks with extensive regional operations.

### Resolution toolkit implemented in Sweden (overview)
- Implemented BRRD principal resolution tools:
  - Sale of business tool;
  - Bridge institution tool;
  - Asset separation tool;
  - Bail-in tool.
- Optional government financial stabilization tools implemented as last-resort measures:
  - Public equity support tool;
  - Temporary public ownership tool.
- Complementary powers include authority to appoint a special manager and impose stays on rights to terminate contracts or execute collateral.
- BRRD requires resolution authorities to have the ability to preempt insolvency proceedings (Article 86).
- NCWO constraint and bail-in:
  - Resolution fund can only be used to exclude some creditors from bail-in under exceptional circumstances and if shareholders and creditors have first absorbed losses of at least 8 percent of total liabilities.

### Key recommendations (extracted from Table 1 and Box 1)
- Ensure adequate and sustainable financial and human resources for recovery and resolution planning commensurate with the size and complexity of Sweden’s financial sector and home-country responsibilities. (MoF/NDO/FI; ¶19) — Time: I,C
- Strengthen legal and operational framework for legal protection for officials, staff, and agents of all financial oversight agencies, including indemnification for legal costs and agency-specific arrangements. (MoF; ¶20) — Time: NT
- Expand the FSC’s mandate to include crisis preparedness, supported by a preparatory group and secretariat with pertinent expertise. (MoF; ¶21) — Time: I
- Under the oversight of the national crisis manager, ensure agency-specific and national financial crisis preparedness, including a national crisis management communication plan and regular single- and multi-agency financial crisis simulation exercises. (MoF/NDO/FI/RB; ¶22) — Time: I,C
- Expedite (1) recovery and resolution planning for credit institutions that will be subject to full or comprehensive plans, (2) development of the Resolution Handbook, and (3) update of the Early Intervention Manual supported with a cooperation agreement between the agencies. (NDO/FI; ¶23, ¶24) — Time: I
- Amend the Riksbank Act to clarify the Riksbank’s financial stability mandate and confirm its ELA power, and prescribe coverage by the state of a shortfall in the Riksbank’s capital and general reserve; consider indemnification and guarantee arrangements for ELA losses if incurred by the Riksbank. (MoF/RB; ¶25, ¶26, ¶27) — Time: MT
- Seek swap-agreements with central banks in jurisdictions where Swedish banks operate through branches to ensure availability of ELA in their currencies. (RB; ¶26) — Time: NT
- Define strategies for liquidity assistance to banks in resolution, and conclude a cooperation agreement for the solvency and viability assessment of institutions that need ELA. (RB/FI/NDO; ¶28) — Time: NT
- Revamp the NBSG, supported by updated bi- and multilateral MoUs, to strengthen crisis preparedness and management, including regular financial crisis simulation exercises. (MoF/NDO/FI/RB; ¶29) — Time: MT,C
- Within the European Union, advocate (1) legal certainty that the BRRD allows for departure from pari passu treatment of creditors with respect to all resolution tools, and (2) a less restrictive interpretation of the least-cost criteria to allow a more effective use of deposit insurance to fund resolution tools. (MoF/NDO; ¶30, ¶31)

### Key statistics and exact figures cited
- DIS Fund: 35.2 billion SEK.
- DIS Fund as share of insured deposits: 2.3 percent (will decrease to approximately 1.8 percent after Nordea Bank’s branchification).
- Relative to EU target level: DIS Fund close to thrice the EU target level.
- Number of banks and investment companies requiring RRPs: 200.
- Number of G-SIBs in Sweden: 1.
- Number of other major cross-border banks: 3.
- Number of institutions with simplified plans: close to 200.
- FI allocated staff for cross-border banks: "4 full-time equivalents (FTEs)."
- FI noted need for "20 FTEs" in ‘Large Bank Supervision’ in "2017-2019 Planning (FI DNR 16-1909)."
- NDO allocated "10 FTE" for resolution planning, including "2 FTE" for policy development and international relations; supported by "1 FTE" from legal department (out of "5 FTE" legal staff).
- FI liability insurance coverage: "10 million SEK."
- Riksbank reserve trigger: "SEK 500 million."
- Riksbank proposed inflation-protected capital: "SEK 75 billion" including "SEK 30 billion in equity capital."
- Loss thresholds in proposal: losses smaller than "SEK 10 billion" compensated by withholding profits.
- End-2015 Riksbank capital: "SEK 1 billion"; reserves "SEK 51.197 billion"; equity "SEK 52.197 billion"; equity with revaluation reserves approximately "SEK 97 billion."
- NDO guarantee authorizations: SEK 750 billion (Stability Fund) and SEK 200 billion (Resolution Reserve).

