## _cr11172

## Source details

**Canonical URL:** [_cr11172](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11172.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11172.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11172.pdf.json)

---

### Executive summary and main findings
- Mission visited Stockholm during March 9–22, 2009. Team comprised Ghiath Shabsigh (Head), Elias Kazarian (Deputy), Rita Babihuga, Michaela Erbenova, Dale Gray, Kotaro Ishi, Nada Oulidi, Katharine Seal, Stephanie Stolz (all IMF), and outside experts: Keith Bell, Richard Britton, Tom Kokkola, Su Hoong Chang, and Philippe Troussard.
- Macroeconomic outcomes and crisis impact:
  - Swedish GDP contracted by 7½ percent from the second quarter of 2008 to the second quarter of 2009.
  - Real GDP growth reached 5½ percent in 2010.
  - Unemployment rose from 6 percent to nearly 10 percent during the crisis period.
  - The krona depreciated by close to 20 percent against the euro.
- Financial sector effects:
  - Major banks faced liquidity strains from heavy reliance on short-term wholesale funding and concerns about Baltic exposures.
  - Insurance companies’ solvency ratios fell due to falling equity prices.
  - Mortgage bond yields rose to unprecedented levels relative to comparable government bond yields.
- FSAP purpose: Assess stability of the financial system as a whole and identify weaknesses to enhance resilience; does not cover risks specific to individual institutions (asset quality, operational or legal risks, or fraud).

### Financial stability analysis and vulnerabilities
- Credit risk resilience:
  - Stress testing results indicate banks should be able to maintain adequate capital in the face of severe credit risk shocks due to high profits, capital buffers, and relatively high-quality loan portfolios.
- Liquidity risk concerns:
  - Liquidity stress tests indicate vulnerabilities because of banks’ heavy reliance on short-term wholesale funding.
  - Short-term liquidity measure is significantly less than 100 percent, suggesting insufficient liquidity reserves to cover modeled cash outflows.
  - Recommendation: Monitor liquidity more closely by instituting higher quality liquidity reporting.
  - Recommendation: Clarify governance framework of international reserve management and review the Riksbanken’s (RB’s) collateral framework.
- Housing and household balance sheets:
  - Prices rose by some 40 percent from 1995 to 2010 and did not correct following the recent crisis.
  - Household debt has increased by twofold since 1995.
  - The share of variable interest rate debt rose from below 10 percent to 50 percent of the total outstanding stock.
  - An 85 percent loan-to-value (LTV) ceiling was imposed in October 2010.
  - Recommendation: Authorities should be prepared to tighten the cap if house prices continue to increase at the same pace.
- Macroprudential arrangements:
  - Current arrangements are comprehensive; consider establishing a high level Systemic Financial Stability Council (SFSC) to coordinate policies with clear lines of responsibilities and accountability.

### Policy response and crisis-intervention measures
- Riksbank and government actions:
  - Government Support to Credit Institutions Act enacted October 2008.
  - SNDO borrowed externally to boost international reserves.
  - RB used swap lines with the ECB (2007) and U.S. Federal Reserve (2008).
  - Deposit guarantee raised from SEK 250,000 to SEK 500,000; to be raised to EUR 100,000 (about SEK 895,000) from 2011.
  - Stabilization fund set up with government contribution of SEK 15 billion.
- Selected crisis-intervention specifics:
  - Emergency liquidity assistance of SEK 5 billion granted to Kaupthing Bank Sverige AB and Carnegie Investment Bank AB; all repaid.
  - Temporary reciprocal swap facilities with the U.S. Fed totaling $30 billion; separate swap facility with the ECB (active, but currently no use).
  - Debt guarantee scheme for medium-term borrowing established with total guarantee set at SEK 1.5 trillion (later reduced to SEK 750 billion) — active, but currently no use.
  - Recapitalization scheme for solvent banks and other credit institutions (active, but currently no use).
  - RB expanded collateral policy; new loan facilities introduced and later adjusted; SNDO held extraordinary auctions of treasury bills and invested via repos in covered bonds (discontinued).
- Exit from measures:
  - Authorities began exiting crisis-response measures in April 2010.
  - RB terminated extraordinary liquidity measures and its balance sheet shrank markedly.
  - Policy rate rose 150 basis points in total to 1.75 percent.

### Crisis management, bank resolution, and deposit insurance
- Shortcomings identified:
  - Need for a robust and flexible framework to intervene and resolve all financial institutions.
  - Introduce a special bank resolution regime.
  - Reform deposit insurance legal framework (including payout period and payout trigger).
- Emergency Liquidity Assistance (ELA):
  - RB would provide ELA, at its discretion, only to a solvent and viable institution with liquidity problems; SNDO expected to deal with insolvent institutions under the Support Act.
  - Recommendation: Clarify which authority is responsible for liquidity assistance in different phases of a crisis.
- Support Act and Stability Fund:
  - Enacted October 2008; tools include guarantees, capital injection, state takeover; Support Authority role given to SNDO with Government retaining final decision rights.
  - Stability Fund funded by levies; special stability fee amounts and governance described.
- Deposit insurance / Stability fund design:
  - Funding levy: 0.036 percent of the balance sheet total excluding equity capital and subordinated debt.
  - Payments are placed in an interest-bearing account at the SNDO.
  - Fund target: 2.5 percent of GDP within 15 years.
  - Backstop: automatic unlimited backing by the SNDO if funds fall short.

### Structure, size, concentration, and exposures
- Financial system assets equivalent to 5½ times of GDP.
- The four largest banks—Swedbank, Nordea, SEB, and Handelsbanken—account for 86 percent of banking sector assets.
- Geographic distribution of loans:
  - Sweden: 50.1%
  - Other Nordics: 28%
  - Baltics: 4.1%
  - Other: 17.9%
- Insurance sector:
  - Accounts for 14 percent of financial sector assets.
  - Top five life insurers accounted for 61 percent of assets of the life sector as of end-2009.
  - Top five nonlife insurers have about 55 percent market share of gross premiums written in 2009.
  - Life insurers’ foreign investments: 32 percent of total assets of the industry.
  - Nonlife insurers write 34 percent of gross premiums in foreign risks (2009).
- Mortgage and household exposure:
  - Housing and property developers’ loans account for 60 percent of total lending.
  - Banks’ share of corporate loans: 22 percent of total loan portfolio.
  - Household share of banks’ total loan portfolio: 34 percent.

### Stress testing — solvency, CCA, scenarios, and outcomes
- Scope and approach:
  - Wide range of stress tests on the largest four banks (accounting for 90 percent of banking system assets): macro stress tests, liquidity stress tests, contagion stress tests, and Contingent Claims Analysis (CCA).
  - Stress-test horizon: 2011–2015 for solvency/CCA; liquidity instantaneous, 3 months and 1 year for liquidity tests.
- Macro stress test scenarios (five-year horizon):
  - Baseline scenario: WEO projections with GDP growth of 2.56 percent in 2011 and 3 percent in 2012.
  - Double-dip scenario: deviations in GDP growth by 2.7 percentage points in 2011 and 3.2 percentage points in 2012 compared to the WEO baseline.
  - More severe double-dip scenario: assumes twice the deviations from baseline for macroeconomic and EU sovereign bond market shocks.
  - Prolonged low-growth scenario: includes a house-price crash inducing a decline in domestic consumption.
- Solvency outcomes:
  - Under all four scenarios, banks showed resiliency.
  - Banks’ capital ratios remain above the 4 percent Tier 1 regulatory minimum, the 6 percent CEBS threshold, and the 8 percent total CAR regulatory minimum under both the FSAP and RB models.
  - Post-shock credit losses were not significant given banks’ high quality loan portfolios, strong operating profits, and large loan loss provisions built up during the crisis.
- Contingent Claims Analysis (CCA) results:
  - In adverse scenarios expected losses to creditors increase and equity capital decreases until 2012 and then begin to rebound.
  - Magnitude of deterioration much smaller than in 2009.
  - No bank has a capital shortfall in any year of the stress test.
  - Note: The capital shortfall concept in CCA analyses is a proxy concept and does not exactly correspond to regulatory capital shortfalls.
- Selected bank-level stress-test illustrations (2011–2015; percent and ratio entries preserved from table excerpts):
  - Bank 1 — Tier 1 ratio across scenarios and years: 10%, 9%, 9%, 10%, 11%; Total CAR: 12%, 11%, 12%, 13%, 14%.
  - Bank 2 — Tier 1 ratio entries: 10%, 9%, 10%, 11%, 12%; Total CAR entries: 12%, 11%, 11%, 12%, 13%.
  - Bank 3 — Tier 1 ratio entries: 12%, 11%, 11%, 13%, 14%; Total CAR entries: 12%, 11%, 11%, 13%, 14%.
  - Bank 4 — Tier 1 ratio entries: 11%, 10%, 10%, 11%, 12%; Total CAR entries: 13%, 12%, 12%, 14%, 15%.
- Funding cost and counterparty parameters (Adverse scenarios preserved):
  - Adverse scenario 1: Short term market funding to be refinanced 5%; Outflow of deposits to be refinanced 2%; % of increased funding cost that can be transferred to customers 95%; A decrease of net commission and other income 5%; A decrease of variable staff cost 20%.
  - Adverse scenario 2: 10%; 5%; 85%; 10%; 40%.
  - Adverse scenario 3: 15%; 10%; 80%; 15%; 60%.
- Counterparty Risk Stress Test Tier 1 Ratios (Table 8):
  - Bank 1: 5.67
  - Bank 2: 4.43
  - Bank 3: 10.51
  - Bank 4: 8.29

### Liquidity stress testing — design, metrics, and results
- Two measures similar to Basel III were calculated:
  - Short-term liquidity measure: evaluates banks’ liquidity buffers under stressed scenarios to cover unexpected outflows over three months.
  - Structural measure: assesses structural long-term liquidity relating the weighted average of liabilities to the weighted average of assets (similar to NSFR).
- Findings:
  - Banks lag in both liquidity metrics behind other European banks owing to heavy reliance on short-term market funding.
  - Structural measure is weak because of heavy reliance on non stable, short-term market funding to finance relatively illiquid assets and a large share of assets in mortgages held on banks’ balance sheets.
- Structural liquidity test results (percentage values shown):
  - Bank 3: 72%
  - Bank 1: 74%
  - Bank 2: 76%
  - Bank 4: 78%
  - Average European banks: 92%
- Recommendations:
  - Tighten liquidity regulations and introduce comprehensive liquidity reporting as envisaged in the Basel proposal.
  - Expand RB’s liquidity enhancement toolkit and review collateral framework to toughen eligibility criteria while maintaining reasonable collateral pool size.

### Large exposures, contagion, and resilience
- Large exposures and contagion tests:
  - Banks could withstand the default of a major bank but not the joint default of their three largest exposures.
  - Joint default of the three largest exposures would result in a significant impact on banks’ capitalization, although none of the banks would fall below the 4 percent Tier 1 capital ratio limit.
- Contagion tests did not evaluate systemic spillover risks from the failure of small banks and resulting deterioration of market confidence.

### Standards, supervision, and cross-cutting concerns
- Basel Core Principles (BCP) assessment:
  - Overall compliance generally high, but important concerns need to be addressed.
  - Overarching concerns: Finansinspektionen’s (FI’s) operational independence and sufficiency of resources could impair FI’s ability to discharge supervisory and oversight functions adequately and effectively.
  - FI’s staffing shortage and dependence on annual appropriations letter process impair operational independence and effectiveness.
  - Recommendations: increase FI’s resources; consider revised legal structure to ensure greater independence; establish legal protection for supervisors and staff.
- Supervisory powers and legal uncertainty:
  - FI has powers to restrict activities, issue warnings, revoke licenses, replace management, and order divestment of qualified holdings, but appeals can suspend execution of administrative decisions, creating legal uncertainty for resolution.
  - Recommendation: implement alternative legal options compatible with right of appeal to ensure timely effectiveness of remedial actions.
- Cross-border supervision and cooperation:
  - Sweden has a good framework for cross-border supervision within EU arrangements; supervisory colleges and Nordic-Baltic MOU provide a sound foundation.
  - Further work needed on modalities for addressing potential cross-border liquidity and improving information sharing.

### Insurance sector and IAIS assessment highlights
- Insurance market structure:
  - As at end-2010, there were 434 insurers: 33 life insurers; 10 unit-linked insurers; 157 nonlife insurers; 5 reinsurers; 49 captive insurers; 82 friendly societies; 97 livestock insurers; 1 association of underwriters.
  - Assets held by insurance industry as at end-2009 totaled SEK 2,967 billion, representing 95 percent of GDP.
  - Motor insurance accounted for 22 percent of total premiums written in 2009.
- Supervisory observations:
  - FI is an integrated supervisor accountable to MOF; resources are insufficient for robust risk-based supervision, especially ahead of Solvency II.
  - FI lacks legal authority to assess fitness and propriety of all senior management of insurers.
  - Recommendations: strengthen resources; extend fit and proper assessments; require reporting of reinsurance strategies, outsourcing, and off-balance sheet exposures; require audited annual regulatory returns.
- Solvency and technical provisions:
  - Life insurers’ solvency hit badly in 2008; some life insurers close to solvency intervention levels and are monitored closely.
  - Traffic-Light model introduced for stress testing; Solvency II implementation expected to strengthen supervision by January 2013.

### Securities markets, IOSCO assessment, and market integrity
- Market structure and statistics:
  - At the end of 2009, 255 companies listed on NASDAQ OMX Stockholm.
  - As of February 2011, there were 89 banks and savings banks and 135 investment firms authorized to carry on securities business.
  - As of February 2011 there were 921 collective investment schemes (CIS) under management: 519 UCITS and 400 special funds.
  - Total assets under management in these funds approximately SEK 1.7 trillion.
  - Thomson Reuters data: 42 percent of Swedish equity trading took place outside NASDAQ OMX in February 2011.
- Key supervisory findings:
  - FI is unitary regulator for banking, securities and insurance but operates under several statutes; operational independence constrained by reliance for 85 percent of its funding on Parliament.
  - Enforcement of prohibitions on insider dealing and market manipulation are inadequate; prosecution authority (NECB) successful in cases it brings but overall deterrent effect limited.
  - Recommendations: review fines and enforcement regime; increase resources for securities supervision; consider changes to funding mix for FI.

### Payment systems, RIX assessment (CPSIPS) and operational findings
- RIX system:
  - RB owns and operates RIX; RIX operating since 1990; technical platform replaced February 2009.
  - RIX has 24 participants.
  - RIX is an RTGS system settling in central bank money; no credit risk to participants on payments received.
- Legal foundation:
  - Generally sound, but "very problematic uncertainties" regarding finality and collateral security due to transposition of the Settlement Finality and Financial Collateral Directives.
  - Recommendation: address problems in legislation related to finality and collateral security.
- Operational and contingency:
  - RIX stable and reliable; two operational centers exist but are within limited geographical distance.
  - Recommendation: consider implementing a business recovery requirement of two hours (RB currently has a four hour requirement).
- Oversight and governance:
  - RB should publish up-to-date comprehensive oversight objectives, policies, scope, standards, methodologies, and distribution of responsibilities with FI.
  - RB lacks formal legal powers regarding payment, clearing and settlement activities it does not operate; recommendation to provide statutory right to issue regulations in conjunction with critical payments system responsibility.
  - Recommend further specification of MOU between RB and FI to avoid overlaps or gaps.

### Central counterparty (NOMX DM) assessment — key findings and recommendations
- Legal and operational status:
  - NOMX DM provides CCP services for equity and fixed income derivatives and repos; clears products issued in SEK, DKK, NOK, EUR; bulk in SEK.
  - NOMX DM is not incorporated as a separate legal entity but is included within NOMX STO which operates the Swedish stock exchange.
- Risk management and financial resources:
  - Comprehensive risk management framework; monitors exposures in real time and conducts intraday margin calls.
  - Concerns:
    - No mutualized default fund; financial resources provided by NOMX STO itself via a complex mechanism, creating legal uncertainty and potential delays.
    - NOMX DM accepts bank guarantees as collateral; these are illiquid and provided by member banks (concentration risk).
    - Only two liquidity providers currently.
  - Recommendations:
    - Do not accept bank guarantees as collateral.
    - Overhaul regulatory capital structure and implement fully funded framework; create two ring-fenced capital bases for NOMX DM and NOMX COM.
    - Enhance liquidity framework and increase number of liquidity providers; operationalize intraday liquidity access to RB.
    - Overhaul custodian arrangements to rely on CSDs and restrict investments to highest rated securities (e.g., AAA).
    - Consider legal separation of clearing activities from trading activities.
- Governance, transparency, and oversight:
  - Governance arrangements specified and publicly available; lack of participant representation on NOMX STO Board and limited multilateral feedback.
  - FI and RB have basis for effective regulation and oversight but need deeper understanding of NOMX COM activities and better cooperation mechanisms.
  - Recommendations: enhance member involvement through advisory committees; formalize and operationalize MOU for cross-border clearing oversight; strengthen FI/RB staffing in quantitative analysis.

### Key recommendations and implementation commitment (selected, preserving timing and priority labels)
- Financial stability:
  - Establish a high-level SFSC. Timing: ST, Priority: HP
  - Monitor closely the performance of mortgage loans. Timing: ST, Priority: HP
  - Collect and monitor on a regular basis loan default rates and nonperforming loans (NPLs) by sector and geographical allocation. Timing: MT, Priority: MP
- Cross-sector issues:
  - Increase FI’s resources to ensure effective supervision. Timing: ST, Priority: HP
  - Enhance the operational independence of FI by, inter alia, redefining the function and nature of the appropriations letter. Timing: ST, Priority: HP
  - Broaden the scope of FI’s discretion in issuing binding secondary regulations in the insurance sector. Timing: MT, Priority: MP
  - Enhance crime prosecution in the securities market sector including for insider dealing and market manipulation. Timing: MT, Priority: HP
- Payment and market infrastructures:
  - Enhance NOMX DM’s risk management procedures and separate financial resources between NOMX DM and NOMX COM. Timing: ST, Priority: HP
  - Review laws and regulations to address legal uncertainty related to settlement finality and collateralization procedures. Timing: ST, Priority: HP
  - Review the Act to allow RB to issue regulations, and formalize division of responsibilities between the RB and FI. Timing: MT, Priority: MP
- Crisis management arrangements:
  - Reconstitute the mandate of the Domestic Standing Group to focus on contingency planning and crisis management. Timing: MT, Priority: MP
  - Hold crisis simulation exercise with all parties to the domestic MOU. Timing: MT, Priority: MP
  - Carry out reform of deposit insurance, including shortening the payout period and redefining the payout trigger. Timing: MT, Priority: MP
  - Introduce a special bank insolvency regime with a possibility of deposit insurance fund to support bank restructuring. Timing: MT, Priority: MP
- Liquidity risk management:
  - Formalize communication between RB and FI in assessing institutions’ solvency and viability in the context of emergency liquidity assistance (ELA). Timing: MT, Priority: MP
  - Develop a formal process, in the context of the proposed SFSC, on international reserve management policy. Timing: MT, Priority: MP
- AML/CFT:
  - Establish measures in relation to the criminalization of terrorism financing to enable the freezing of all funds. Timing: MT, Priority: MP
  - Amend the legal framework to require current beneficial ownership information. Timing: MT, Priority: MP
- Implementation commitment:
  - Authorities committed to swiftly address FSAP concerns: proceed immediately to strengthen FI’s resources and independence; begin review of legal frameworks for bank resolution and securities markets; task force established to coordinate and oversee implementation.

### Data gaps, FSIs, and monitoring recommendations
- Data weaknesses:
  - Lack of consistent sectoral and geographic breakdowns of data on banks’ nonperforming assets.
  - Recommendation: Authorities should regularly collect and monitor loan default rates and NPLs by sector and geographical allocation, in particular housing related loans.
- Core FSIs and selected exact series (preserved values):
  - Total financial system (2010) — Number of institutions 1,493; Num ber of branches 155; Total assets (in millions of SEK) 17,865,864; Percent of total assets 100.0; Percent of GDP 557.6.
  - Four Major Banks, consolidated (2010) — Number of institutions 4; Num ber of branches 56; Total assets (in millions of SEK) 11,779,660; Percent of total assets 65.9; Percent of GDP 367.6.
  - Nominal GDP (in millions of SEK) 3,306,271 (2010).
  - Employees in the financial system: 76,508 (2009), 82,991 (2010).
- Selected FSIs time series (exact series preserved):
  - Regulatory capital to risk-weighted assets (2003–2011 Q1): 10.5, 10.6, 10.5, 10.5, 10.2, 10.7, 13.0, 12.6, 12.4.
  - Regulatory Tier I capital to risk-weighted assets (2003–2011 Q1): 8.0, 8.3, 7.7, 7.8, 7.5, 8.1, 10.9, 11.0, 11.1.
  - Nonperforming loans to total gross loans (2003–2010): 2.0, 1.2, 0.9, 0.8, 0.6, 1.1, 2.0, 1.9, 1.7.
  - Household debt as percent of GDP (2003–2010): 57.1, 60.4, 64.3, 66.9, 69.0, 72.8, 81.9, 82.9 (2010).
  - Real estate prices (One- or two dwelling buildings, year-on-year percent change): 6.1, 10.0, 10.5, 10.5, 11.3, -2.0, 7.1, 5.2.

*Source: IMF staff summary and IMF staff report materials contained in content unit _cr11172.*

### 2011. The views expressed in this document are those of the staff team and do not necessarily reflect

### SWEDEN — Financial System Stability Assessment (FSAP Update), June 23, 2011

### Executive summary and main findings
- The mission visited Stockholm during March 9–22, 2009. The team comprised Ghiath Shabsigh (Head), Elias Kazarian (Deputy), Rita Babihuga, Michaela Erbenova, Dale Gray, Kotaro Ishi, Nada Oulidi, Katharine Seal, Stephanie Stolz (all IMF), and outside experts: Keith Bell, Richard Britton, Tom Kokkola, Su Hoong Chang, and Philippe Troussard.
- The Swedish economy rebounded strongly after the crisis:
  - Swedish GDP contracted by 7½ percent from the second quarter of 2008 to the second quarter of 2009.
  - Real GDP growth reached 5½ percent in 2010.
  - Unemployment rose from 6 percent to nearly 10 percent during the crisis period.
  - The krona depreciated by close to 20 percent against the euro.
- The financial crisis had substantial effects on the financial sector:
  - Major banks faced liquidity strains due to heavy reliance on short-term wholesale funding and concerns about Baltic exposures, causing a sharp decline in banks’ share prices.
  - Insurance companies’ solvency ratios fell due to falling equity prices.
  - Mortgage bond yields rose to unprecedented levels relative to comparable government bond yields.
- FSAP purpose: Assess stability of the financial system as a whole and identify weaknesses to enhance resilience; does not cover risks specific to individual institutions (asset quality, operational or legal risks, or fraud).

### Financial stability analysis and vulnerabilities
- Credit risk resilience:
  - Stress testing results show banks should be able to maintain adequate capital in the face of severe credit risk shocks, owing to high profits and capital buffers and relatively high-quality loan portfolios.
- Liquidity risk concerns:
  - Liquidity stress tests indicate vulnerabilities because of banks’ heavy reliance on short-term wholesale funding.
  - Liquidity risks that emerged during the crisis were managed well, but weaknesses were exposed.
  - Recommendation: Monitor liquidity more closely by instituting higher quality liquidity reporting.
  - Recommendation: Clarify governance framework of international reserve management and review the Riksbanken’s (RB’s) collateral framework.
- Housing and household balance sheets:
  - Continuing house price increases and high and rising household indebtedness warrant close monitoring of mortgage loan performance.
  - The regulatory cap on loan-to-value (LTV) ratio of 85 percent was introduced and judged a good start; authorities should be prepared to tighten the cap if house prices continue to increase at the same pace.
- Macroprudential arrangements:
  - Current financial stability arrangements are comprehensive and key elements are in place.
  - Consideration: Establish a high level Systemic Financial Stability Council (SFSC) to coordinate financial stability policies and actions among relevant authorities with clear lines of responsibilities and accountability.

### Standards, supervision, and cross-cutting concerns
- Standards and codes assessment:
  - Compliance is generally high, although important concerns need to be addressed.
  - Overarching concerns: Finansinspektionen’s (FI’s) operational independence and the sufficiency of its resources could impair FI’s ability to discharge supervisory and oversight functions adequately and effectively.
  - FI and RB should clarify regulatory responsibilities for financial infrastructures and enforce adequate risk management procedures for the central counterparty (CCP).
- Cross-border supervision and cooperation:
  - Sweden has a good framework for cross-border supervision, developing within EU-wide arrangements; supervisory colleges and the Nordic-Baltic MOU provide a sound foundation for cross-border crisis management and burden sharing.
  - Further work may be needed on modalities for addressing potential cross-border liquidity and improving information sharing.

### Crisis management, bank resolution, and deposit insurance
- Recent bank failures handled relatively effectively, but the crisis revealed toolkit shortcomings for failing banks.
- Needs identified:
  - A robust and flexible framework to intervene and resolve all financial institutions.
  - Introduce a special bank resolution regime.
  - Reform the deposit insurance legal framework (including payout period and payout trigger).

### Implementation commitment
- Authorities committed to swiftly address FSAP concerns:
  - Proceed immediately to strengthen FI’s resources and independence.
  - Begin a review of legal frameworks for bank resolution and securities markets.
  - A task force established to coordinate and oversee implementation of envisaged reforms.

### Key recommendations (from Table 1)
- Financial stability
  - Establish a high-level SFSC. Timing: ST, Priority: HP
  - Monitor closely the performance of mortgage loans. Timing: ST, Priority: HP
  - Collect and monitor on a regular basis loan default rates and nonperforming loans (NPLs) by sector and geographical allocation. Timing: MT, Priority: MP
- Cross-sector issues (banking/insurance/securities)
  - Increase FI’s resources to ensure effective supervision. Timing: ST, Priority: HP
  - Enhance the operational independence of FI in discharging its supervisory responsibility by, inter alia, redefining the function and nature of the appropriations letter. Timing: ST, Priority: HP
  - Broaden the scope of FI’s discretion in issuing binding secondary regulations in the insurance sector. Timing: MT, Priority: MP
  - Enhance crime prosecution in the securities market sector including for insider dealing and market manipulation. Timing: MT, Priority: HP
- Payment and market infrastructures
  - Enhance NOMX DM’s risk management procedures and separate financial resources between NOMX DM and NOMX COM. Timing: ST, Priority: HP
  - Review laws and regulations to address legal uncertainty related to settlement finality and collateralization procedures. Timing: ST, Priority: HP
  - Review the Act to allow RB to issue regulations, and formalize division of responsibilities between the RB and FI. Timing: MT, Priority: MP
- Crisis management arrangements
  - Reconstitute the mandate of the Domestic Standing Group to focus on contingency planning and crisis management. Timing: MT, Priority: MP
  - Hold crisis simulation exercise with all parties to the domestic MOU. Timing: MT, Priority: MP
  - Carry out a reform of deposit insurance, including shortening the payout period and redefining the payout trigger. Timing: MT, Priority: MP
  - Introduce a special bank insolvency regime with a possibility of deposit insurance fund to support bank restructuring. Timing: MT, Priority: MP
- Liquidity risk management
  - Formalize communication between RB and FI in assessing institutions’ solvency and viability in the context of emergency liquidity assistance (ELA). Timing: MT, Priority: MP
  - Develop a formal process, in the context of the proposed SFSC, on international reserve management policy. Timing: MT, Priority: MP
- AML/CFT
  - Establish measures in relation to the criminalization of terrorism financing to enable the freezing of all funds. Timing: MT, Priority: MP
  - Amend the legal framework to require current beneficial ownership information. Timing: MT, Priority: MP

(Note: ST: short-term, implementation within 12 months; MT: medium-term, 1–3 years; HP: high priority; MP: medium priority.)

### Background — macroeconomic and financial setting (selected indicators and events)
- Crisis impact and recovery:
  - GDP contraction: 7½ percent from Q2 2008 to Q2 2009.
  - Real GDP growth: 5½ percent in 2010.
  - Kroonadepreciation: close to 20 percent against the euro.
  - Unemployment: rose from 6 percent to nearly 10 percent.
  - Fiscal stance: public finances remain the strongest among advanced economies, with the fiscal balance projected to return to surplus in 2011.
- Financial sector funding pressures:
  - Extensive reliance on short-term wholesale funding, combined with market concern about Baltic exposures, led several Swedish banks to face acute funding pressures.
- Nonbank sector:
  - Insurance solvency ratios fell due to falling equity prices.
  - Mortgage bond yields rose to unprecedented levels relative to comparable government bond yields.

*Source: INTERNATIONAL MONETARY FUND. Financial System Stability Assessment — Sweden. Prepared by the Monetary and Capital Markets and European Departments. Approved by José Viñals and Antonio Borges. June 23, 2011.*

### 3.      The authorities’ forceful policy response helped restore confidence. The RB

### _cr11172 - 3.      The authorities’ forceful policy response helped restore confidence. The RB

### Policy response and crisis-intervention measures
- The Riksbank (RB) implemented new liquidity measures by expanding its balance sheet and supporting banks’ liquidity needs and market reassurance.
- Key government and public sector actions:
  - The Government Support to Credit Institutions Act was enacted in October 2008 to deal with distressed systemically important institutions.
  - The Swedish National Debt Office (SNDO) borrowed externally to boost international reserves.
  - The RB used swap lines established with the ECB in 2007 and the U.S. Federal Reserve in 2008.
  - Deposit guarantee raised from SEK 250,000 to SEK 500,000; to be raised to EUR 100,000 (about SEK 895,000) from 2011.
  - A stabilization fund was set up with government contribution of SEK 15 billion.
- Selected crisis-intervention specifics (Box 1):
  - Emergency liquidity assistance of SEK 5 billion was granted to Kaupthing Bank Sverige AB and Carnegie Investment Bank AB; all repaid.
  - Temporary reciprocal swap facilities with the U.S. Fed totaling $30 billion; a separate swap facility was also established with the ECB (active, but currently no use).
  - A debt guarantee scheme for medium-term borrowing of banks and mortgage institutions was established with total guarantee set at SEK 1.5 trillion (later reduced to SEK 750 billion) — active, but currently no use.
  - A recapitalization scheme for solvent banks and other credit institutions (active, but currently no use).
  - The Riksbank expanded collateral policy (active); set up new 3, 6, and 12-month loan facilities (replaced by 28-day loan facility with a penalty rate, April 2010); temporary credit facility using commercial paper as collateral (discontinued, September 2009); new dollar term loan facilities with maturities of 28 and 84 days (discontinued, November 2009).
  - SNDO held extraordinary auctions of treasury bills and invested funds (via repos) in covered bonds to support the covered (mortgage) bond markets (discontinued).

### Effects on market confidence and exit from extraordinary measures
- Policies were successful in restoring market stability; financial sector strains eased by mid-2009.
- The authorities began exiting crisis-response measures in April 2010:
  - The RB terminated extraordinary liquidity measures and its balance sheet shrank markedly.
  - The policy rate rose 150 basis points in total to 1.75 percent.
- Remaining risks noted: a highly concentrated banking sector with important foreign activities and continued reliance on wholesale funding, including in foreign currencies.

### Corporate sector and nonfinancial corporations
- Nonfinancial corporations rebounded during 2010, with corporate financial positions strengthening, particularly for large export-oriented companies.
- Banks’ exposure to the corporate sector is much lower than during the 1990s crisis:
  - Share of corporate loans in banks’ total loan portfolio: 22 percent.
  - Household share of banks’ total loan portfolio: 34 percent.

### Household indebtedness, house prices, and mortgage credit quality
- House prices and household indebtedness have risen steadily over the past two decades:
  - Prices rose by some 40 percent from 1995 to 2010 and did not correct following the recent crisis.
  - Household debt has increased by twofold since 1995.
  - The share of variable interest rate debt rose from below 10 percent to 50 percent of the total outstanding stock.
  - An 85 percent loan-to-value ceiling was imposed in October 2010.
- Mortgage credit quality historically has not generated significant system losses due to structural features:
  - Highly regulated covered bonds market provides incentives for selective mortgage origination.
  - Swedish bankruptcy law makes it difficult for borrowers to “walk away” from debt; by law, a borrower is personally liable for life, even after a default and foreclosure procedure has been initiated.
  - A well-developed social welfare system supports households’ ability to service debt during unemployment.
  - The absence of a speculative “buy-to-let” market due to a highly regulated rental market and tenant owner subletting restrictions has prevented a speculative bubble.

### Financial sector structure, exposures, and vulnerabilities
- Size and concentration:
  - Financial system assets are equivalent to 5½ times of GDP.
  - The four largest banks—Swedbank, Nordea, SEB, and Handelsbanken—account for 86 percent of banking sector assets.
- Geographic distribution of loans (Figure 2):
  - Sweden: 50.1%
  - Other Nordics: 28%
  - Baltics: 4.1%
  - Other: 17.9%
- Insurance sector:
  - Insurance sector accounts for 14 percent of financial sector assets.
  - Top five life insurers accounted for 61 percent of assets of the life sector as of end-2009.
  - Top five nonlife insurers have about 55 percent market share of gross premiums written in 2009.
  - Life insurers’ foreign investments: 32 percent of total assets of the industry.
  - Nonlife insurers write 34 percent of gross premiums in foreign risks (2009).
- Banking vulnerabilities highlighted:
  - Renewed global recession could damage asset quality via unemployment, deteriorating corporate earnings, and real estate price corrections.
  - Funding risks due to heavy reliance on short-term wholesale funding and use of short-term foreign exchange debt to finance SEK mortgages.
  - Cross-border lending exposures, including approximately 4 percent of total loans in the Baltic countries, where Swedbank and SEB have the largest exposures (approximately 10 percent).
  - Sustained declines in real estate prices: housing and property developers’ loans account for 60 percent of total lending.

### Stress testing: methodology, scenarios, and results
- Stress testing scope:
  - A wide range of stress tests were performed on the largest four banks that account for 90 percent of the banking system’s total assets.
  - Tests included macro stress tests covering four scenarios, liquidity stress tests, and contagion stress tests.
- Macro stress test scenarios (five-year horizon; losses combined from credit risk, sovereign valuation losses in banking and trading books, and funding cost increases):
  - Baseline scenario: in line with October 2010 World Economic Outlook (WEO) projections for GDP growth of 2.56 percent in 2011 and 3 percent in 2012, with conservative projections for unemployment and interest rates.
  - Double-dip scenario: implies increase in unemployment and interest rates, assuming deviations in GDP growth by 2.7 percentage points in 2011 and 3.2 percentage points in 2012 compared to the WEO baseline.
  - More severe double-dip scenario: assumes twice the deviations from baseline for the macroeconomic and EU sovereign bond market shocks.
  - Prolonged low-growth scenario: includes a house-price crash inducing a decline in domestic consumption.
- Stress test outcomes:
  - Under all four scenarios, banks showed resiliency.
  - Banks’ capital ratios remain above the 4 percent Tier 1 regulatory minimum, the 6 percent CEBS threshold, and the 8 percent total CAR regulatory minimum under both the FSAP and RB models.
  - Shocks to sovereign bond portfolios and funding costs have limited impact given banks’ limited sovereign bond exposures.
  - Post-shock credit losses are not significant given banks’ high quality loan portfolios, low initial values of credit risk measures, strong operating profits, and large loan loss provisions built up during the crisis.