*Source: cr17306 — Executive Summary, Box 1, Appendix III and related sections.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Background and recent reforms
- Since the 2011 FSAP, Sweden has enacted new legislation, introduced a resolution regime for credit institutions and certain investment firms, established a national resolution authority and a Financial Stability Council (FSC), held financial crisis simulation exercises, and revised its deposit insurance system (DIS) allowing it to fund resolution measures.
- The DIS appears well-funded, standing at close to thrice the EU target level.
- Sweden’s financial oversight architecture ensures—consistent with EU rules—functional separation between resolution, supervision, and lender-of-last-resort (LOLR) functions.

### Sound Swedish foundations
- A comprehensive resolution toolkit now exists, including recovery and resolution planning (RRP).
- Proper execution of each agency mandate promotes that the agencies are collectively prepared for a crisis.
- Sweden is home to one global systemically important bank (G-SIB) and three other major cross-border banks, which creates significant home-country responsibilities.

### Need to invest in operational capacity
- Further investments are needed to strengthen the safety net and crisis management frameworks to ensure operational capacity to rapidly deploy recovery and resolution tools.
- Under an expanded FSC mandate (to include crisis preparedness), authorities need to ensure:
  - Agency-specific and national financial crisis preparedness, including a national crisis management plan.
  - Regular single- and multi-agency financial crisis simulation exercises.
- The Nordic-Baltic Stability Group (NBSG) needs to be revamped to fulfill a similar role at the regional level under a strengthened, active Swedish leadership.
- Authorities should define strategies for liquidity assistance to banks in resolution and develop a formal framework for the solvency and viability assessment of institutions that need emergency liquidity assistance (ELA).
- Ongoing discussions to increase staffing should be concluded as soon as possible to ensure that adequate and sustainable financial and human resources are allocated to RRP commensurate with the size and complexity of Sweden’s financial sector and the country’s home-country responsibilities, which will help expedite the RRP for systemic institutions.

### Riksbank operational and legal clarifications
- The Riksbank Act should be amended to:
  - Confirm the Riksbank’s ELA power as a component of its financial stability mandate.
  - Provide explicit statutory authority to extend ELA for financial stability purposes not only to individual banks but also to the financial system as a whole.
  - Prescribe coverage by the state of a shortfall in the Riksbank’s capital and general reserve.
- Consider complementing the state coverage with ex ante indemnification and guarantee arrangements for ELA losses if incurred by the Riksbank, to promote the Riksbank’s financial and operational autonomy.
- To ensure the availability of ELA in foreign exchange, the Riksbank should seek to conclude swap-agreements with central banks in jurisdictions where Swedish banks operate through branches.

### Recovery and resolution planning and inter-agency arrangements
- Expedite:
  - Recovery and resolution planning for credit institutions that will be subject to full or comprehensive plans.
  - Development of the Resolution Handbook.
  - Update of the Early Intervention Manual, supported with a cooperation agreement between the agencies to smoothly transition from early intervention to resolution.
- Strengthen the legal and operational framework for legal protection for officials, staff, and agents of all financial oversight agencies by:
  - Complementing current protection they enjoy as civil servants with specific clauses in financial sector legislation, including indemnification for legal costs—consistent with international standards.
  - Establishing agency-specific internal arrangements to ensure legal aid, liability indemnification, and protection against self-incrimination.