*Source: IMF staff summary (content unit: _cr11172 - 3.      The authorities’ forceful policy response helped restore confidence. The RB)*

### 19.      Liquidity risk stress tests covered both short-term cash outflows and structural

### 19.      Liquidity risk stress tests covered both short-term cash outflows and structural

### Liquidity stress tests: design and metrics
- Tests covered both short-term cash outflows and structural maturity mismatches.
- Two measures similar to Basel III were calculated:
  - A short-term liquidity measure evaluating banks’ liquidity buffers under stressed scenarios to cover unexpected outflows over three months. Unexpected cash outflows could arise as a result of a drying up of wholesale markets, deposit withdrawals, and a drawing down of unused credit lines.
  - A structural measure assessing banks’ structural long-term liquidity relating the weighted average of their liabilities to the weighted average of their assets.
- Asset weights are based on liquidity and liability weights on stability of funds.

### Liquidity stress-test results: findings
- Banks lag in both liquidity metrics behind other European banks owing to heavy reliance on short-term market funding.
- The short-term liquidity measure is significantly less than 100 percent, suggesting banks do not have sufficient liquidity reserves to cover modeled cash outflows.
- The structural measure is weak, reflecting:
  - heavy reliance on non stable, short-term market funding to finance relatively illiquid assets; and
  - a large share of banks’ assets in mortgages, which in Sweden are kept on banks’ balance sheets (not securitized).

### Large exposures and contagion tests
- Tests evaluated concentration risk and interbank exposures across unsecured lending, securities, and derivatives.
- Results suggest banks could withstand the default of a major bank but not the joint default of their three largest exposures.
- Joint default of the three largest exposures would result in a significant impact on banks’ capitalization, although none of the banks would fall below the limit of 4 percent in Tier 1 capital ratio.
- Contagion tests evaluated the impact of a bank defaulting on its payments to other banks; large exposure stress tests evaluated the impact of a default of large counterparties on banks.
- These contagion tests did not evaluate systemic spillover risks from the failure of small banks and resulting deterioration of market confidence.

### Contingent Claims Analysis (CCA) complement to balance-sheet stress tests
- Balance sheet stress tests for the four major banks were complemented with tests based on the CCA framework.
- Balance sheet stress-test results were used to estimate changes in bank assets; together with the impact from changes in global risk appetite, CCA outputs were calculated for the four scenarios covering the 2011–2015 period.
- CCA outputs included:
  - expected losses to creditors;
  - bank credit spreads;
  - CCA capital ratio (market value of equity from the scenario output divided by the market value of assets); and
  - capital shortfall measure.
- Results are qualitatively similar to the balance sheet stress tests:
  - in the adverse scenarios, expected losses increase and equity capital decreases until 2012 and then begin to rebound;
  - the magnitude of deterioration is much smaller than in 2009 during the financial crisis;
  - no bank has a capital shortfall in any year of the stress test.
- Note: The capital shortfall concept in the CCA analyses is a proxy concept and does not exactly correspond to regulatory capital shortfalls.

### Key statistics and contextual figures
- Government bond holdings are relatively marginal at 5 percent of assets.
- Large banks’ direct sovereign exposures to vulnerable European countries are less than 0.5 percent of shareholders’ equity as of March 2010.
- Four major banks were the focus of the balance sheet and CCA analyses.
- Stress-test horizon: 2011–2015.
- Adverse equity deterioration observed through 2012 with rebound thereafter; comparison baseline year of major crisis deterioration: 2009.
- Regulatory Tier 1 capital ratio threshold referenced: 4 percent.

### Data gaps and monitoring recommendations
- Crisis revealed lack of sufficient granularity in data for monitoring financial sector developments.
- Specific data weaknesses: lack of consistent sectoral and geographic breakdowns of data on banks’ nonperforming assets.
- Recommendation: Authorities should regularly collect and monitor loan default rates and nonperforming loans (NPLs) by sector and geographical allocation, in particular housing related loans.

### Capital, liquidity regulation, and policy recommendations
- Robustness of banks’ financial positions is largely attributed to current high level capital buffers.
- Authorities’ planned actions are appropriate:
  - accelerate implementation of Basel III capital requirement, based on current high banks’ capital level;
  - tighten liquidity regulations;
  - impose higher than minimum capital requirements on the largest and systemically important banks.
- These measures are supported given the nature of major banks’ exposures and prevailing risks.

### Institutional and macroprudential framework
- Financial stability responsibilities are spread across several authorities:
  - FI: statutory mandate for financial stability and consumer protection.
  - RB: not explicitly mandated for financial stability; responsible for safe and efficient payments system, provision of ELA and systemic liquidity.
  - MOF: ultimate political responsibility as fiscal authority; responsible for legislation in financial sector and crisis management role.
  - SNDO: manages the stability fund, deposit insurance and investor protection systems and supports when public funds are conferred to credit institutions.
- Consideration could be given to establishing a high-level SFSC focused solely on financial stability and macroprudential policies to coordinate policies and actions across agencies.
  - SFSC considerations include scope of analysis, range of risks, set of instruments, institutional and governance frameworks, possible inclusion of independent members, representation at the highest level, consultative nature, and clear lines of public accountability (including possibly reporting to Parliament).

### Systemic liquidity and operational framework
- Authorities managed systemic liquidity pressures well; efforts to strengthen liquidity regulations are welcome.
- In December 2010, FI adopted a new regulation on governance of banks’ liquidity risk management embedding main elements of the Basel principles for liquidity management.
- FI planned to introduce a new comprehensive liquidity reporting framework in mid-2011, including quantitative liquidity risk measures as envisaged in the Basel proposal.
- Institutional/governance issues:
  - RB’s U.S. dollar lending facility has been effective, but legal framework does not clarify resolution of differing views on international reserve management policy between RB and SNDO.
  - Recommendation: establish a formal process (potentially within proposed SFSC) to enable RB to raise international reserves if necessary to mitigate systemic foreign exchange liquidity risks.
- Operational framework recommendations:
  - Comprehensive review of the collateral framework to toughen eligibility criteria while maintaining reasonable collateral pool size and a level playing field (RB currently accepting a broader range of assets as collateral).
  - Expand RB’s liquidity enhancement toolkit to include, for example, a treasury securities lending facility in collaboration with SNDO.
  - For RIX and NOMX DM: ring-fence NOMX DM in a distinct legal entity; set up a default fund financed by participants; enhance governance through members’ representation; introduce new mechanism for margin collection; diversify liquidity sources, including access to central bank money.
  - Clarify legal uncertainties regarding treatment of funds transfer and collateral transactions within RIX.
  - RB is not empowered to issue regulations on private sector payment systems; cooperation between RB and FI guided by a high-level MOU should be further specified to clarify division of roles and responsibilities.

*Source: _cr11172 - 19.      Liquidity risk stress tests covered both short-term cash outflows and structural*

### 44.      The design of ELA framework is sound but greater clarity would be helpful. The

### The design of ELA framework is sound but greater clarity would be helpful.

### Emergency Liquidity Assistance (ELA) and authority responsibilities
- The RB would provide ELA, at its discretion, only to a solvent and viable institution with liquidity problems, while the SNDO is expected to deal with insolvent institutions as a resolution authority under the Support Act.
- Given that solvency determination can be subject to considerable uncertainty in a rapidly evolving crisis, the legal framework should clarify which authority is responsible for liquidity assistance in the different phases of events.
- Eligible institutions include banks (including branched of foreign banks) and Swedish companies subject to FI supervision.

### Overall assessment of crisis management and recent practice
- Bank failures during the recent crisis have been handled relatively effectively and the authorities have demonstrated an ability to act in a coordinated and decisive manner.
- The crisis revealed shortcomings in the framework for dealing with failing credit institutions, including the lack of specific rules on bank insolvency. This gap is particularly acute for nonsystemic institutions.
- A failure of even a nonsystemic institution may adversely affect market confidence and trigger broader contagion risks.

### Authorities’ review and international engagement
- A committee was set up to analyze the lessons learned from the recent financial crisis and propose legislative and institutional measures to improve the authorities’ crisis management ability.
- The authorities are also actively involved in the EU-wide review of the crisis management framework as well as in the work of multilateral standard setting bodies.

### FI corrective and remedial powers and legal certainty
- The FI has powers to restrict the activities and limit the operation of credit institutions, issue warnings or revoke license, replace a managing director or any member of the Board, and may order an owner with a qualified holding to divest shares.
- Though there are no formal triggers for early intervention powers and to require prompt corrective action, FI is able to exert supervisory pressure at an early stage.
- FI’s powers of sanction and decision making can be affected by an appellate procedure that can suspend the execution of an administrative decision, creating legal uncertainty that has important consequences for bank resolution.

### Framework for official financial support to SIFIs (Support Act and Stability Fund)
- The framework for official financial support to systemically important financial institutions (SIFIs) introduced in 2008 is a pragmatic response to the oligopolistic structure of the banking sector.
- The possibility of government support is envisaged for both continued operation of a systemic credit institution and to support its orderly restructuring or liquidation if it is no longer deemed viable.
- A Stability Fund, established in 2008, is financed by levies on financial institutions, and will in time provide necessary financial backing reducing direct claims on public funds, while moral hazard is mitigated by valuation rules that exclude account for the state aid.
- Approaches that would enable the authorities to write down the claims of some or all of the unsecured creditors and to convert debt into equity would usefully complement this framework taking into account work done by the Basel Committee on Banking Supervision and the Financial Stability Board (FSB).

### Need for a special framework for nonsystemic institutions
- The SIFI resolution framework should be complemented by a framework for orderly resolution of nonsystemic financial institutions.
- General company rules on bankruptcy and liquidation apply to banks and are inadequate for effectively handling bank resolution, while license revocation enforcement could be postponed by shareholders’ appeals in multiple courts and a possibility of having action stayed.
- The insolvency test, defined as inability to pay debts as they fall due, is inappropriate for banks.
- The mission has urged authorities to introduce a special bank resolution framework for all credit institutions, whether or not ex ante they are considered systemic.
- Recommended powers and features:
  - FI should be given powers to initiate special bank resolutions administratively based upon the regulatory criteria and at a sufficiently early stage with an aim to ensure continuity of critical functions, minimize public financial support, reduce legal uncertainty and achieve a prompt resolution.
  - The framework should give FI the right to petition for bank insolvency.
  - Transfer of assets to third-party acquirers with assumption of liabilities (purchase and assumption) should be enabled by law.
  - The DI fund should be authorized to support purchase and assumption transactions as is already a case in a number of European countries.
  - While preserving the rights of shareholders to appeal the FI’s decision to revoke the license, the possibility that a court stays license revocation should be removed and the shareholders should instead be entitled to monetary damages ex post.

### Deposit insurance (DI) reform
- The payout by deposit insurance fund—which is ex ante funded and enjoys an unlimited loan backup from the SNDO—is triggered only after the institution has been placed into bankruptcy.
- Authorities are encouraged to make changes to the DI framework along the lines of the recent government proposal to bring it in line with the applicable EU requirements while work on a more comprehensive resolution framework continues.
- Details of the government proposal (as described in the source):
  - The proposal was referred to the Legislative Council in March 2011 and presented to Parliament in April, with an intention for them to come into force on July 1, 2011.
  - The proposal is intended to ensure Sweden’s compliance with the revised EU Deposit Insurance Directive and entails inter alia shortening the payout deadline to 20 days, stricter information requirements for institutions collecting insured deposits and a new trigger for payout depended on FI’s decision.
  - The proposed amendment would also improve information exchange between the FI and SNDO on matters related to deposit insurance.

### Box 2 — Government Support to Credit Institutions Act (2008:814, “Support Act”)
- Enacted in October 2008 as a framework to deal with weak or insolvent systemically important institutions alongside a package of other measures aimed at increasing confidence and stability of the financial sector.
- Objective: Government support can be given to financial institutions headquartered in Sweden to counter a risk of severe turbulence in the Swedish financial system.
- Tools: Guarantees, capital injection, and state takeover are specifically covered in the act; the act also allows for support in “other manner” as needed. Specific tools are detailed in government ordinances, including rules on fees paid by credit institutions for support and restrictions on remuneration during the support period.
- Contractual basis: Support should as a rule be based on a contract between the bank and the state, but measures can be taken also in other cases if it is not possible or suitable to use a contract.
- Support Authority: The act stipulates that a support authority is responsible for handling support measures, including orderly resolution. The Government has given this role to SNDO, while retaining the right to take final decisions on proposals for support measures put forward by the SNDO.
- Appeal: If the SNDO and the institution fail to reach an agreement on the terms for the support, the SNDO can request that the terms be considered by a special Appeals Board (“Prövningsnämnden”). The Appeals Board can also rule on disagreements between the SNDO and a bank on the interpretation or application of a support contract. No case has yet been decided by the Board.
- Nationalization: The SNDO has the right to nationalize an institution if it is of extraordinary importance from the public perspective that the state takes control and (i) the institution has a capital ratio below 2 percent (i.e., ¼ of the legal requirement); or (ii) refuses to reach an agreement on support on conditions found reasonable by the Appeals Board; or (iii) if the institution does not follow its obligations following from the support agreement.
  - This decision gives rise to a right to buy out also warrants and convertibles issued by the company.
  - Valuation of the shares must be undertaken as though the company had not received state aid.
  - Disagreements about the right to take over an institution or about the valuation are tried by the Appeals Board.
- Stability Fund: The law created a Stability Fund to be used to fund future support measures associated with administrative costs and functioning of the Appeals Board. Recoveries, fees and other incomes from support measures go to the fund. Credit institutions are required to pay a special stability fee amounting to

*Source: IMF staff report excerpt (page content provided).*

### 0.036 percent of the balance sheet total excluding equity capital and subordinated debt. Payments are placed

### _cr11172 - 0.036 percent of the balance sheet total excluding equity capital and subordinated debt. Payments are placed

### Deposit insurance / stability fund design and targets
- Funding levy: 0.036 percent of the balance sheet total excluding equity capital and subordinated debt.
- Treatment of payments: Payments are placed in an interest-bearing account at the SNDO.
- Fund target: 2.5 percent of GDP within 15 years.
- Use of fund: Can be used for various forms of aid.
- Backstop: If the funds fall short of the required support, an automatic unlimited backing by the SNDO is ensured.
- Future plans: Authorities envisage exploring a proposal to merge the stability and deposit insurance funds and introduce risk-based fees; developments at the EU level will also be taken into account.

### Structure of the financial system (selected exact figures from Table 3)
- Total financial system (2010): Number of institutions 1,493; Num ber of branches 155; Total assets (in millions of SEK) 17,865,864; Percent of total assets 100.0; Percent of GDP 557.6.
- Total financial system (2009): Number of institutions 1,466; Total assets (in millions of SEK) 17,199,559; Percent of total assets 100.0; Percent of GDP 536.8.
- Total banking sector (mem. item): 13,725,841 (2010) — Percent of total assets 76.8; Percent of GDP 428.4.
- Four Major Banks, consolidated (2010): Number of institutions 4; Num ber of branches 56; Total assets (in millions of SEK) 11,779,660; Percent of total assets 65.9; Percent of GDP 367.6.
- Four Major Banks, Nordea (2010): 1; 8 branches; Total assets (in millions of SEK) 5,491,917; Percent of total assets 30.7; Percent of GDP 171.4.
- Total Top Four Banks (2002–2010 trend highlights): 5,760,842 (2002); 9,491,189 (2007); 11,438,287 (2009); 11,779,660 (2010).
- Insurance companies (2010): Number 8; Total assets (in millions of SEK) 531,718; Percent of total assets 3.0; Percent of GDP 16.6.
- Mortgage credit institutions (2010): Number 3; Total assets (in millions of SEK) 1,983,218; Percent of total assets 11.1; Percent of GDP 61.9.
- Mutual funds (2010): Number 878; Total assets (in millions of SEK) 1,511,564; Percent of total assets 8.5; Percent of GDP 47.2.
- Memorandum: Nominal GDP (in millions of SEK) 3,306,271 (2010); Employees in the financial system: 76,508 (2009), 82,991 (2010).

### Core Financial Soundness Indicators (FSIs) for banks (selected exact series and levels)
- Regulatory capital to risk-weighted assets (2003–2011 Q1): 10.5, 10.6, 10.5, 10.5, 10.2, 10.7, 13.0, 12.6, 12.4.
- Regulatory Tier I capital to risk-weighted assets (2003–2011 Q1): 8.0, 8.3, 7.7, 7.8, 7.5, 8.1, 10.9, 11.0, 11.1.
- Capital as percent of assets (leverage ratio) (2003–2011 Q1): 5.1, 4.8, 4.8, 4.8, 4.7, 4.6, 5.0, 4.7, 4.6.
- Nonperforming loans to total gross loans (2003–2010): 2.0, 1.2, 0.9, 0.8, 0.6, 1.1, 2.0, 1.9, 1.7.
- Nonperforming loans net of loan-loss provisions to capital (2003–2010): 11.9, 4.8, 3.1, 4.3, 3.4, 7.4, 10.7, 9.9, 10.1.
- Loan-loss provisions to nonperforming loans (2003–2010): 49.4, 66.2, 69.7, 56.1, 58.3, 49.1, 55.4, 44.3, 43.9.
- Return on assets (Net income as percent of average total assets) (2003–2010): 0.6, 0.7, 0.8, 0.8, 0.8, 0.5, 0.3, 0.4, (2011 Q1 not shown).
- Return on equity (Net income as percent of average equity capital) (2003–2010): 12.5, 15.9, 18.1, 19.9, 18.5, 12.7, 13.0, 9.8, (2011 Q1 not shown).
- Liquid assets as percent of total assets (2003–2010): 4.4, 5.2, 5.0, 5.0, 5.0, 4.0, 6.3, 4.8, 5.1.
- Liquid assets as percent of short-term liabilities (2003–2010): 29.3, 30.6, 31.6, 32.1, 34.1, 23.6, 43.6, 44.4, 46.4.
- Customer deposits as a percent of total (non-interbank) loans (2003–2010): 50.6, 52.6, 50.2, 53.8, 51.4, 46.1, 47.1, 47.8, 47.7.
- Noninterbank loans to noninterbank deposits (2003–2010): 142.6, 130.8, 137.4, 135.7, 139.8, 139.6, 144.8, 154.9, 155.8.

### Sectoral, geographical, and market indicators (selected exact figures)
- Sectoral distribution of bank credit to the private sector (percent) (2003–2010): Sweden 57.2, 56.7, 53.8, 54.0, 52.7, 44.0, 46.1, 50.0, 49.5.
- Outside Sweden share of bank credit to private sector (2003–2010): 42.8, 43.3, 46.2, 46.2, 47.3, 55.4, 50.3, 46.0, 46.5.
- OM Stockholm Stock Exchange Index (annual percent change): -39.7, 43.2, 10.6, 34.9, 12.9, -24.0, -25.1, 54.4 (years covered in Table 5).
- Household debt as percent of GDP (2003–2010): 57.1, 60.4, 64.3, 66.9, 69.0, 72.8, 81.9, 82.9 (2010).
- Real estate prices (One- or two dwelling buildings, year-on-year percent change): 6.1, 10.0, 10.5, 10.5, 11.3, -2.0, 7.1, 5.2.

### Summary of credit risk stress testing results, 2011–15 (Table 6; percent deviations and ratios)
Notes: Profits before loan losses, loan losses, and RWA are given in percent deviations from baseline. Tier 1 ratios and total CARs are given in percent.
- Bank 1 (Adverse scenarios summary rows shown across 2011–2015):
  - Profits before Loan Losses (examples): -3.6, -3.7, -3.5, -3.4, -3.4 (baseline/adverse categories shown in table).
  - Loan Losses (examples): 21.2, 47.5, 30.3, 15.9, 0.0.
  - RWA (examples): 7.5, 15.8, 10.5, 5.6, 0.0.
  - Tier 1 ratio across scenarios and years: 10%, 9%, 9%, 10%, 11% (table entries).
  - Total CAR across scenarios and years: 12%, 11%, 12%, 13%, 14% (table entries).
- Bank 2 (examples):
  - Profits before Loan Losses: -4.9, -4.9, -4.5, -4.5, -4.5.
  - Loan Losses: 21.3, 48.7, 31.3, 16.5, 0.0.
  - RWA: 8.2, 17.7, 11.8, 6.4, 0.0.
  - Tier 1 ratio entries: 10%, 9%, 10%, 11%, 12%.
  - Total CAR entries: 12%, 11%, 11%, 12%, 13%.
- Bank 3 (examples):
  - Profits before Loan Losses: -8.2, -8.2, -7.8, -7.7, -7.5.
  - Loan Losses: 21.6, 49.1, 31.5, 16.6, 0.0.
  - RWA: 9.5, 20.4, 13.6, 7.4, 0.0.
  - Tier 1 ratio entries: 12%, 11%, 11%, 13%, 14%.
  - Total CAR entries: 12%, 11%, 11%, 13%, 14%.
- Bank 4 (examples):
  - Profits before Loan Losses: -4.7, -4.7, -4.5, -4.6, -4.6.
  - Loan Losses: 20.7, 46.5, 29.7, 15.5, 0.0.
  - RWA: 7.5, 16.4, 10.9, 5.8, 0.0.
  - Tier 1 ratio entries: 11%, 10%, 10%, 11%, 12%.
  - Total CAR entries: 13%, 12%, 12%, 14%, 15%.
- Adverse scenarios labeled: Adverse 1, Adverse 2, Adverse 3 (presented in table headings).

### Funding cost and counterparty risk stress testing (Table 7 and Table 8)
- Counterparty Risk Stress Test Tier 1 Ratios (Table 8):
  - Bank 1: 5.67
  - Bank 2: 4.43
  - Bank 3: 10.51
  - Bank 4: 8.29
- Short-term market funding that needs to be refinanced with long-term funding and related parameters (Adverse scenarios; percent values preserved):
  - Adverse scenario 1: Short term market funding to be refinanced 5%; Outflow of deposits to be refinanced 2%; % of increased funding cost that can be transferred to customers 95%; A decrease of net commission and other income 5%; A decrease of variable staff cost 20%.
  - Adverse scenario 2: 10%; 5%; 85%; 10%; 40%.
  - Adverse scenario 3: 15%; 10%; 80%; 15%; 60%.

### Liquidity stress testing and structural liquidity (Figure 6 notes and results)
- Structural liquidity stress test: Ratio similar to the Net Stable Funding Ratio (NSFR) was computed, weights based on stability of funding and liquidity of assets, market assumed to undergo a one-year stress.
- Structural liquidity test results (percentage values shown in figure):
  - Bank 3: 72% (as plotted)
  - Bank 1: 74%
  - Bank 2: 76%
  - Bank 4: 78%
  - Average European banks: 92% (as plotted in the figure legend context)

### Cross-country comparison and market indicators (selected exact statements)
- Capital Adequacy Ratio: comparable to other European Countries, while the leverage ratio is somewhat lower.
- Asset quality: among the highest in Europe.
- Profitability: at comparable levels.

### Annex — Basel Core Principles (BCP) assessment: summary, key findings, and recommendations
- Overall: Sweden’s compliance with the international supervisory standards is generally high.
- Supervisory framework: The banking supervisory framework and its implementation in Sweden are in line with many of the Basel Core Principles’ essential criteria.
- Improvements since crisis: Since the advent of the global financial crisis, FI has instituted a more robust supervisory approach, made important advances on the previous regime, and initiated a number of fruitful projects, but continued technical development is needed.
- Capacity constraints and independence concerns:
  - FI’s overall capacity to supervise banks is chiefly impacted by an acute staffing shortage.
  - FI is established as a government authority responsible to the MOF.
  - Assessors found evidence of impairment of FI’s operational independence through the mechanism of the annual appropriations letter process.
  - The combination of inadequacy of independence and resource significantly impairs FI’s ability to discharge its supervisory and oversight functions adequately and effectively.
- Recommendations:
  - Staffing levels at FI are an urgent concern to be remedied as soon as possible.
  - Consider a revised legal structure ensuring greater independence of FI.
- Assessment methodology notes:
  - The assessment used the Core Principles (CP) Methodology issued by the Basel Committee in October 2006.
  - Grading system used: compliant; largely compliant; materially noncompliant; and noncompliant.
  - Essential criteria (EC) are the only elements on which to gauge full compliance with a core principle; additional criteria are suggested best practices and commented on but not reflected in the grading.

*Source: IMF staff and authorities materials contained in the provided content unit.*

### 5.      The assessment team reviewed the framework of laws, rules, and guidance and

### _cr11172 - 5.      The assessment team reviewed the framework of laws, rules, and guidance and

### Assessment scope, methodology, and cooperation
- The assessment team reviewed the framework of laws, rules, and guidance and held extensive meetings with officials of FI, and additional meetings with the Riksbank (RB), the MOF and banking sector participants, including the industry association representing banks and a number of domestic and nondomestic institutions.
- The team appreciated the very high quality of cooperation received from the authorities and thanks staff who provided extensive documentation while multiple domestic, European and global regulatory initiatives were in progress.
- Sweden was assessed against the BCP as revised in 2006, significant because:
  - (i) the revised BCP have a heightened focus on risk management and its practice by supervised institutions and its assessment by the supervisory authority; and
  - (ii) the standards are evaluated in the context of a financial system’s sophistication and complexity.
- Ratings use five categories: compliant; largely compliant; materially noncompliant; noncompliant; and non-applicable. Definitions provided include:
  - “compliant”: all essential criteria are met without any significant deficiencies;
  - “largely compliant”: only minor shortcomings, with clear intent to achieve full compliance within a prescribed period;
  - “materially noncompliant”: severe shortcomings despite formal rules and procedures, weak practical implementation;
  - “noncompliant”: not substantially implemented, several essential criteria not complied with;
  - “nonapplicable”: reserved (though not used) for criteria not relating to Swedish authorities.
- The 2006 BCP update raised the bar for measuring supervisory effectiveness; thus ratings here may not be directly comparable to pre-2006 FSAP assessments.

### Institutional and macroeconomic setting; market structure
- Financial system size and concentration:
  - Financial system assets account for 550 percent of GDP, of which 65 percent belong to four systemic banking groups.
  - There are over a hundred regulated banking entities in the nonsystemic sector; the secondary banking sector represents at least 25 percent of the domestic system (FI estimate).
- Household savings and liquidity implications:
  - Trusts and pensions are significant vehicles for household savings, reflecting a relatively lower level of domestic deposits in the Swedish banking system.
  - Low sovereign debt issuance and a lower retail deposit base may pose higher challenges in meeting the Basel III liquidity framework emphasis on stable retail deposits and stocks of high quality liquid assets, ideally government debt instruments.
  - FI is monitoring the situation closely, has intensified supervision of liquidity risk management, revised liquidity risk management standards (based on Basel and EU guidelines), is trialing revised liquidity reporting requirements, and is undertaking a major review of liquidity practices across a broad segment of the banking market.
  - Basel has signaled recognition that changes may be needed to its liquidity framework; FI needs to remain alert to potential need to encourage structural changes to banks’ balance sheets.
- Capitalization and profitability:
  - The four major banks are well capitalized with a capital adequacy ratio (CAR) of 12.2 percent in part due to major rights issues in 2008 and 2009.
  - Banks’ profits rebounded from 2009 lows; retained earnings continue to support capitalization.
  - Profits declined in banks with Baltics exposures due to substantial increases in loan loss provisions; most provisions were booked in 2009 and further reversals are expected owing to improved macro conditions in the Baltics.
- Group structure and supervisory organization:
  - Large banks have operations within the life insurance sector; many large insurance companies have banks of their own; some groups exhibit complex structure.
  - FI is an integrated regulator responsible for banking and insurance supervision, organized into sector specific divisions—this supports focus but creates the challenge of ensuring management resources to assess interaction of banking and insurance risks and avoid silo thinking.
- Regional role and cross-border cooperation:
  - Sweden is a regional banking hub, more as a home than as a host jurisdiction; fewer than half of the consolidated assets of the systemic groups are located in Sweden.
  - FI was an early establisher of colleges of supervisors and has agreed a multilateral MOU on cross border financial stability, crisis management and resolution with Nordic/Baltic peers.
  - FI views colleges as active participatory processes for shared risk assessment; progress on concrete proposals (systemically important groups, resolution, monitoring, burden sharing) is at early stages.
- Implementation of international frameworks:
  - Basel II, including Pillar II, has been implemented in Sweden through the Capital Requirements Directive (CRD); FI uses this framework to assess systemic banking groups and nonsystemic institutions.
- Supervisory approach:
  - Historically, Sweden relied on a collegiate, consensual approach with high trust that institutions would rectify deficiencies; FI is transitioning to a more assertive, disciplined and formal approach while retaining constructive dialogue.

### Preconditions for effective banking supervision
- Macroeconomic environment:
  - The Swedish economy experienced strong growth between 2002–2008, was affected by the global financial crisis, exited recession in mid-2009, and financial and industrial sectors have recovered.
  - Housing prices were resilient in the downturn.
  - GDP growth rebounded strongly and is projected to grow 2.5–3 percent in 2011–2012.
  - Public finances are among the strongest in advanced economies, with the fiscal balance projected to return to a surplus by 2012.
  - Financial system stabilization evidenced by increases in banks’ capital positions and lower loan losses.
  - Authorities began to exit from crisis response measures since April 2010.
- Public infrastructure and legal framework:
  - New cooperation arrangements were established during the crisis among MOF, RB, FI, and SNDO to support financial stability; experience of cooperation and information exchange was positive though some gateways (e.g., with SNDO) are yet to be fully opened and greater formalization outside crisis periods is needed.
  - Swedish legal system is based on civil law; general courts and general administrative courts handle respective matters; State Aid to financial institutions is taken before a special Appeals Board established for that purpose.
  - As an EU member, much domestic legislation derives from EU regulations, directives and decisions.
  - Principle of transparency: information collected or communicated by a public Swedish authority is open by default; the Public Access to Information and Secrecy Act of 2009 governs disclosure and confidentiality provisions.
  - Sweden has implemented IFRS and has a full range of accountancy, audit, legal, and ancillary financial services.
- Market discipline and disclosure:
  - Disclosure and transparency are well established; Basel “Pillar 3” disclosure framework implemented in Sweden through CRD.
  - FI states it discloses as much information as possible while not disclosing sensitive information affecting firms’ competitive positioning.
  - FI issues regular reports assessing and describing the risk environment; RB publishes a biannual financial stability report.
- Financial sector safety net:
  - Deposit insurance introduced in Sweden in 1996 in conformity with EU directive on deposit guarantee schemes.
  - Since the end of 2010, deposits in credit institutions are protected to the maximum limit of €100, 000.
  - Since introduction of the scheme there have been few failures leading to a payout: two in 2006 when administered by the now disbanded Deposit Guarantee Board and one in 2010.
  - The scheme has been managed by the SNDO since 2008.
  - Payout is triggered only when the institution is placed into bankruptcy; although FI can revoke a license, it cannot place an insolvent institution into bankruptcy.
  - The deposit protection scheme plays no role in bank restructuring and is funded ex ante according to a fee structure sensitive to the capital adequacy strength of contributing institutions.
  - Deposits made to deposit companies pursuant to the Deposits Business Act are not covered; deposits to such companies are limited to SEK50, 000 per individual.
- Crisis measures and exit:
  - Crisis measures were largely based on the 2008 Government Support to Credit Institutions Act, including debt guarantee, recapitalization, and bank takeover.
  - As state-aid measures, the Act and programs were subject to European Commission scrutiny.
  - In April 2010 authorities began to exit from crisis-response measures.
  - Banks participating in support schemes were subject to restrictions on remuneration to senior management.
  - RB implemented liquidity measures by expanding its balance sheet, supported banks’ capital and market assurance; SNDO borrowed externally to boost international reserves; RB established swap facilities with the U.S. Federal Reserve and ECB.

### Main findings — Objectives, independence, powers, transparency, and cooperation (CP 1)
- Operational independence and funding:
  - FI needs operational independence to set priorities, make day-to-day decisions, allocate resources, and establish a long-term supervisory strategy.
  - The annual appropriations letter contains tasks and priorities and can be amended during the year, introducing uncertainty and potentially impeding FI’s ability to plan and execute a supervisory program.
  - The minister of finance can indirectly influence FI through the budgetary process.
  - A more straightforward financing process — for example where FI levies fees and uses these to finance its own budget directly — may be worthy of consideration; the government ministry could subsequently oversee efficiency and budgetary performance.
- Government involvement and licensing:
  - Legislation allows for government involvement in or control of supervisory decisions, though such powers have rarely been used.
  - If a matter involves principle or particular importance, the government and not FI must make the licensing decision.
  - The government is empowered to make a wide range of decisions (intervention, sanctions, revocation) when FI refers matters of principle to it.
  - Recommendation: legislative changes to ensure FI is the sole responsible authority for supervisory decisions.
- Resource constraints:
  - Resources at FI increased over the last five years but material concerns remain that FI is too resource constrained to deliver effective minimum levels of supervision and, owing to the appropriations process, lacks independent means to redress this deficiency.
  - Areas showing severe resource strain include depth and intensity of supervisory actions (e.g., on-site inspections), ability to launch proactive investigations, timeliness of follow up on remedial action, and ensuring sufficiently high supervision for the secondary banking market (nearly one third of the banking sector in terms of domestic loans to the public).
  - The forthcoming international regulatory agenda will add to FI’s burdens.
- Mandate clarity and accountability:
  - The Swedish approach is highly transparent and lines of accountability are clearly set out.
  - FI’s mandate includes twin objectives of financial stability and consumer protection, expressed at a very high level; prudential objectives are not stated explicitly.
  - It is not clear how FI is expected to balance between priorities and demands of these objectives despite the issuance of the annual appropriations letter.
- Legal uncertainty and appeals:
  - Regulatory decisions by FI (use of remedial powers, sanctions, revocation) are subject to challenge and reversal in court; the right of appeal is an important component, but high-level grounds for appeal can impede effectiveness of FI’s interventions and exacerbate crisis management as decisions cannot be applied until court rulings.
  - An alternative method of satisfying the right to appeal is needed to remove such uncertainties.
- Legal protection for supervisors:
  - There is no direct or explicit protection afforded to FI or its staff against liability for actions and omissions in discharging duties; this should be remedied.
  - Assessors note high thresholds for successful legal action and a less litigious cultural environment, but recommend amending the legal framework to include legal protection for supervisors (as per BCP principle 1): legal immunity for the authority and individual staff and indemnity for legal fees, with a small carve out for gross negligence/misconduct.

*Source: _cr11172 - 5.      The assessment team reviewed the framework of laws, rules, and guidance and*

### 32.      Sweden has extensive gateways for information sharing, domestic and

### _cr11172 - 32.      Sweden has extensive gateways for information sharing, domestic and 

### Information sharing and gateways
- Sweden has extensive gateways for information sharing, domestic and nondomestic, complemented by a network of arrangements, MOUs and colleges.
- Gateway provisions exist for exchange of information between principal domestic authorities with responsibilities for financial stability.
- Upon implementation of the revision to the EU CRD (CRD2) Sweden will widen and reinforce gateways for information exchange both between supervisors (domestic and non domestic) and other relevant domestic authorities, particularly in respect of crisis management situations.
- During the financial crisis Sweden enhanced domestic cooperation practices; the challenge is to ensure open and effective communication and information exchange remains in place now that the peak of the crisis is passed.