### Table 1 — Recommendations on Financial Safety Net and Crisis Management
- 1. Ensure that adequate and sustainable financial and human resources are allocated to recovery and resolution planning commensurate with the size and complexity of Sweden’s financial sector and the country’s home country responsibilities. (MoF/NDO/FI; ¶19) — Time: I,C
- 2. Strengthen the legal and operational framework for legal protection for officials, staff, and agents of all financial oversight agencies, by complementing the current protection they enjoy as civil servants with specific clauses in financial sector legislation, including indemnification for legal costs—consistent with international standards—and agency-specific internal arrangements to ensure legal aid, liability indemnification, and protection against self-incrimination. (MoF; ¶20) — Time: NT
- 3. Expand the FSC’s mandate to include also crisis preparedness, supported by a preparatory group and secretariat with pertinent expertise. (MoF; ¶21) — Time: I
- 4. Under the oversight of the national crisis manager, ensure agency-specific and national financial crisis preparedness, including a national crisis management communication plan and regular single- and multi-agency financial crisis simulation exercises. (MoF/NDO/FI/RB; ¶22) — Time: I,C
- 5. Expedite (1) recovery and resolution planning for credit institutions that will be subject to full or comprehensive plans, (2) the development of the Resolution Handbook, and (3) the update of the Early Intervention Manual supported with a cooperation agreement between the agencies to smoothly transition from early intervention to resolution. (NDO/FI; ¶23, ¶24) — Time: I
- 6. Amend the Riksbank Act to (1) clarify the Riksbank’s financial stability mandate and confirm its ELA power, and (2) prescribe coverage by the state of a shortfall in the Riksbank’s capital and general reserve; and consider complementing this with indemnification and guarantee arrangements for ELA losses if incurred by the Riksbank. (MoF/RB; ¶25, ¶26, ¶27) — Time: MT
- 7. Seek to conclude swap-agreements with central banks in jurisdictions where Swedish banks operate through branches, aiming to ensure the availability of ELA in their currencies. (RB; ¶26) — Time: NT
- 8. Define strategies for liquidity assistance to banks in resolution, and conclude a cooperation agreement for the solvency and viability assessment of institutions that need ELA. (RB/FI/NDO; ¶28) — Time: NT
- 9. Seek to revamp the NBSG, supported by updated bi- and multilateral MoUs, to strengthen crisis preparedness and management, including regular financial crisis simulations exercises. (MoF/NDO/FI/RB; ¶29) — Time: MT,C

*Executive Summary, Sweden: IMF Financial Sector Assessment Program (FSAP) – Executive Summary section.*

### 10. Within the European Union, advocate (1) legal certainty that the BRRD allows for departure

### 10. Within the European Union, advocate (1) legal certainty that the BRRD allows for departure from pari passu treatment of creditors with respect to all resolution tools, and (2) a less restrictive interpretation of the least-cost criteria to allow a more effective use of deposit insurance to fund resolution tools. (MoF/NDO; ¶30, ¶31)

### Background and context
- The note elaborates on recommendations of the 2016 Financial Sector Assessment Program (FSAP) Update for Sweden with respect to the financial safety net and crisis management arrangements.
- Sweden has implemented the EU Bank Recovery and Resolution Directive (BRRD) and related EU single rulebook elements, including CRD IV, DGSD, and EBA binding technical standards.
- Sweden is outside the EU Banking Union but is subject to the EU single rulebook.
- The Swedish resolution framework is recent and remains untested; the NDO is designated as the Swedish resolution authority and Sweden has enacted a new Resolution Act (2015:1016) and a new Precautionary Government Support to Credit Institutions Act (PGS Act, 2015:1017).

### Key findings related to the recommendation
- The note identifies issues that may require advocacy within the European Union because some matters cannot be addressed unilaterally by Swedish authorities.
- The FSAP recommended allowing the Deposit Insurance Scheme (DIS) to fund resolution measures; Sweden has implemented the full resolution toolkit including discretionary government stabilization tools.
- The Swedish DIS Fund stands at 35.2 billion SEK, which represents 2.3 percent of insured deposits; this will decrease to approximately 1.8 percent after Nordea Bank’s branchification—when NDO will also need to cover depositors in the new branches—yet it remains close to thrice the EU target level; the NDO has access to an unlimited credit facility on the government.

### Policy recommendations and advocacy points (implicit in the content unit)
- Advocate within the European Union for:
  - Legal certainty that the BRRD allows for departure from pari passu treatment of creditors with respect to all resolution tools.
  - A less restrictive interpretation of the least-cost criteria to allow a more effective use of deposit insurance to fund resolution tools.
- Recognize that clarifications to BRRD interpretation and application may be necessary at the EU level because the Swedish authorities cannot unilaterally change EU directives and regulations.

### Operational capacity and resource implications
- Staffing and resourcing needs:
  - Recovery and resolution planning (RRP) workload: first recovery and resolution plans for all 200 banks and investment companies.
  - Sweden is home to one G-SIB and three other major cross-border banks for which full RRPs should be adopted, and several other banks that will require comprehensive plans—in addition to close to 200 institutions with simplified plans.
  - FI and NDO appear to be understaffed relative to the size and complexity of Sweden’s financial sector and home-country responsibilities; the mission recommended that ongoing discussions to increase the staffing of the NDO and FI be concluded as soon as possible, and adequate and sustainable financial and human resources be allocated, particularly to recovery and resolution planning commensurate with the size and complexity of Sweden’s financial sector and the country’s home-country responsibilities.
- Operational tasks requiring resources:
  - Develop a new resolution handbook to operationalize the resolution toolkit.
  - Produce an updated early intervention manual to ensure consistency with the BRRD.
  - Prepare full RRPs for large cross-border banks and simplified RRPs for other institutions.

### Key statistics and exact figures from the note
- DIS Fund: 35.2 billion SEK.
- DIS Fund as share of insured deposits: 2.3 percent (will decrease to approximately 1.8 percent after Nordea Bank’s branchification).
- Relative to EU target level: DIS Fund close to thrice the EU target level.
- Number of banks and investment companies requiring RRPs: 200.
- Number of G-SIBs in Sweden: 1.
- Number of other major cross-border banks: 3.
- Number of institutions with simplified plans: close to 200.

*cr17306 - 10. Within the European Union, advocate (1) legal certainty that the BRRD allows for departure from pari passu treatment of creditors with respect to all resolution tools, and (2) a less restrictive interpretation of the least-cost criteria to allow a more effective use of deposit insurance to fund resolution tools.*

### Box 1. Recovery and Resolution Staffing

### Box 1. Recovery and Resolution Staffing

### Staffing for recovery and resolution functions
- FI—For the four cross-border banks’ full recovery planning, FI has allocated "4 full-time equivalents (FTEs)."  
- FI—No decision has been made about the staffing for the several banks that will require partially simplified recovery plans, and the close to "200 institutions" for which fully simplified plans will need to be adopted.  
- FI—In its "2017-2019 Planning (FI DNR 16-1909)" FI notes that "20 FTEs" are needed in ‘Large Bank Supervision’ to execute its new tasks, including BRRD-related responsibilities.  
- Authorities—Fee-based funding has been introduced for supervisory assessments of recovery plans.  
- NDO—For resolution planning, NDO has allocated "10 FTE," including "2 FTE" for policy development and international relations.  
- NDO—The resolution staff is supported by "1 FTE" from the legal department (out of a total of "5 FTE" legal staff).

### Legal protection and indemnification
- Finding—Sweden relies on the non‑litigious business culture and the legal protection that the agencies’ officials and staff enjoy under the Tort Law.  
- Issue—Unclear whether the Tort Law’s high level of protection for civil servants extends to (1) agents (lawyers, accountants, auditors, IT experts) engaged by agencies for resolution measures, and (2) the agencies themselves.  
- Gap—The Tort Law is silent on indemnification for legal costs; none of the agencies has pertinent internal rules, policies, and procedures in place.  
- Recommendation—Include specific clauses in pertinent financial sector legislation covering agencies, current and former officials, staff, and agents—including indemnification for legal costs.  
- Recommendation—Agencies should put in place operational arrangements to make legal protection effective, covering:
  - choice and (timing of) payment of legal representation;
  - protection against self-incrimination during internal investigations also to build a case to defend the agencies;
  - liability and legal aid insurance covering realistic monetary amounts in light of the high financial stakes at play in resolution cases.  
- Note—The mission noted that the liability insurance provided by FI covers claims up to "10 million SEK," which is unlikely to be sufficient.

### FSC mandate, contingency planning, and crisis simulation exercises (CSEs)
- Finding—The FSC has been set up as a forum for exchanging information on financial stability and discussing measures to prevent financial imbalances and crisis management measures, but responsibility to actively oversee national contingency planning, including national and cross-border financial CSEs, has not been formally assigned; nor is there a national contingency plan.  
- Recommendation—Government should update the FSC’s terms of reference (ToR 2013:120) and expand the FSC’s mandate to include crisis preparedness at the national level; supporting preparatory group and FSC secretariat should include contingency planning expertise.  
- Three-prong approach recommended:
  - Agency-Specific Plans—All agencies have business continuity plans; Riksbank has a ‘crisis binder’ covering ELA operations; NDO is developing a ‘resolution handbook.’ All agencies should have contingency plans tailored to financial sector contingencies, supported by effective communications.
  - National Plan—Develop a national plan to ensure cooperation and communication in the FSC, ensure officials use the same facts and assumptions, ensure rapid access to reliable information and timely assessments, and focus specifically on communication (stay on message, explain unconventional actions, neutralize speculations).
  - Crisis Simulation Exercises (CSEs)—Each agency should regularly test and update contingency plans; single-agency CSEs should be complemented by regular multi-agency CSEs (also with cross-border counterparts); simulations could include industry participants and be comprehensive or focused (e.g., information sharing and decision-making).  
- Note—The national plan could build on the recently updated MoU among agencies; authorities intend to supplement the MoU with more detailed and thematic agreements.