### Licensing and structure (CPs 2–5)
- Deposit taking is overwhelmingly located in entities licensed by, and subject to, the supervision of FI.
- Deposits can also be taken by “deposit companies” operating under the Deposits Business Act; deposits per customer are limited to 50,000 SEK but they are not covered by the deposit guarantee scheme.
  - “deposit companies” are registered by FI but not supervised by it although there are limited reporting requirements and the companies are subject to AML requirements also.
  - This presents an unnecessary reputational risk to FI and a risk to customers’ own interests.
- FI lacks statutory power to assess the fitness and propriety of all members of senior management; currently power is limited to the CEO and his/her deputy (CP 2).
- FI should have statutory power to revoke a license obtained through deception or other irregularity and firms should be obliged by statute to notify FI forthwith upon learning of any material information that may negatively affect the suitability of a major shareholder.
- The notification/approval threshold for acquisitions/investments is set at more than 25 percent of the investor’s capital base; investments below the threshold may be made without informing FI either before or after the fact.
  - Consideration should be given to requiring FI’s prior approval for investments in subsidiaries, over to be determined threshold, and after-the-fact notification.

### Prudential regulation and requirements (CPs 6–18)
- A range of issues require attention, some with urgency, across a number of individual risk areas.
- FI’s capacity to determine the quality of institutions’ own oversight and management of key risk areas is significantly constrained by limits on its own resources.
- FI has prioritized major risk factors and launched initiatives to improve understanding and industry practice in key areas, notably liquidity, trading book valuations and operational risk.

### Methods of ongoing banking supervision (CPs 19–21)
- Supervisory approach is risk based and an effective method of resource allocation but needs further analytical development.
- FI does not have a formalised, analytical risk framework to assess an institution’s risk profile; current supervisory effort focuses on the supervisory review evaluation process (SREP) designed to assess capital adequacy.
- The SREP needs development and supplementation to ensure environmental, business model, governance and other risks are fully and systematically assessed, including forward-looking elements.
- FI is developing analytical tools for monitoring smaller firms and credit risk (internal ratings).
- Lack of resource is a severe and damaging constraint upon FI:
  - FI needs to spend more time on site with institutions, both systemic and nonsystemic.
  - Supervisors’ capacity to assess the dimensions of risk facing firms is presently undermined by limitations on the frequency, duration and intensity of supervisory interactions.
- FI must balance time and attention between systemic banks and the secondary banking sector and reconsider whether the current balance achieves an effective minimum level of supervision for the secondary banking sector.

### Accounting and disclosure (CP 22)
- FI does not have the power to reject and rescind the appointment of an external auditor.
  - FI can often achieve this objective through pressure on an institution’s Board but an unfettered power would be preferable.

### Corrective and remedial powers of supervisors (CP 23)
- FI has a range of corrective and remedial powers but gaps and limitations exist.
- With respect to sanctions and penalties on individuals FI can remove or bar an individual from the Board or position of managing director but cannot remove senior management other than the CEO/Deputy CEO.
- Legal uncertainty from the appeals process affects intervention and bank resolution:
  - Revocation decisions can be overturned and liquidations may be suspended pending appeal.
  - A robust and flexible early-intervention framework is needed to provide supervisory and resolution authorities with tools and mandate to intervene and resolve ailing institutions at an earlier stage and to resolve identified legal concerns.

### Consolidated and cross-border banking supervision (CPs 24–25)
- FI practices consolidated supervision according to the EU legislative framework and applies prudential standards on a consolidated basis.
- FI does not have direct powers to impose its prudential standards on nonfinancial (and nonmixed activity) parent companies of credit institutions; consideration should be given to extending FI powers to holding companies.
- FI maintains an extensive network of MOUs and arrangements with home or host supervisors supported by gateways for information exchange and confidentiality provisions.
- Sweden is home jurisdiction to four systemically significant banking groups for the Nordic region, one considered globally systemic; Sweden hosts 45 foreign branches.
- Home-host arrangements are critical; FI aims for information exchange to be a first step toward deeper understanding of group activities and risk profiles.
- Progress would benefit from increased time spent on on-site visits to host/home jurisdictions, limited by resource constraints.

### Key compliance observations (selected points from Table 1)
- 1.1: Statutory mandates are open to interpretation and lack clarity on balancing prudential objectives with consumer protection objectives.
- 1.2: FI’s effectiveness may be compromised by annual appropriation letters from the government; both FI and government have powers to issue or withdraw a banking licence creating potential government involvement in institution-specific issues.
- 1.4: Regulatory decisions by FI (remedial powers, sanctions, revocation) are subject to challenge and reversal in court; legal uncertainty impedes effective supervision.
- 1.5: No direct or explicit protection afforded to FI or its staff against liability for actions and omissions.
- 2: Deposit taking is not reserved for entities licensed and subject to supervision as banks.
- 3: FI lacks power to assess fitness and propriety of all senior management; obtaining a license through false information is not sufficient grounds for revocation.
- 5: Notification limit for major acquisitions is set at more than 25 percent of the CI’s capital base; no requirement to notify FI after an acquisition/investment except in limited cases.
- 9, 13, 14, 15: Concerns over FI’s ability to robustly determine quality of processes and controls in major institutions across problem assets, market risk, liquidity risk and operational risk; liquidity risk supervision described as very weak and subject to major revision.
- 17: Regulations deficient in requiring firms to inform FI of material information affecting fitness and propriety of Board or senior management; nine (9) on-site examinations with an Internal Control theme in the three years to December 31, 2010.
- 18: CIs are not obliged to implement screening procedures to ensure high ethical and professional standards when hiring staff nor required to report to FI suspicious activities and incidents of fraud material to their safety, soundness or repute.
- 20–21: Severe weakness in balance of on-and-off site supervision; FI’s on-site inspection program is modest and rarely includes validation of supervisory reporting accuracy.
- 22: FI lacks power to reject or rescind appointment of an external auditor (EC 6).
- 23: FI can only remove or bar Board members or managing director; uncertainty in sanctions and revocation appeals process requires reform.
- 24: Consider widening legal framework to ensure FI powers apply to bank holding companies.

### Recommended action plan (selected items from Table 2)
- 1.1: FI should articulate how it interprets its mandate including how it would respond in the event of conflict between consumer protection and financial stability.
- 1.2: Ensure operational and legal independence of FI; remove duality of powers of FI and government to determine licensing and revocation; review scale of funding and funding model for FI.
- 1.4: Identify and implement alternative legal options compatible with the right of appeal and redress to ensure FI can deliver decisions or sanctions, such as revocation, without undue risk of reversal by the courts.
- 1.5: Establish direct or explicit protection to FI and its staff against liability for actions and omissions in discharging their duties when acting in good faith.
- 2: Restrict deposit taking to entities licensed and subject to supervision as banks.
- 3: Grant FI power to assess fitness and propriety of all members of senior management and revise statute to provide power to revoke a license obtained by deception.
- 4: Amend regulations to obligate firms to notify FI forthwith upon becoming aware of material information that may negatively affect suitability of a major shareholder.
- 5: Laws or regulations should provide precise criteria to judge individual acquisition proposals; expand prior notification requirements, establish specific thresholds, and require after-the-fact notification.
- 7: Ensure focus is placed on corroborating firms’ risk management practices rather than on formal existence of policies and processes.
- 9: Ensure adequacy of information on quality of assets from firms.

*Source: _cr11172 - 32.      Sweden has extensive gateways for information sharing, domestic and*

### 11. Related parties Consider developing more explicit rules. Ensure

### _cr11172 - 11. Related parties Consider developing more explicit rules. Ensure

### Related parties
- Consider developing more explicit rules.
- Ensure adequate supervisory focus in the context of reviews.
- The Standard Report should include a breakdown of exposures to related parties.

### Market risk
- Continue with current initiative on trading book valuation.
- Ensure that findings inform future supervisory practice in on site reviews.
- Ensure that there is feedback to internal and external auditors to enhance understanding of supervisory expectations.

### Liquidity risk
- Continue with planned implementation of liquidity initiatives.
- Ensure that findings from the reviews are incorporated in guidance and supervisory practice.

### Operational risk
- Continue with development of guidance for firms.
- Establish, to the extent possible, a systematic approach to the on-site assessment of firms’ practices.
- Ensure firms are placing sufficient emphasis on business continuity and contingency plans.

### Internal control and audit
- Remedy deficiencies in regulations with respect to obligations on institutions to inform FI of material information that may negatively affect the fitness and propriety of a Board member or a member of senior management.
- Where Internal Audit is included in a themed inspection with a different focus, the report should indicate the findings.
- FI should be granted power to reject or rescind the appointment of an external auditor.
- FI has no power to remove auditors or actuaries, nor do they have to be approved; FI may take indirect action by requiring insurers to take corrective action if auditors, actuaries or senior managers do not meet regulatory requirements.

### Abuse of financial services / Staffing ethics
- CIs should be formally required to implement screening procedures to ensure high ethical and professional standards when hiring staff.
- The text of FFFS 2005:12 should be revised to provide for reporting of incidents of suspicious activity and high impact fraud to FI.

### Supervisory approach and techniques
- Establish a formalised analytical framework for the risk assessment of firms, building on existing practices.
- Determine resource requirements to ensure minimum level of effective oversight in respect of: risk management, credit risk, problem assets, market risk, liquidity risk, operational risk, internal control and audit. (CPs 7, 8, 9, 13, 14, 15, and 17)
- FI adopts a systematic supervisory risk assessment process to prioritizing and planning supervisory activities and resources.
- FI adopts a transparent supervisory approach, supported by the Traffic Light model.
- FI has instituted structured processes for prioritization of supervisory activities and risk assessment to ensure consistency in supervisory measures and decisions.

### Supervisory reporting and certification
- FI should consider demanding certification of filings by a CI’s CEO or CFO and obtaining statutory authority to levy significant fines for misreporting.
- FI should consider requiring external auditors opining whether filings have been accurately made, with the fee being for the CI’s account.

### Remedial action and sanctions
- Ensure that sanctions can be applied to senior management (in addition to Managing Director).
- Consider early intervention framework.
- Identify appropriate revisions to remove legal uncertainties created by the possibility that a revocation decision can be overturned.
- The ambiguity of status of a revoked institution (including liquidation issues) may lead to significant supervisory hesitation in using powers of revocation.
- Review levels of fines that can be applied to supervised institutions, including the removal of the existing cap of SEK 50,000, 000.

### Consolidated supervision
- Ensure that consolidated supervision powers can be applied to and enforced on a bank holding company.

### Authorities’ response to the assessment
- The Swedish authorities welcome the assessment and look forward to using the recommendations to improve regulation and supervision of the banking sector in Sweden.
- The authorities generally share the views and grading of most Basel Core Principles, but do not fully share the materially noncompliant rating for Basel Core Principle 1.2 and provide reasons:
  - Government decisions after referral from FI are circumscribed through provisions in law and interpretative statements; in practice decisions have been taken by FI rather than by the government.
  - FI’s current fee model—where fees levied by FI are passed on to the state budget—ensures funds are subject to parliamentary control.
  - Assessments in other FSAPs during 2007 and 2008 resulted in higher ratings where supervisory authorities were subject to government decision-making power in areas such as allocation of funds, supervisory priorities and staffing issues.
  - Authorities are about to initiate work aiming at revising the framework and welcome a new assessment in the not too far distant future.

### IAIS Insurance Core Principles — Introduction and market structure
- This report summarizes the assessment against the Insurance Core Principles (ICPs) issued by the IAIS in 2003 based solely on laws, regulations, and supervisory requirements and practices in place at the time of assessment.
- The insurance sector in Sweden is well-developed and mature, with around 50 percent of households’ financial assets held in life insurance products.
- As at end-2010, there were 434 insurers comprising:
  - 33 life insurers
  - 10 unit-linked insurers
  - 157 nonlife insurers
  - 5 reinsurers
  - 49 captive insurers
  - 82 friendly societies
  - 97 livestock insurers
  - 1 association of underwriters
- The number of licensed insurance intermediaries reached 1,044 by end-2010.
- Assets held by the insurance industry as at end-2009 totaled SEK 2,967 billion, representing 95 percent of GDP.
- Insurers’ holdings in the Swedish bond market totaled SEK 1,125 billion or approximately 50 percent of the amount outstanding as at end-2009.
- The number of insurance groups more than doubled from 23 to 60 as at end-2010.
- The five largest insurance groups accounted for approximately 50 percent of total assets as at end-2009.
- The top-5 life insurers accounted for 61 percent of assets of the life sector while the top-5 nonlife insurers have about 55 percent market share in terms of gross premiums in 2009.
- Motor insurance accounted for 22 percent of total premiums written in 2009.
- Foreign risks made up 34 percent of nonlife insurers’ portfolio in 2009.
- Insurers’ solvency:
  - Life insurers’ solvency was hit badly in 2008; solvency ratios recovered somewhat in 2009 but some life insurers are close to solvency intervention level and are monitored by FI closely.
  - Nonlife insurers’ overall operating income and solvency ratio dropped in 2008; overall solvency ratio for nonlife insurers improved in 2009 and FI’s assessment is that there is only a minor solvency risk.
  - Solvency ratios for reinsurers and captives have been declining since 2007; a number of captive insurers are subject to closer monitoring by FI.

### Supervisory framework and legal foundations
- FI is the integrated supervisor for the financial sector in Sweden and supervises private insurance business but not social insurances.
- FI is a central administrative authority with a mandate to promote stability and efficiency in the financial system and ensure effective consumer protection.
- FI is accountable to the Ministry of Finance (MOF) and its annual budgets are funded by the MOF.
- Government formulates and issues financial sector legislation and regulations and may authorize FI to issue secondary regulations only if specifically provided for under the relevant law or primary regulations.
- Key legislation: IBA and FIBA; the IBA came into effect on April 1, 2011.

### Key findings and recommendations (ICPs)
- The Swedish regulatory framework has a high level of observance with the ICPs; regime broadly in line with EU Directives.
- FI has introduced the Traffic-Light model, a framework for stress testing, to better understand insurers’ risk exposures and facilitate early intervention.
- The impending implementation of Solvency II will strengthen FI’s risk-based supervision, subject to the adequacy of supervisory resources.
- Coverage and robustness of FI’s prudential supervision should be strengthened:
  - FI has no legal authority to establish and assess fitness and propriety of senior management of insurers during licensing and on an ongoing basis.
  - No regulatory requirement for insurers to report reinsurance strategies and programs, outsourcing arrangements and off-balance sheet exposures including derivatives transactions.
  - Supervision of insurance groups needs strengthening in reinsurance, risk concentrations and group risk management.
  - FI should formulate a risk-based supervision approach based on both impact and probability of failure, supported by appropriate baseline supervision.
- Additional regulatory requirements advised to enhance protection of policyholders:
  - FI has not issued regulations or guidelines on conditional bonuses setting out equitable distribution of surplus, the basis for computing technical provisions and related disclosures.
  - Review adequacy of regulatory measures to ensure policyholders are given proper advice in their best interests given increased possibility of transferring policies.
- Review continued involvement of the government in institution-specific supervisory issues:
  - IBA explicitly provides for government involvement in matters such as license approval or revocation, issuing reprimands or imposition of administrative fines, or where an insurer fails to comply with an order by FI; IBA does not specify the circumstances for “matters of principle or special importance.”
  - The possibility of intervention may compromise FI’s independence.
- Resourcing and empowerment of FI:
  - FI’s insurance supervisory staffs are competent and qualified but inadequate resources have limited baseline supervision.
  - Significant resource implications arise from implementation of Solvency II and supervision of cross-border insurance groups/ conglomerates.
  - Authorities are advised to consider whether legal protection available to FI and its staff is at the level envisaged by ICP 3.

### Conditions for effective insurance supervision (ICP 1–5)
- A sound and clearly defined financial sector policy framework facilitates insurance supervision in Sweden.
- Swedish accounting, auditing and actuarial standards are generally consistent with international standards.
- High degree of self-regulation by the Swedish insurance industry.
- Well-developed financial infrastructure and access to international markets support effective asset-liability management.

### The supervisory system and ongoing supervision (ICP 2–17)
- FI has a clear mandate to promote a stable and well-functioning financial system with consumer protection.
- FI exercises supervision within the state budget framework and MOF’s annual appropriation letters and is subject to clear accountability mechanisms.
- FI has limited resources for a large number of insurers; resourcing constraints hinder implementation of robust risk-based and baseline supervision.
- FI has instituted structured processes for prioritization and risk assessment; uses Traffic Light model.
- FI is empowered and regularly exchanges information with other supervisors within and beyond EU, subject to confidentiality safeguards; Sweden is a signatory of the Helsinki protocol, the revised Siena protocol and Budapest protocol.
- Licensing policy, criteria, and procedures are clear and transparent, but IBA provides for government involvement in licensing of specific institutions.
- Senior managers (except Managing Director (MD)) are not subject to fit and proper assessment.
- FI conducts due diligence on board members, MDs and qualifying holders and may remove such persons if no longer fit and proper.
- Corporate governance framework broadly in line with ICP 9; authorities advised to strengthen corporate governance to reflect international standards and promote objectivity and effectiveness of boards.
- FI supervises and assesses insurers’ internal controls and has taken supervisory measures for deficiencies.
- FI has a systematic and transparent approach to market analysis to identify, assess and mitigate risks; due to limited resources FI does not analyze developments outside the Swedish market on a regular basis but will do so as part of group supervision when important.