### Risk assessments, Early Intervention Framework (EIF), and coordination with resolution
- FI—Continues to strengthen bank-specific risk assessments and the EIF.  
- FI—Follows EBA Guideline "EBA/GL/2014/13" on common procedures and methodologies for the supervisory review and evaluation process (SREP). In September 2016, FI intends to complete the first cycle of continuous risk assessments as required by the guideline; these will be the basis for reviewing recovery plans, which in turn are mapped against the SREP outcome.  
- EIF—Strengthened through implementation of the CRD IV package and the BRRD (Appendix II). Late 2016, FI intends to update its EIF Manual, including decision-making procedures for triggering early intervention measures, consistent with EBA Guideline "EBA/GL/2015/03," which links such measures to SREP outcomes.  
- Coordination gap—Besides existing legal requirements for coordination and information, no formal arrangements are in place between FI and NDO to ensure a smooth transition from early intervention by FI to resolution by NDO.  
- Recommendation—Expedite the update of the EIF Manual and update the MoU between FI and NDO to specifically address operational aspects of transition from EIF to resolution.

### Recovery and Resolution Plans (RRPs) timing and strategy
- FI—Will organize Swedish banks subject to recovery planning in categories depending on systemic relevance:
  - full plans for approximately "the ten largest";
  - partially simplified plans for banks that need less comprehensive plans;
  - fully simplified plans for the overwhelming majority of the "200 banks and investment firms."  
- NDO—Expects to finalize the first resolution plans for the large banks by "end-2016," then turn to mid-size banks. NDO will develop policies for simplified plans.  
- NDO—Aims to adopt its MREL policy in the "first quarter of 2017" (after consultation with FI).  
- Mission view—Single point of entry resolution with open-bank bail-in seems the most appropriate resolution strategy for the four cross-border banks.  
- Staffing constraint—Agencies have limited staffing resources for RRP; cooperation and agreement of cross-border counterparts required.  
- Mission recommendations on timeline:
  - Finalize category 1 RRPs by "end-2016";
  - Expedite category 2 RRPs so as not to delay the annual update for category 1 plans in 2017;
  - Start category 3 RRPs in 2017;
  - Expedite development of NDO’s Resolution Handbook.

### Riksbank financial autonomy, capital, and ELA powers
- Current legal framework—The Riksbank Act does not provide for a loss-coverage mechanism nor for a comprehensive capital shortfall mechanism; it provides that when the Riksbank reserve fund is less than "SEK 500 million," "10 percent of the annual profits—if any is made—will be allocated to the reserve fund until it has reached said threshold."  
- Concern—This could leave the Riksbank with low or negative capital for a prolonged period, threatening its autonomy.  
- Parliamentary consideration—MoF, at the request of the Riksdag, is considering amendments to the Riksbank Act based on a proposal from a 2013 Commission of Inquiry into the Riksbank’s financial autonomy. Proposed elements include:
  - Riksbank’s inflation-protected capital to be "SEK 75 billion," including "SEK 30 billion in equity capital";
  - losses smaller than "SEK 10 billion" would be compensated by withholding profits until equity capital is restored;
  - larger losses would require restoration by injection of new equity capital.  
- Mission view—Welcomed efforts to strengthen the Riksbank’s financial autonomy and suggested using a percentage of the Riksbank’s monetary liabilities and risk-bearing assets (instead of an absolute amount) to set statutory capital and reserve levels, and the statutory threshold for mandatory recapitalization.  
- Balance-sheet note—Chapter 10, Article 4: End-2015, the Riksbank’s capital stood at "SEK 1 billion" and its reserves at "SEK 51.197 billion" adding up to an equity of "SEK 52.197 billion." When revaluation reserves are added, the equity totals approximately "SEK 97 billion."

- ELA powers—Government assigned a parliamentary commission of inquiry to consider clarifying the Riksbank’s ELA powers. Current Riksbank Act authorizes:
  - (1) to provide credit to banks in the context of monetary policy, which authorities argue could be used to provide systemic liquidity support;
  - (2) to provide credits and grant guarantees to banks in "exceptional circumstances," which authorities argue could be used for bilateral liquidity support. Pertinent policies and procedures are documented in the Riksbank’s crisis binder.  
- Recommendation—Riksbank should complement existing arrangements with swap-agreements with central banks in jurisdictions where Swedish banks operate through branches to ensure availability of ELA in those countries’ currency.  
- Mission recommended that the Riksbank Act clearly confirm that the Riksbank has authority to provide three types of liquidity:
  - Systemic Liquidity Support—Adjunct to liquidity management via OMOs; may require change in terms on which OMOs are provided (lengthening tenure, expanding collateral accepted), possibly creating new facilities.
  - Bilateral Liquidity Support—Needed when an individual bank or a few are unable to maintain or roll over funding; should be provided at the central bank’s discretion, at a penalty rate, with appropriate haircuts on collateral, and should trigger enhanced supervision.

*Source: Box 1. Recovery and Resolution Staffing (cr17306).*

### Chapter 6, article 5 and 7, respectively, of the Riksbank Act.

### Chapter 6, article 5 and 7, respectively, of the Riksbank Act.

### Explicit ELA mandate and foreign exchange reserves
- The 2016 Article IV IMF mission will discuss with the authorities the appropriate level for the Riksbank’s foreign exchange reserves.
- Multiple reviews recommended clarifying or widening the Riksbank’s ELA powers:
  - A government-commissioned Financial Crisis Committee recommended that the Riksbank’s ELA powers be “clarified;”
  - An evaluation by Goodhart/Rochet, commissioned by parliament, recommended that the Riksbank Act be amended “to widen and clarify the conditions under which the Riksbank can provide ELA.”
- The ECB welcomes an explicit statutory mandate for ELA powers (citing ECB Opinion CON/2008/42 concerning Luxembourg’s introduction of an explicit mandate for the Banque Central du Luxembourg to provide ELA).
- The mission noted that the MoF and the Riksbank could consider an agreement requiring the Riksbank to inform the MoF before providing ELA above a certain amount to facilitate early dialogue on fiscal consequences.
- For further discussion the source references “The Lender of Last Resort Function after the Global Financial Crisis” (IMF Working Paper, WP/16/10).

### Liquidity support in resolution and modalities
- Liquidity Support (to systemic banks) in Resolution:
  - In limited cases, bilateral ELA may be needed as a temporary liquidity backstop while creating a bridge bank or recapitalizing a failed bank.
  - The mission recommended that resolution planning specify liquidity and collateral management strategies to ensure preferred resolution strategies will work.
  - Under the BRRD, resolution planning cannot assume ELA will be available, but in an actual resolution bailed-in entities may need significant liquidity, including potentially access to ELA from central banks or liquidity from governments (lending or guarantees).
  - Both types of liquidity support are addressed in the 2013 European Commission Communication on state aid rules and financial support to banks in financial crisis and in a recently published FSB guideline.
- The mission recommended that strategies be developed for such support—including on the source of the funding—and that the Riksbank, NDO, and FI agree on the modalities for assessing the liquidity-receiving institution’s solvency and viability.
- The FSB guideline notes that “Public sector backstop liquidity may be provided by one or more of the following mechanisms and/or authorities: resolution funds, deposit insurance funds, resolution authorities, central banks and/or finance ministries.”

### Central bank balance sheet protection, guarantees, and operational autonomy
- The Riksbank’s balance sheet should be protected against potential ELA exposures.
- The mission illustrated central bank ELA loss risks with Ireland’s GFC experience, during which ELA peaked at around €80 billion while collateral quality was diminishing.
- Authorities advised the mission that:
  - The Riksbank could obtain, on an ad hoc basis, guarantees from the government for regular ELA;
  - Up to certain limits, guarantees could be obtained from the NDO for ELA in resolution measures.
- The mission recognized the importance of guarantees but highlighted two issues:
  1. Capital shortfall coverage arrangements do not prevent time lags between the moment ELA losses are suffered and the moment capital shortfalls are actually covered by the guarantor (typically, the government).
  2. Ad hoc guarantees give the guarantor an ad hoc veto right, which could compromise the Riksbank’s operational autonomy.
- Mission recommendations to address these issues included:
  - Consider concluding an agreement between the government and the Riksbank to promptly indemnify the Riksbank for losses stemming from future ELA operations—possibly with express understanding that any indemnification should give due consideration to fiscal consequences; or
  - Give the Riksbank an ongoing statutory guarantee for ELA operations—possibly with a cap on such guarantee—(1) from the government for liquidity support outside resolution, and (2) from NDO for liquidity support in resolution.
- Regardless of balance sheet protection, the Riksbank should continue to appropriately value and where available demand collateral, and assess the ELA recipient’s solvency and viability (in consultation with FI and NDO).