*Source: _cr11172 - 11. Related parties Consider developing more explicit rules. Ensure*

### 75.      FI has issued regulations and guidelines setting out the scope, content and

### _cr11172 - 75.      FI has issued regulations and guidelines setting out the scope, content and

### Supervisory reporting, off-site monitoring, and resources
- FI has issued regulations and guidelines setting out the scope, content and frequency of reports by different types of insurers.
- FI is empowered to require additional reports necessary for effective supervision or timely intervention.
- Regulatory returns are not audited; FI must reconcile returns with insurers’ audited annual reports.
- Insurers are not required to report outsourcing arrangements as well as derivatives and off-balance sheet transaction to FI regularly.
- FI does not have adequate resources to conduct adequate off-site monitoring for all licensed insurers.

### On-site inspection, supervision approach, and enforcement powers
- FI conducts both full scale and focused inspections and has conducted joint inspections with foreign supervisors.
- FI lacks adequate resources to implement baseline supervision for a large number of supervised insurers and intermediaries as part of its risk-based supervision.
- Effective inspection should go beyond a checklist approach to better understand insurers’ operations and risks.
- FI is empowered to take a progressive escalation of preventive measures to address emerging supervisory concerns and takes a proportionate approach in exercising enforcement and sanction powers.
- FI has no power to:
  - a) order a compulsory transfer of insurance portfolios;
  - b) intervene against a subsidiary of an insurer who is not under its supervision; and
  - c) take measures to protect the interests of the public and policyholders pending the completion of police investigations.

### Winding-up, policyholder protection, and technical provisions
- The IBA and FIBA provide for orderly exits of insurers from the market.
- Policyholders (including ceding insurers) and legitimate beneficiaries have priority rights to the assets covering insurers’ technical provisions in the event of insolvency.
- Regulatory requirements over assets covering technical provisions could be strengthened and clear rules of distribution of assets in the event of insolvency should be established.
- FI has established principles and regulatory guidelines on the computation of insurers’ technical provisions, subject to stress testing under the Traffic Light Model.
- FI is empowered to require insurers to remedy any shortfall in their technical provisions, if necessary.
- There is no explicit risk margin and no regulatory policy for computing technical provisions in respect of conditional bonuses.
- The current solvency regime in Sweden is largely based on EU Solvency I; FI introduced the Traffic Light model with prescribed stress testing and reporting requirements to better understand insurers’ risk profiles and facilitate early intervention.
- The implementation of Solvency II will strengthen supervision of insurance groups, subject to the adequacy of regulatory resources.
- The implementation of Solvency II with effect from January 2013 will facilitate FI in implementing a more robust and risk-sensitive solvency regime.

### Risk management, reinsurance, investments, and derivatives
- FI has issued guidelines on supervisory expectations of insurers’ risk management including underwriting and reinsurance risks.
- FI reviews insurers’ underwriting policies and controls as well as reinsurance arrangements during on-site inspections.
- Supervisory processes in relation to assessment of insurers’ reinsurance arrangements and risk transfer instruments could be enhanced.
- There is a lack of resources to implement policies and processes to monitor the adequacy of insurers’ risk management systems on a regular basis.
- The IBA and FI regulations set out requirements for insurers’ investments covering technical provisions, but there is scope for updating FI’s regulations to reflect international best practice.
- FI does not have adequate resources to examine insurers’ investment operations on a regular basis.
- Insurers disclose their derivative activities in accordance with relevant accounting standards, Annual Reports Act (ARA) and Annual Reports for Insurance Undertakings Act (ARIUA).
- FI has not issued regulations on insurers’ derivative activities but is in the process of drafting the relevant regulations as authorized under the new IBA.

### Markets, consumers, and consumer protection
- The regime for consumer protection in Sweden is established under various legislations, administered mainly by FI and Swedish Consumer Agency with the support of industry associations; other agencies involved include the National Board for Consumer Complaints and the Consumer Ombudsman.
- Consumer protection should be strengthened by establishing regulatory requirements for conditional bonuses and review of effectiveness of regulatory measures for transfer of policies.
- The ARIUA, ARA as well as regulations and guidelines issued by FI govern insurers’ public disclosure; however, the disclosure regime does not fully cover the requirements under the IAIS standards on public disclosure.
- FI and industry participants have taken a proactive approach to combating insurance fraud, with close cooperation and information exchange with Swedish Economic Crime Authority and other enforcement agencies and supervisors, locally and internationally, to preserve the integrity of the insurance sector.

### AML/CFT supervision
- Recent FATF follow-up report noted that Sweden has taken measures to bring 18 out of the 20 recommendations previously rated partially compliant or noncompliant to at least a level equivalent to largely compliant.
- More supervisory resources are needed to ensure effective supervision of anti-money laundering/combating the financing of terrorism compliance by insurers’ and insurance intermediaries.

### Key recommendations to improve observance of ICPs (selected highlights preserved verbatim)
- ICP 2: Consider adopting explicit supervisory objectives for the insurance sector, including FI’s role in protecting policyholders.
- ICP 3: a) review the adequacy of supervisory resources for effective implementation of a more robust risk-based supervision; b) consider a more principle-based approach in respect of the scope for FI to issue secondary regulations; c) review the role of the government in institutional-specific supervisory issues; d) consider reviewing whether the legal protection available to FI and its staff members are at the level envisaged by ICP3; and e) require publication of the reasons for the removal of board members and the DG of FI.
- ICP 4: Consider reviewing the impact of judicial review on the ability of FI to make timely interventions to protect policyholders’ interests.
- ICP 5: Expedite Sweden’s accession to the IAIS multilateral MOU.
- ICP 6: a) review the government’s role in the licensing process under the IBA; b) extend the fit and proper assessment to senior management of insurers; c) consider empowering FI to impose licensing conditions; and d) consider having a definition of insurance business in the IBA.
- ICP 7: a) explicit provision for FI to assess the fitness and propriety of senior management of insurers as well as their auditors and actuaries; and b) require insurers to notify FI of circumstances that may affect the fitness and propriety of its board members, MD, senior managers, auditors and actuaries.
- ICP 9: Establish clear corporate governance standards for insurers on independence, board committees, board effectiveness assessments, senior managers’ roles and accountabilities, and actuaries’ access to the board.
- ICP 10: Consider adopting explicit provisions to ensure that internal auditors have unfettered access to the board and senior management and appropriate status.
- ICP 11: Enhance FI capacity and resources to analyze developments outside the Swedish market on a regular basis including Swedish insurers’ exposures to foreign risks.
- ICP 12: a) formulate a more robust risk-based supervision approach supported by appropriate baseline supervision; b) review adequacy of resources for off-site monitoring; c) establish clear regulatory requirement for insurers to report their reinsurance strategy and program, outsourcing arrangements and off-balance sheet exposures including derivatives transactions; and d) require annual regulatory returns of insurers to be audited.
- ICP 13: Improve robustness of on-site inspection and ensure planned baseline onsite supervisory program is supported by adequate supervisory resources.
- ICP 15: a) empower FI to order a compulsory transfer of insurance portfolios of an insurer in distress; b) strengthen FI’s intervention powers against unregulated entities within an insurance group or financial conglomerate; c) consider how best to empower FI in taking necessary measures to protect the interests of the public pending completion of police investigations; and d) review the government’s continued involvement in enforcement and sanctions at institution-specific level.
- ICP 16: a) ensure adequate controls over assets covering technical provisions including quarterly submission of the special register of assets; and b) establish clear rules on distribution of existing assets of an insolvent insurer amongst policyholders.
- ICP 17: a) review adequacy of supervisory resources for effective supervision of cross-border groups/conglomerates; b) harmonize supervisory approach for insurance groups and conglomerates; and c) formulate regulatory requirements applicable to nonregulated holding companies.
- ICP 18: Develop policies and processes to monitor adequacy of insurers’ risk management systems on a regular basis, including requiring insurers to report on their risk management system as part of the annual returns.
- ICP 19: a) review adequacy of reinsurance programs as part of routine off-site surveillance; and b) establish policies and procedures to check that insurers properly account for all risk transfer instruments.
- ICP 21: Enhance robustness of supervision of insurers’ investment operations and update regulations on investment management by insurers.
- ICP 22: Expedite issuance of regulations governing insurers’ derivative activities.
- ICP 25: a) review adequacy of current regulatory requirements for conditional bonuses and transfer of policies; and b) consider articulating more clearly the roles and accountabilities of various agencies involved in consumer protection.
- ICP 26: Formulate plans to implement the IAIS supervisory standards on public disclosures.
- ICP 28: a) review adequacy of resources for AML-CFT supervision; and b) update legal requirements where insurers rely on intermediaries to perform customer due diligence (CDD).

### Authorities’ response
- The Swedish authorities welcome the assessment and share the views expressed and the grading of observance of the Insurance Core Principles.
- The recommendations will be used to improve regulation and supervision of the Swedish insurance sector.
- Several issues will be addressed with implementation of Solvency II and participation in IAIS work on Internationally Active Insurance Groups.
- Regulation regarding transfer of policies and other life insurance related issues is under national review.

### IOSCO Principles and securities regulation (summary of assessment and market structure)
- An assessment of IOSCO Principles in Sweden’s securities market was conducted March 9–21, 2011 as part of the FSAP, based on the IOSCO Principles and Objectives of Securities Regulation and its Methodology adopted in 2003 and updated in 2008.
- The structure of financial regulation in Sweden is a unitary model with a single administrative authority, the FI, responsible for licensing and supervising all entities providing financial services, established in the Financial Supervisory Authority Instructions Ordinance (2007) and the Instructions Ordinance (2009).
- FI is responsible for supervision, regulation and licensing of financial markets and firms and coordinating supervision as regards AML-CFT; Section 2 requires FI to promote a stable and sound financial system and endeavor to ensure solid consumer protection.
- Self-regulation remains important; NASDAQ OMX and the Swedish Securities Council (SSC) play significant roles.

Key market statistics and structure (preserve numeric values exactly)
- At the end of 2009, 255 companies were listed on NASDAQ OMX Stockholm.
- Only limited companies with at least SKr 500,000 in capital may offer their shares for public trading.
- As of February 2011, there were 89 banks and savings banks and 135 investment firms authorized to carry on securities business.
- As of February 2011 there were 921 collective investment schemes (CIS) under management, of which 519 were Undertakings for Collective Investment in Transferable Securities (UCITS) and 400 were special funds.
- Total assets under management in these funds were approximately SEK 1.7 trillion.
- They are managed by 105 authorized firms of which, 82 are fund management companies and 23 are investment firms.
- There are also 3977 foreign CIS authorized in Sweden under the UCITS based legislation and two specialized funds integrated into the Swedish State Pension System.
- Data from Thomson Reuters indicates that 42 percent of Swedish equity trading took place outside NASDAQ OMX in February 2011.
- NASDAQ OMX Group, Inc. is currently the sixth largest trading venue in Europe.
- In addition to NASDAQ OMX Stockholm, Nordic Growth Market (NGM) and Burgundy have been licensed by FI to operate as stock and derivatives exchanges in Sweden; there are also three MTFs.

*Source: _cr11172 - 75.      FI has issued regulations and guidelines setting out the scope, content and*

### 99.      There are a number of general preconditions necessary for the effective

### 99.      There are a number of general preconditions necessary for the effective

### General preconditions
- There are no significant barriers to entry and exit for market participants.
- Competition is encouraged and foreign participation is welcomed.
- The legal and accounting system supports the implementation of effective regulation of market participants.
- The commercial law is up-to-date, and so are corporate governance standards.
- The legislation regarding insolvency is sophisticated, although there are issues concerning the enforcement of market contracts entered into in the period immediately after insolvency is declared.
- The regulators have legally enforceable powers of decision and action.
- The taxation framework is supportive of the operations of the industry in the jurisdiction.

### Main findings — Principles for the regulator (Principles 1-5)
- FI is a unitary regulator but must regulate banking, securities and insurance under several separate statutes.
- Interfaces between separate acts can create risks to investors; this is a matter of the effectiveness of enforcement rather than gaps between laws.
- FI is highly accountable.
- Restrictions on operational independence arise from the imposition of mandatory special requirements during the course of a financial year and its reliance for 85 percent of its funding on Parliament.
- Staff resources have increased in recent years but remain insufficient for current and predictable future work; turnover, particularly of experienced staff, is high.
- Rules are in place to ensure procedural fairness as required by the Principle; the structure of FI is well described and the processes are reasonably transparent.
- In practice the process of representation prior to the imposition of a major sanction such as license revocation may need enhancement.

### Main findings — Principles for self-regulation (Principles 6-7)
- Self regulation has a long history in Sweden and still has a far greater role here than in many other European countries.
- FI’s powers over exchanges have been strengthened since the 2001 FSAP, but limitations remain in FI’s ability to secure changes in certain rules and processes short of the threat of significant sanctions.
- Although regarded as self regulatory bodies, the listing rules of securities exchanges and the power to make them are set out in the law.
- The accountability of securities exchanges to FI, the statutory regulator, is unclear in this part of their business model.

### Main findings — Principles for enforcement (Principles 8-10)
- FI has a comprehensive range of inspection, investigation, surveillance and enforcement powers.
- Delegated powers (e.g., to the Swedish Securities Council regarding takeovers) have appropriate oversight and review.
- Scarce resources limit the capability to carry out effective enforcement and compliance activities, limiting FI’s ability to ensure compliance or detect breaches.
- The interface between supervision and enforcement does not recognize the different skill and mind sets required.
- The maximum amount licensees and others can be fined is too low.
- There have been cases where FI’s use of statutory discretion not to fine a fund manager which has remedied a breach indicates a significant weakness in FI’s use of administrative sanctions.

### Main findings — Principles for cooperation (Principles 11-13)
- FI and other government authorities have a fundamental obligation to share information including with foreign regulators.
- There are appropriate confidentiality provisions in the law and the gateways through these appear effective.
- FI can share information with foreign counterparts even if the alleged conduct would not constitute a breach of Swedish law if conducted within Sweden.
- FI is a full signatory to the IOSCO MMOU.

### Main findings — Principles for issuers (Principles 14-16)
- The listing rules of NASDAQ OMX and the other securities exchanges derive directly from statute and are not delegated to the exchange by FI.
- There is a high level of protection for securities holders in Swedish company law and via implementation of EU directives on takeovers and shareholder rights.
- Sweden applies the “comply or explain” approach with regard to corporate governance of public companies.
- The governance code is updated by a private sector body which has self regulatory elements.
- Classes of shares with multiple voting rights render some major companies largely immune from hostile takeover bids, but these arrangements are transparent to incoming minority shareholders.
- The conduct of takeovers is governed by stock exchange listing rules; the Swedish Securities Council, operating under delegated powers from FI (and subject to its oversight), plays a role in enforcing the rules and granting exemptions.
- Company boards must represent the interests of all shareholders equally and there are limits to their use of defense mechanisms to thwart a hostile bid.
- Accounting and auditing standards are high.
- Supervision of auditors and auditing standards is the responsibility of a government authority, the Supervisory Board of Public Accountants.
- Sweden has adopted the International Federation of Accountants (IFAC) international standards on auditing ISA.
- Independence of auditors is required under the Auditors Act.
- Standards for companies listed on an RM are set by the Swedish Financial Reporting Board; enforcement of elements of the regime is the responsibility of the relevant stock exchange, which looks unsound in a market where for-profit exchanges have begun to compete for listings.
- The position is currently under review in the MOF.

### Main findings — Principles for collective investment schemes (Principles 17-20)
- FI has inadequate resources to effectively supervise fund management companies and insurance intermediaries who market collective investment schemes.
- The last comprehensive survey (three years ago) discovered a level of noncompliance which suggests many breaches currently go undiscovered unless investors complain.
- Insurance intermediaries are in practice largely unsupervised for this business.
- Too much reliance is placed on a legal requirement for licensees self-reporting breaches or the external auditor doing so; evidence suggests this system has not been working as intended and FI has begun to explore mechanisms to improve it.
- Sweden has seen the emergence of a category of fund salespersons that has been able to exploit an element of the Swedish interpretation of the UCITS directive whereby Sweden has implemented a set of rules that allows for marketing in the sense of advertising of a CIS with no requirement to obtain a license in advance.
- Sweden plans shortly to strengthen the wording of the IFA, such that any kind of marketing of a CIS in Sweden will require a notification or license.
- Due to resource constraints FI is unable to be fully effective in supervising compliance with its asset segregation rules; recent cases highlighted breaches extending, in one case, over several years.
- FI’s policy as regards the use of its fining powers does not appear sufficient to act as a deterrent to major fund managers and custodians.
- Disclosure requirements are as in the UCITS III and appear sufficient.
- There will be new rules, and additional obligations on the boards of UCITS management companies with the implementation of UCITS IV in July 2011.
- On unlisted securities FI has issued guidance imposing a special duty of care on fund managers as regards valuations.