### Available guarantee capacity and statutory limits
- Without further parliamentary involvement, NDO is authorized to guarantee up to SEK 750 billion through the Stability Fund and SEK 200 billion through the Resolution Reseve.

### Cross-border cooperation and Nordic-Baltic arrangements
- In light of Nordic-Baltic interlinkages, close cooperation among Nordic-Baltic countries should compensate for Banking Union arrangements that do not apply in four (including Sweden) out of five Nordic countries.
- Sweden, as home to one G-SIB and three other major cross-border banks with extensive regional operations, will need comprehensive bi- and multilateral cross-border arrangements for recovery and resolution planning, crisis preparedness, and management.
- The mission recommended that Sweden assume an active leadership role in a revamped Nordic-Baltic Stability Group (NBSG), supported by efforts between Swedish agencies and Nordic-Baltic counterparts to conclude bi- and multilateral MoUs, organize regular cross-border CSEs, and develop general policies for the treatment of systemic branches.

### Deposit Insurance System (DIS), least-cost criteria, and funding flexibility
- A strict interpretation of the BRRD least-cost criteria and Article 109 would leave the DIS unable to fund resolutions in many circumstances because covered deposits’ preference over other creditors could constrain DIS support.
- Article 109 states that “in all cases the liability of the deposit guarantee shall not be greater than the amount of losses that it would have had to bear had the institution been wound up under normal insolvency proceedings.”
- If strictly interpreted, the DIS could be prevented from providing upfront support greater than its estimated cost (net of recoveries in liquidation) without taking recoveries from resolution into account.
- The mission recommended reconsideration to allow the DIS to disburse greater funds up front in a resolution if the estimated eventual cost to the DIS, net of recoveries, would be lower than its estimated net liquidation costs.
- The Swedish authorities appear to support a less strict interpretation of Article 109; clarification by the EBA as part of the single rulebook Q&A process was pending.
- The mission recommended that, within the European Union, Sweden advocate a less restrictive interpretation of the least-cost criteria to allow a more effective use of deposit insurance to fund resolution tools.

### Pari passu principle, transfers, and need for EU clarification
- While EU legislation allows departures from pari passu explicitly for the bail-in tool, Swedish authorities adhere to a more flexible interpretation consistent with the Key Attributes, which prescribe flexibility to depart from pari passu to contain systemic impact or maximize resolution value.
- The BRRD does not explicitly provide for departures from pari passu for sale of business and bridge institution tools, possibly raising legal challenges invoking fundamental property rights.
- The mission recommended that the authorities advocate within the European Union that this issue be clarified and pertinent changes be adopted if needed.
- Recent court cases have refused recognition where national actions did not precisely match BRRD terms (examples cited in the source).

### Resolution toolkit implemented in Sweden (overview)
- Sweden has implemented the BRRD’s principal resolution tools:
  - Sale of business tool
  - Bridge institution tool
  - Asset separation tool
  - Bail-in tool
- Optional government financial stabilization tools have been implemented as well.
- Complementary powers include authority to appoint a special manager and imposition of stays on rights to terminate contracts or execute collateral.
- The BRRD requires resolution authorities to have the ability to preempt insolvency proceedings (Article 86).

### Bail-in tool and NCWO constraint
- The BRRD allows the resolution authority to write down or convert capital instruments and to write down and/or convert bank liabilities into equity.
- NCWO principle: no creditor should be worse off as a result of resolution than in insolvency at the time resolution commenced.
- The BRRD specifies that the resolution fund can only be used to exclude some creditors from bail-in under exceptional circumstances and if shareholders and creditors have collectively first absorbed losses of at least 8 percent of total liabilities.

### Sale of business, bridge institution, and asset separation tools (details)
- Sale of Business and Bridge Institution tools:
  - NDO may sell shares of the failing bank or its assets, rights, and liabilities to a private purchaser without consent of shareholders or third parties.
  - A bridge institution may be established, wholly or partially owned by public authorities, to conduct banking activities pending sale or wind-down.
- Asset Separation tool:
  - Resolution authority may transfer assets, rights, and liabilities to an asset management vehicle under authority ownership/direction.
  - Asset separation may only be used in combination with other resolution tools.

### Government stabilization tools (optional implementation)
- Sweden implemented the BRRD’s optional government stabilization tools as last-resort measures when other resolution tools would not suffice:
  - Public equity support tool: temporary capital in exchange for CET1 instruments, Additional Tier 1 instruments, or Tier 2 instruments.
  - Temporary public ownership tool: member states may temporarily acquire a bank’s shares subject to resolution.
- Use of either tool is subject to state aid rules and the mandatory 8 percent contribution to loss absorption by the bank’s shareholders and creditors.
- The SRM Regulation does not make these tools available to the SRB.

### Legal protection and indemnification standards for supervisors and resolution staff
- Key references and standards cited include:
  - Key Attributes of Effective Resolution Regimes for Financial Institutions (G20 and FSB, October 2014): KA 2.6 and Annex 3 on protection against liability for resolution authority staff acting in good faith.
  - KA Methodology (consultative document, August 2013) essential criteria EC 2.6.1 and EC 2.6.2 specify statutory legal protection and indemnification for costs of defending actions.
  - Explanatory notes clarify that protection should not prevent judicial review and that agents should be contractually indemnified if statutory protection is not provided.
  - Basel Committee Core Principles for Banking Supervision (BCP 2 and EC 9) require legal protection for supervisors and staff against lawsuits for actions taken in good faith.
  - Core Principles for Effective Deposit Insurance (IADI Principles, Principle 11, November 2014) require legislative legal protection for deposit insurer staff and coverage of defense costs as incurred; a contractual indemnity is not a substitute for statutory protection.
  - IAIS ICP 2.10 requires legal protection for supervisors and staff acting in good faith.
  - IOSCO Principles and methodology require adequate legal protection for securities regulators and staff acting in bona fide discharge of functions.

*Italic: Source — cr17306 - Chapter 6, article 5 and 7, respectively, of the Riksbank Act.*

### Appendix III. Early Intervention Powers

### Appendix III. Early Intervention Powers

### Role of early intervention and framework
- Resolution frameworks depend critically on the effectiveness of early intervention by the supervisor.
- The overall framework should establish a logical progression ("ladder") of increasingly stringent powers to deal with issues from noncompliance to insolvency, but:
  - This ladder should not constitute an inflexible, mechanical requirement that less intrusive measures must be applied before more intrusive actions are taken.
- International principles prescribe an early intervention framework including the following component elements (as stated):
  - (1) clear triggers for the timely exercise of powers in a manner that helps reduce arbitrariness and promotes transparency;
  - (2) broad range of effective powers available to the supervisor to help restore weak banks to sound financial conditions;
  - (3) a clear path to orderly resolution when the financial institution appears unlikely to return to viability.

### Competent authority powers under BRRD and progression of measures
- The competent authority’s extensive array of early intervention powers includes the power to direct a bank to implement a recovery plan.
- Under the BRRD, a broad and increasingly intrusive set of powers becomes available to the competent authority as different thresholds are crossed.
- Examples of progressive measures available to the competent authority:
  - Direct an institution to change its business strategy or implement elements of its recovery plan where the institution no longer meets, or is likely to breach in the near future the prudential requirements set out in CRD IV or the CRR (for example, due to a deteriorating liquidity situation).
  - Remove or replace one or more members of an institution’s senior management or management body where earlier powers are insufficient to reverse deterioration or remedy infringements.
  - Appoint a ‘temporary administrator’ to carry out all or part of the management functions of the institution, when, among other factors, removal or replacement of management would be insufficient to remedy the situation.

### Write-down and conversion powers (loss-absorbing instruments)
- In addition to early intervention powers, FI may write down or convert capital instruments to prevent the failure of a bank or an entity in the banking group.
- FI may require the write-down of relevant capital instruments (that is, common equity Tier 1 [CET1), additional Tier 1 or Tier 2 instruments) independently of resolution measures when one or more of the following circumstances apply:
  - (1) the competent authority has determined that unless the write-down or conversion power is exercised in relation to the relevant capital instruments, the bank, other entity, or the group will no longer be viable; or
  - (2) extraordinary public financial support (other than support available to mitigate a systemic crisis) is required by the bank or other entity in the group.
- The write-down and conversion power may also be used in combination with a resolution action, where the remaining conditions for entry into resolution have been met.

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*cr17306 - Appendix III. Early Intervention Powers*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17306.pdf_