### Main findings — Principles for intermediaries (Principles 21-24)
- The number of staff carrying on prudential and in particular conduct of business supervision is insufficient.
- Applicants for a license are only subject to an on-site inspection if their business is sufficiently large and complex that physical Chinese walls are an issue.
- The six major firms are seen by the prudential supervisors at least annually and often quarterly; the remainder is seen once in 2.5 years.
- Conduct of business supervisors do no on-site inspections except for cause or as part of “themed” projects.
- Within the limits set by the number of staff, inspections and examinations appear thorough.
- Pre-visit planning is detailed and objective based.
- Feedback to firms itemizes problem areas comprehensively and action is required and followed up.
- The department has introduced a risk based supervision approach to make the best use of limited resources.
- There is a problem in the interface between the SMA and the Insurance Intermediation Act which creates risk to retail investors.
- Unless licensed under the more rigorous requirements of the SMA an insurance intermediary is not permitted to give investment advice on shares, bonds structured products or other complex financial instruments but some are doing so.
- FI has recently initiated a full review of its relevant regulations.
- There are initial and ongoing minimum capital requirements harmonized at the EU level under the CRD, transposed into Swedish law via the Capital Adequacy and Large Exposures Act (2006).
- The requirements set out in the IOSCO Principle appear to be present.
- An intermediary is required to self-report problems to FI and the external auditor has an obligation to report any problems discovered on the audit of the intermediary; the effectiveness of this requirement is in doubt.
- One large case has stretched the supervision resources even farther than normal.
- The appropriate agreements are in place to deal with the failure of an intermediary.
- FI, RB and the MOF have signed an MOU regarding crisis management.
- FI is a signatory to the MOU on cooperation between the financial supervisory authorities, central banks, and finance ministries of the EU on cross-border financial stability.
- With regards to Swedish financial institutions with significant activities in other countries there are MOUs on supervision with other relevant jurisdictions within Sweden and in the Nordic area.
- Regular scenario/stress test situations are carried out together with RB; such work has also been carried out at the Nordic level.

### Main findings — Principles for secondary markets (Principles 25-30)
- Securities exchanges in Sweden have a wide self regulatory remit compared with exchanges globally.
- In recent years, FI’s powers over exchanges have been significantly strengthened.
- The authorization provisions currently applied to trading systems operated by some of the large banks do not fully meet the IOSCO Principle regarding transparency.
- There are challenges across Europe as markets fragment and a variety of trading platforms are developed.
- Sweden does not appear to derogate from the current Markets in Financial Instruments Directive (MiFID) pre and post trade transparency regime.
- The assessment recognizes the concerns identified in Sweden and elsewhere as part of the current MiFID review on specific elements in the current regime.

*Source: _cr11172 - 99.      There are a number of general preconditions necessary for the effective*

### 109.     Enforcement of prohibitions on insider dealing and market manipulation are

### _cr11172 - 109.     Enforcement of prohibitions on insider dealing and market manipulation are

### Summary findings on enforcement, market integrity, and supervisory capacity
- Enforcement of prohibitions on insider dealing and market manipulation are inadequate.
- The prosecution authority (NECB) has a good record in successfully prosecuting those cases it brings to court, but the current regime has only limited deterrent effect in applying dissuasive sanctions despite Sweden having implemented the Market Abuse Directive.
- Sweden has implemented relevant EU directives such as the Settlement Finality Directive to secure market integrity and minimize systemic risk.
- Large Exposures are dealt with in the Capital Adequacy and Large Exposures Act to which all banks and market intermediaries are subject.
- Market authorities have powers to take action under their rules and regulations if necessary.

### Key assessments under IOSCO Principles (selected highlights)
- Principle 1: FI is a unitary regulator for banking, securities and insurance but regulating under several separate statutes can create interface problems that risk retail investors; these are framed as enforcement effectiveness issues rather than statutory gaps.
- Principle 2: FI is highly accountable; restrictions on operational independence arise from mandatory special requirements during the financial year and its reliance for 85 percent of its funding on Parliament.
- Principle 3: Staff resources increased but remain insufficient; turnover, particularly of experienced staff, is high.
- Principle 4: Procedural rules exist to ensure fairness; the process for permitting a party to be heard prior to major sanctions (e.g., license revocation) may need enhancement.
- Principle 6–7: Self-regulation has a long history and still plays a greater role in Sweden than in many other European countries; FI’s powers over exchanges have been strengthened since the 2001 FSAP but limitations remain.
- Principle 8–9: FI has comprehensive inspection, investigation, surveillance and enforcement powers; delegated powers (e.g., Swedish Securities Council on takeovers) have appropriate oversight.
- Principle 10: Scarce resources limit breach detection; the interface between supervision and enforcement does not recognize different skill sets required; maximum fine amounts are too low and FI’s discretion not to fine remedial fund managers is a significant weakness.
- Principle 11–13: FI and other authorities can share public and nonpublic information domestically and with foreign counterparts; FI has more than 40 active MOUs and Letters of Intent and is a full signatory to the IOSCO MMOU.
- Principle 14: Listing rules derive directly from statute rather than being delegated; provisions allowing companies to keep confidential information lack specificity; maximum of 120 days for filing annual reports may be slow compared with markets where 90 or 75 days is the norm.
- Principle 15: High level of protection for securities holders via company law and EU directives; “comply or explain” corporate governance approach; classes of shares with multiple voting rights are transparent to incoming minority shareholders.
- Principle 16: Accounting and auditing standards are high; supervision of auditors is by the Supervisory Board of Public Accountants; Sweden has adopted ISA; group and listed company accounts must be prepared according to IFRS as adopted by the EU; enforcement of some accounting elements for listed companies is the responsibility of exchanges—a position under MOF review.
- Principle 17–18: FI has inadequate resources to effectively supervise fund management companies and insurance intermediaries who market CIS; insurance intermediaries largely unsupervised for CIS sales; reliance on self-reporting and auditors; a category of fund salespersons can market CIS advertising without a license under Sweden’s UCITS interpretation; FI is unable to fully supervise compliance with asset segregation rules and fining policy in this area is not sufficiently deterrent.
- Principle 19–20: Disclosure and valuation/pricing requirements for CIS appear sufficient; UCITS IV implementation (July 2011) will impose new rules and board obligations; FI guidance imposes a special duty of care on fund managers for unlisted securities valuation and restricts valuation by fund management personnel.
- Principle 21: Number of staff for prudential and conduct supervision is insufficient; conduct supervisors do not undertake routine on-site inspections except for cause or themed projects; within staff limits inspections are thorough and risk-based supervision introduced.
- Principle 22–23: Initial and ongoing capital requirements exist harmonized under MiFID and the Capital Requirement Directive (CRD); standards for internal organization and operational conduct appear present, but effectiveness of self-reporting and auditor reporting is in doubt following a large case that stretched resources.
- Principle 24: Crisis management arrangements in place (MOU among FI, RB, MOF); Investors Compensation Scheme present; FI successfully handled several major intermediary failures in cooperation with domestic and overseas authorities in the last three years.
- Principle 25–27: Authorization and oversight of trading systems exist but authorization provisions for trading systems operated by some large banks do not fully meet Principle 25 requirements on transparency; FI’s powers over exchanges strengthened though weaknesses exist in listings; Sweden does not appear to derogate from the current MiFID pre- and post-trade transparency regime.
- Principle 28: Sanctions for criminal law violations are not sufficient to be fully effective, proportionate and dissuasive.
- Principle 29: Relevant EU Directives implemented; Large Exposures addressed under the Capital Adequacy and Large Exposures Act; market authorities have powers to act under rules and regulations.
- Principle 30: Systems for clearing and settlement not assessed.

### Recommended action plan (selected, preserving original wording)
- Principle 1: Clarify that insurance intermediaries wishing to sell shares, bonds, structured products and other complex products must be licensed under the SMA and develop mechanisms to communicate this to current and potential licensees.
- Principle 2: Government should reconsider attaching specific short term project requirements to Parliament’s annual budget allocation for FI during the financial year; examine changing FI funding mix away from reliance on Parliamentary allocation toward fees levied by FI and allow FI, subject to consultation, to set fees necessary to fulfill its mandates.
- Principle 3: Government and FI should consult on measures to ensure FI has sufficient, experienced and qualified staff to meet current and predicated workloads; FI should consider career paths and work environment improvements to retain staff.
- Principle 4: FI should review internal processes for licensees to make representations prior to imposition of major sanctions such as license revocation.
- Principle 7: Government might consider whether issuer regulation should be on a statutory basis by a single statutory body such as FI to ensure consistent, effective and efficient issuer regulation.
- Principle 10: FI should consider whether it has the balance right between supervision and enforcement in its current structure; consider increasing fines to dissuasive levels and review the use of statutory discretion not to fine fund management companies that rectify breaches.
- Principle 14: See recommendation under Principle 7; FI and NASDAQ OMX should jointly consider greater specificity and transparency on criteria allowing listed companies to delay publishing price sensitive information; government might consider whether the EU standard maximum of 120 days for filing annual reports is adequate.
- Principle 15: FI might consider whether the requirement for insiders to report their transactions in 5 days is too long given current technology.
- Principle 16: MOF should pursue to a definitive conclusion its review of whether for-profit securities exchanges should continue to be responsible for enforcing accounting standards on listed companies.
- Principle 17: Strengthen regulation of insurance intermediaries who sell collective investment schemes; FI should end the provision permitting unlicensed persons to sell unapproved foreign CIS to retail investors as long as no money changes hands directly; FI, in consultation with government, should increase resources in the investment funds supervision department; government should review maximum fines and FI should review its apparent policy of forbearance at the top end of the range.
- Principle 18: Consider additional segregation requirements and detailed confirmation of assets by the independent auditor where the AMC and custodian are not at arm’s length.
- Principle 21: FI, in consultation with government, should increase resources in the securities firms supervision department to meet its mandate.
- Principle 22: Consider more timely/frequent reporting by securities firms.
- Principle 25: FI should review trading rules for compliance with the SMA and its Regulations and analyse the performance of trade matching or execution algorithms of automated trading systems.
- Principle 28: Government should carry out a comprehensive review of the legal and judicial framework around prosecution of securities market crimes to see whether steps could be taken to make the process more effective, proportionate and dissuasive.

*Source: _cr11172 - 109. Enforcement of prohibitions on insider dealing and market manipulation are*

### 110.     The Swedish authorities appreciate the work carried out by the IMF in assessing

### _cr11172 - 110.     The Swedish authorities appreciate the work carried out by the IMF in assessing

### Information and methodology used for assessment
- Assessment undertaken in March 2011 in the context of an IMF Financial Sector Assessment Program (FSAP) mission covering the Core Principles for Systemically Important Payment Systems (CPSIPS).
- Covered the Riksbank’s Funds Transfer System (RIX), providing real-time gross settlement (RTGS) in central bank money of Swedish kronor (SEK).
- Sveriges Riksbank (RB) provided a detailed self-assessment, supporting documents, and extensive meetings with RB, Ministry of Finance (MOF), Swedish Banker’s Association (SBA) and four RIX participants (two banks and two clearing/settlement institutions).
- Assessment used CPSS Report on CPSIPS Part I and II and an IMF and World Bank guidance note.

### Institutional arrangements
- RB’s mandate (Sveriges Riksbank Act): promote a safe and efficient payment system; may make available systems for settlement of payments; RB operates RIX.
- FI: Swedish financial supervisory authority; supervises clearing organizations and payment systems except RIX; reports to MOF.
- MOF: responsible for legislation to make the financial system efficient and stable; monitors financial market developments; much legislation is EU-driven.
- SNDO (Riksgälden): reports to MOF; responsibilities include central government cash management, managing central government debt, deposit insurance and investment schemes; participates in RIX for government payments.
- SBA: private sector association with standing committees on payment processing and regulatory/technical aspects; participants (excluding public entities) enter agreements on cut-off times and processing; owner of retail payment system operated by Bankgirocentralen BGC AB (BGC).

### The payment infrastructure in Sweden
- RB owns and runs RIX; RIX operating since 1990; technical platform replaced in February 2009 by a system from Società Interbancaria per l'Automazione - Società per i Servizi Bancari (SIA-SSB).
- RIX has 24 participants.
- Euroclear Sweden operates the Securities Settlement System (SSS); equities, bonds and money market instruments are dematerialized and handled in book-entry form.
- NASDAQ OMX runs the Swedish stock exchange, derivatives exchange and electronic inter-dealer exchange for certain government bonds; NASDAQ OMX acts as CCP for derivatives and repo transactions.
- European Multilateral Clearing Facility (EMCF) introduced in 2009 as a second CCP for Swedish equity market (licensed in the Netherlands).
- BGC offers Automated Clearing House (ACH) services with settlements at participants’ accounts in RIX.

### RIX payments statistics (Table 6)
- Number of participants: 21 20 21 21 23 24
- Volume, million transactions: 1,501,701,952,01 2,582,96
- Value, Billion SEK: 111,174 124,750 122,873 136,600 174,562 137,370

### Main findings—summary
- High degree of observance of the CPSIPS overall, with opportunities for improvements in legal basis and public disclosure of major policies to ensure full adherence.
- Legal foundation (CP I):
  - Generally sound legal basis, but "very problematic uncertainties" regarding finality and collateral security due to transposition of Settlement Finality and Financial Collateral Directives.
  - Certainty exists for transactions completed before opening of bankruptcy/reorganization; uncertainties remain for funds transfers and collateral transactions completed after, but within the same business day of such court decisions.
- Understanding and management of risks (CPs II–III):
  - RIX is an RTGS system settling in central bank money; no credit risk to participants on payments received.
  - RB faces credit risk when providing credit, mitigated by collateral with daily valuation and haircuts.
  - Main participant exposure is liquidity risk; intraday credit and system tools available for liquidity management.
- Settlement (CPs IV–VI):
  - Individual payments settled on real-time gross basis in RIX RTM module or in liquidity saving mode (still gross) in one of five LOMs.
  - FIFO settlement; in queue situations "FIFO- next first fit bypass" applies.
  - Payments settled with immediate finality.
- Security, operational reliability and contingency arrangements (CP VII):
  - RIX is stable and reliable with good availability track record; operational/technical procedures extensively documented.
  - Two operational centers exist but are within limited geographical distance and no guarantee of staff availability at secondary site.
  - Data replicated in real-time; network redundancy; RB conducts contingency testing and has crisis management manual.
  - Recommendation to consider reducing business recovery requirement to two hours.
- Efficiency and practicality (CP VIII):
  - New RIX system is state-of-the-art and well received by users; good payment flow throughout the day.
  - RB applies full cost recovery; participants’ overall cost for making a payment in RIX is relatively high.
- Criteria for participation (CP IX):
  - Participation rules are clear, objective, documented and publicly available.
- Governance (CP X):
  - RB owns and operates RIX; internal governance clearly defined and documented.
  - Operational and oversight functions of RB are clearly separated.
  - RIX Council and RIX User Group involve users in system development; monitoring reports and customer satisfaction surveys are regularly shared.
- Central bank responsibilities in applying CPSIPS:
  - RB published oversight information in 2001; given financial system evolution, RB should publish up-to-date, comprehensive oversight objectives, policies, scope, standards, methodologies, and distribution of responsibilities with FI.
  - Annual oversight assessments for systemically important systems are published in full; new systems/products/functions are reviewed informally prior to going live—formalizing proactive reviews is recommended.
  - RB lacks formal legal powers regarding payment, clearing and settlement activities it does not operate; recommendation to provide statutory right to issue regulations applicable to relevant parties/activities.
  - RB and FI cooperation guided by high-level MOU; further specification recommended to clarify division of responsibilities and avoid overlaps/gaps.
  - RB and FI encouraged to take more straightforward positions when identifying shortcomings or where remedies are not timely.

### Summary observance of CPSIPS (from Table 7) — key points
- CP I (Legal foundation): Important uncertainties remain regarding treatment of funds transfers and collateral transactions completed after, but within the same business day of a court decision on opening of bankruptcy or reorganization.
- CP II (Rules and procedures): System rules and procedures are comprehensive, fully documented and clear.
- CP III (Credit and liquidity risk management): No credit risk on payments received in RIX; intraday credit and system tools available for liquidity management.
- CP IV (Prompt final settlement): System provides RTGS with immediate finality.
- CP V (Multilateral netting): Not applicable.
- CP VI (Settlement assets): Transactions are settled in central bank money.
- CP VII (Security and contingency): RIX stable and reliable; secondary site arrangement and a move to a two-hour business recovery requirement could be considered.
- CP VIII (Efficiency): New RIX welcomed by users; participants’ overall cost for making a payment in RIX is relatively high.
- CP IX (Participation criteria): RIX participation rules are clear, objective and publicly available.
- CP X (Governance): Internal and external governance clearly defined, documented and well appreciated.
- Responsibility A (Central bank disclosure): Beneficial to publish up-to-date comprehensive oversight information; formalize change assessments.
- Responsibility B (Systems RB operates): Annual assessments published in full on RB’s website.
- Responsibility C (Oversight of systems RB does not operate): Desirable to provide RB statutory right to issue regulations in conjunction with critical payments system responsibility.
- Responsibility D (Cooperation): Further specify division of responsibilities between RB and FI to avoid overlaps/gaps.

### Key recommendations (from Table 8)
- CP I:
  - Address problems in legislation related to finality and collateral security caused by transposition of the Settlement Finality and Financial Collateral Directives.
- CP VII:
  - Consider implementing a business recovery requirement of two hours for RIX (RB currently has a four hour requirement).
- Responsibility A:
  - Lay out and publish up-to-date and comprehensive information on RB’s oversight objectives and policies, scope of oversight, standards applied and methodologies used, and distribution of responsibilities and work between RB and FI.
  - Formalize change assessments for new systems, products or functions and consider moving to somewhat lower frequency for work-intensive full-scale assessments.
- Responsibility C:
  - Provide in RB’s statute the right to issue regulations in conjunction with its critical payments system responsibility.
  - Further specify the MOU between RB and FI to avoid overlaps or gaps in assessment of key market infrastructures.
  - RB (and FI) should take more straightforward positions when areas of concern are identified, or where identified shortcomings would not be addressed within an appropriate period.

### Authorities’ response to the assessment
- (No substantive text provided in the source.)

*Source: _cr11172 - 110.     The Swedish authorities appreciate the work carried out by the IMF in assessing*

### 137.     The Swedish authorities welcome the detailed assessment of the RIX system

### 137.     The Swedish authorities welcome the detailed assessment of the RIX system

### Core Principle 1 — Legal foundation
- The Swedish authorities welcome the detailed assessment of the RIX system conducted by the IMF and appreciate the insights and suggestions for improvements.
- Several authorities have highlighted perceived shortcomings in current law, and the Ministry of Finance is looking for a way to address these issues at first opportunity.

### Core Principle VII — Operational risk
- The Swedish authorities agree that demands on security, operational reliability and contingency must be extremely high due to the RIX system’s importance for the Swedish financial market.
- Demands must be feasible and in accordance with the central bank’s size and resources.
- In line with the IMF recommendation, improvements may be made and the Swedish authorities will request the operator of the RIX system to include the recommendations from the IMF in their current analysis on how the contingency arrangements for RIX can be strengthened.

### Central Bank’s responsibility A in applying the Core Principles
- The Swedish authorities agree with the recommendations.
- Work has been initiated to make the oversight of the financial infrastructure more efficient and clear.
- The aim is to publish a paper with comprehensive information regarding the Riksbank’s oversight role and to describe the roles of the Riksbank and Finansinspektionen.

### Assessment of Observance of CPSS-IOSCO Recommendations for Securities Settlement Systems and Central Counterparties — information and methodology
- The assessment of NOMX DM against the CPSS/IOSCO Recommendations for Central Counterparties (RCCPs) was undertaken in the context of the IMF’s Financial Sector Assessment Program (FSAP) Update for Sweden, March 9–22, 2011.
- Prior to the mission, NOMX DM conducted a comprehensive and clear self-assessment following the methodology of the RCCPs published in 2004.
- The assessor benefited from discussions with FI, RB, NOMX DM senior management and staff, and some participants in the system.
- The Swedish authorities were fully cooperative and all relevant documentation was made readily available. Relevant authorities and the operator provided supplemental information and organized additional meetings when required.

### Institutional and market structure — overview
- NOMX DM provides CCP services for equity and fixed income derivatives, as well as repos transactions since 2010.
- It clears products issued in SEK, DKK, NOK, EUR, but the bulk of the products are in SEK.
- Products cleared are either exchange traded or OTC traded but highly standardized.
- NOMX DM is not incorporated as a separate legal entity, but is included within NOMX STO which operates the Swedish stock exchange.
- NOMX STO is a subsidiary of NOMX Nordic Limited which belongs to the NOMX Group, an international group that offers services for trading securities in more than 50 countries.
- In 2008, NOMX Group acquired Nord Pool Clearing. In December 2009, Nord Pool Clearing was incorporated in NOMX STO and its activities have been conducted since then as a Norwegian branch of NOMX STO.

### Key statistics of NOMX DM, 2006–10 (as reported)
- 1. Number of transactions (thousands)
  - 1.1 Equities Derivatives: 788 765 696 762 870
  - 1.2 Equity Index Derivatives: 1.90 83.88 06.68 3 7.83 28.64 3
  - 1.3 Fixed Income Derivatives: 314 053 3848
  - TOTAL: 2.727 4.685 7.432 8.632 9.561
- 2. Value of transactions (SEK billions): 4.79 17.49 06.605 5766.623
- 3. Average daily value of transactions (SEK billions): 1829 25 2026
- 4. Peak value of transactions (SEK billions): 109152116 101119
- 5. Number of clearing members: 313737 4846
  - 5.1 Foreign clearing members: 91215 2624
- 6. Clearing fund (EUR millions): 000 00
- Source: NASDAQ OMX.

(Note: table formatting and numeric strings are preserved exactly as presented in the source.)

### Regulatory framework and oversight
- NOMX STO is authorized as an exchange and has a permit from FI to conduct clearing operations in accordance with the Securities Market Act.
- NOMX STO is subject to supervision by FI. NOMX DM, as a secondary legal name (brandname) for NOMX STO, has the same legal status and supervision.
- NOMX DM is also subject to RB’s oversight. FI and RB cooperate to monitor NOMX DM activities.
- FI and RB use the European standards (ESCB/CERS) in conducting supervisory and oversight responsibilities regarding NOMX DM, which are similar to the RCCPs.

### Main findings — legal framework (Rec. 1)
- NOMX DM clearing activities are subject to a well defined legal regime comprising laws, rules, and contractual provisions supporting enforcement of transactions, netting procedures, protection of customer assets, and delivery-versus-payment (DvP) with finality.
- Adequate rules exist for addressing the event of a participant default, including effective use of collateral, and these rules can legally be enforced.

### Participation requirements (Rec. 2)
- Access and exit criteria are well defined and publicly disclosed.
- Requirements for participants’ financial resources and operational reliability are defined according to membership category.
- All members must be regulated entities with a minimum capital requirement and adequate operational capability.
- NOMX DM monitors compliance with participation requirements on an ongoing basis.
- However, direct pledge end customers with direct relationships to NOMX DM are not subject to specific requirements though NOMX DM has direct counterparty risk with them. Recommendation: NOMX DM should set participation requirements for direct pledge end customers.

### Financial risk management (Rec. 3–6)
- NOMX DM has a comprehensive risk management framework with objectives, measures, and tools.
- NOMX DM monitors participants’ exposure on a real time basis and conducts intraday calls for margins when thresholds are hit.
- NOMX DM regularly validates coverage of the models and parameters used to determine margin requirements.
- In the absence of a mutualized default fund, financial resources to face extreme losses are provided by NOMX STO itself, which might create moral hazard.
  - These resources are ring-fenced but accessed through a highly complex mechanism raising concerns about legal uncertainty and delays in access to funds and a lack of liquidity.
  - Within NOMX STO, both trading and clearing activities are conducted; two different clearing activities (NOMX DM for financial derivatives and NOMX COM for commodities) share the same “regulatory capital” dedicated to cover losses in case of a member’s default, creating potential spillover risk between them.
  - Financial resources do not provide a sufficiently reliable liquidity level.
  - NOMX DM accepts as collateral bank guarantees, which are not liquid resources and are provided by banks that are also NOMX DM members; two of these banks are the sole liquidity providers.
  - The concentrated nature of the Swedish banking sector makes it nearly impossible for NOMX DM to sufficiently diversify liquidity providers, enhancing reliance on central bank credit.
- Default procedures are clearly stated in system rules and published on the website.
- Customer segregation under the agent clearing model facilitates transfer of collateral and positions of end-customers in case of member default.

### Custody and investment risks (Rec. 7)
- NOMX DM relies on custodian banks, which are also CCP members, for collection of collateral, valuation, application of haircuts, and compliance with concentration limits.
- This setup is risky because NOMX DM may not have access to collateral in case of a custodian default.
- NOMX DM does not sufficiently monitor custodians and lacks real time knowledge on the composition of collateral; ex post information is limited to an annual test.
- Investments are made in high quality securities, but the investment policy is less strict.

### Operational risk (Rec. 8)
- NOMX DM identifies and analyses sources of operational risks through a framework that encompasses outsourced operations.
- NOMX DM has two mirrored sites and a Business Continuity Plan (BCP) which is regularly tested.
- Operational risk is under the scope of Internal Audit.

### Money settlements (Rec. 9)
- NOMX DM uses the central bank model for SEK and DKK which represent 99 percent of settlement flows.
- Payments made and received by NOMX DM are effected on its accounts with RB and Nationalbank.
- Payments through commercial banks are negligible and not relevant from a risk management perspective.

### Physical deliveries (Rec. 10)
- Securities deliveries are carried out through securities settlement systems that ensure DvP, eliminating the risk of payment without delivery.
- NOMX DM’s obligations for physical delivery are clearly stated.

### Risks in links between CCPs (Rec. 11)
- Not applicable since there is no link in place.

### Efficiency (Rec. 12)
- NOMX DM reviews pricing, service levels, and capacity level regularly and performs periodic benchmarking with other CCPs in other European countries.

### Governance (Rec. 13)
- Governance arrangements are clearly specified and publicly available on the website.
- Separation in reporting lines supports robust risk management.
- In the Clearing Risk Committee and the Default Committee, the head of risk management has veto power.
- NOMX DM does not sufficiently request feedback on its clearing services from members on a multilateral basis.
- Participants are not represented on NOMX STO Board or through participant committees within NOMX DM.

### Transparency (Rec. 14)
- NOMX DM discloses to clearing members and market participants its rules and relevant documentation in an easy to understand style on its website.
- Documentation covers rights and obligations of participants, procedures for handling risks, and fees.
- NOMX DM completed a comprehensive self-assessment following the RCCPs assessment methodology.

### Regulation and oversight (Rec. 15)
- The basis for effective regulation and oversight exists. FI and RB have the ability and resources to carry out regulation and oversight activities effectively.
- Responsibilities, roles and major policies of FI and RB are clearly defined and publicly disclosed.
- FI and RB require NOMX DM to provide information necessary for regulation and oversight.
- However, they do not have a sufficient level of information and understanding of activities conducted by NOMX COM to assess potential spillover effects on NOMX STO and NOMX DM.
- FI and RB cooperate with each other and with other relevant authorities, but efficiency gains may be achieved by more effective cooperation and by adopting a more risk-based approach.

*Source: IMF assessment text as provided in the content unit.*

### 6. A CCP default procedures should be

### 6. A CCP default procedures should be

### Default procedures — clarity and effectiveness
- The default procedures are clearly described in the R&R and permit to close out or manage appropriately the positions of the defaulting clearing members.
- The structure of customer segregation under the agent clearing model highly facilitates the transfer of collateral and positions of end-customers in case of a member’s default.
- NOMX DM has an internal plan in place that clearly delineates the responsibilities for managing customers’ positions in default and for drawing on financial resources.
- Key aspects of the default procedures should be publicly available.

### Custody and investment risk
- A CCP should hold assets in a manner whereby risk of loss or of delay in its access to them is minimized. Assets invested by a CCP should be held in instruments with minimal credit, market and liquidity risks.
- Findings:
  - NOMX DM has no real time knowledge on the composition of collateral collected as well as no ex post information on it, except when it conducts a test once in a year.
  - NOMX DM relies on Custodian Institutions, which are also CCP’s members, for collection of collateral, valuation, application of haircuts, compliance with concentration limits.
  - Controls on Custodian Institutions are delegated to an outside body which may conduct inspections.

### Operational risk
- A CCP should identify sources of operational risk and minimize them through the development of appropriate systems, controls and procedures. Systems should be reliable and secure, and have adequate, scalable capacity. BCPs should allow for timely recovery of operations and fulfillment of a CCP’s obligations.
- Findings:
  - NOMX DM identifies and analyses source of operational risks through a framework also encompassing outsourced operations.
  - NOMX DM has two mirrored sites and a BCP in place which is regularly tested.
  - The operational risk is under the scope of Internal Audit.

### Money settlements
- A CCP should employ money settlement arrangements that should eliminate or strictly limit its settlement bank risks, that is, its credit and liquidity risk from the use of banks to effect money settlements with its participants. Funds transfers to a CCP should be final when effected.
- Findings:
  - NOMX DM uses the central bank model for SEK and DKK which represent 99 percent of settlement flows.
  - Payments made and received by NOMX DM are effected on its accounts with RB and Nationalbank.
  - Funds transfers to NOMX DM’s accounts are final when effected.
  - Payments made and received through commercial banks are negligible and not relevant from a risk management perspective.

### Physical deliveries
- A CCP should clearly state its obligations with respect to physical deliveries. The risks from these obligations should be identified and managed.
- Findings:
  - NOMX DM’s R&R clearly set its obligations with respect to deliveries of securities.
  - NOMX DM uses securities settlement systems that ensure the DvP.
  - NOMX DM has not implemented a penalty regime in case of late delivery while some new participants are a source of late delivery.

### Risks in links between CCPs
- CCPs that establish links either cross-border or domestically to clear trades should evaluate the potential sources of risks that can arise, and ensure that the risks are managed prudently on an ongoing basis. There should be a framework for cooperation and coordination among the relevant regulators and overseers.
- Status: Not applicable.

### Efficiency
- While maintaining safe and secure operations, CCPs should be cost-effective in meeting the requirements of participants.
- Findings:
  - NOMX DM has in place the mechanisms to regularly review its cost and pricing as well as its service levels and operational reliability.
  - NOMX DM also benchmarks its costs and fees with other CCPs, but considers that due to differences in the nature of the services and markets, the results have to be considered with caution.

### Governance
- Governance arrangements for a CCP should be clear and transparent to fulfill public interest requirements and to support the objectives of owners and participants. In particular, they should promote the effectiveness of a CCP’s risk management procedures.
- Findings:
  - Governance arrangements of NOMX DM are clearly specified and information about them is publicly available on the website.
  - The governance arrangements support robust risk management by a separation in the reporting lines between risk management and other operations.
  - The Board and the management are accountable for NOMX DM’s performance. The objectives include delivering sound risk management.
  - Shortcomings:
    - Lack of users’ feedback and involvement through consultative user groups.
    - NOMX DM does not sufficiently request feedback on its clearing services from members on a multilateral basis.
    - Participants are not represented on NOMX STO Board or through participant committees within NOMX DM that would bring their specific perspectives and interests.

### Transparency
- A CCP should provide market participants with sufficient information for them to identify and evaluate accurately the costs and risks associated with using its services.
- Finding:
  - NOMX DM discloses a wide range of information, both in Swedish and in English, which its members can use to evaluate the risks of using the CCP services.

### Regulation and oversight
- A CCP should be subject to transparent and effective regulation and oversight. In both a domestic and an international context, central banks and securities regulators should co-operate with each other and with other relevant authorities.
- Findings and observations:
  - The basis for an effective regulation and oversight exists. FI and RB have the ability and the resources to carry out regulation and oversight activities effectively.
  - Authorities could have been more proactive regarding NOMX DM collateral management system. For years, the authorities have had knowledge of the set up for collecting margin which is fully outsourced to Custodian Institutions and which involves risks for NOMX DM (see recommendation 7). They had mentioned in their annual assessments that such set up was a concern but they did not request or seek to induce changes to that situation.
  - The responsibilities and roles of FI and RB are clearly defined and publicly disclosed. However, they do not have a sufficient level of information and understanding of the activities conducted by NOMX COM which would be required by the spillover effects this latter one could have on NOMX STO and notably NOMX DM.
  - FI and RB cooperate with each other and with other relevant authorities. The exact respective responsibilities regarding NOMX COM, both in normal times and in crisis situation, among Norwegian and Swedish authorities is not fully clear among the concerned authorities.

### Key Recommendations (Table 11)
- Recommendation 2: Participation requirements
  - NOMX DM should set participation requirements for direct pledge end customers. It should be noted that NOMX DM has started a process for possibly setting requirements for such end customers.
- Recommendation 4: Margin requirements
  - NOMX DM should not accept bank guarantee as collateral due to the fact that such collateral is not liquid and that providers of such guarantees are NOMX DM’s members.
- Recommendation 5: Financial resources
  - NOMX DM should overhaul the complete structure on which its regulatory capital is based and implement a more straightforward and fully funded framework.
  - Two totally ring-fenced capital bases for both NOMX DM and NOMX COM should be set up. Based on the envisaged set up of a mutualized guarantee fund to fulfill likely requirements set by EMIR, this should result in two separated guarantee funds for NOMX DM and for NOMX COM being set up.
  - Swedish authorities should thoroughly explore the possibility to legally separating clearing activities from trading activities currently being conducted within the same legal entity.
  - NOMX DM should enhance its liquidity framework. It should ensure that the collateral collected present a high degree of liquidity and consequently bank guarantees should be excluded. NOMX DM should raise the number of its liquidity providers (only two currently). NOMX DM should put in place the operational set up so that it can use, in case of needs, the intraday liquidity that may be provided by RB.
- Recommendation 7: Custody and investment risks
  - NOMX DM should completely overhaul its current custodian arrangements and rely on CSDs. NOMX DM should review its investment policy and analyze whether there is a need to strengthen it through restricting investment to the highest rated securities, for instance AAA securities as currently done in practice.
- Recommendation 13: Governance
  - NOMX DM should enhance member’s involvement in clearing activities through their adequate representation, for instance through a formal advisory committee.
- Recommendation 15: Regulation and oversight
  - Swedish authorities should clarify in practical terms with Norwegian authorities the exact sharing of responsibilities among themselves regarding NOMX COM, both in normal times and in crisis situation, and consequently adapt their supervision and oversight.
  - Swedish authorities should enhance their knowledge of activities conducted by NOMX COM, due to the spillover effects this latter one could have on NOMX STO and notably NOMX DM.
  - The authorities should operationalize for clearing activities the MOU on cross border financial stability among MOF, central banks and FSAs in Nordic countries, signed in August 2010.
  - FI and RB should formalize the routines and procedures of their cooperation in order to increase exchange of information, to possibly share or allocate specific tasks among themselves, to enhance their common analysis capacity, and to gain efficiency beneficial for both parties. As an example for information sharing, this routine could comprise common reporting requirements that would allow the authorities to get regular and frequent updated data from NOMX DM.
  - Authorities should analyze whether an annual assessment is necessary or whether a less frequent review could be contemplated combined with a more risk based approach.
  - Authorities should strive to strengthen their staffing resources with skills in quantitative analysis in order to be in a position to directly asses (and/or be able to critically review reports which are ordered to external consultants) quantitative models used to calculate margins and financial resources.

### Additional Recommendations (Table 12)
- Recommendation 1: Legal risk
  - FI should approve any substantial changes in the R&R in order to ensure that the rules stay consistent with the whole risk management framework.
- Recommendation 10: Physical deliveries
  - NOMX DM should implement a penalty system for failed delivery.
- Recommendation 12: Efficiency
  - The satisfaction survey conducted by NOMX DM every year should include questions on clearing services.
- Recommendation 15: Regulation and oversight (additional items)
  - RB as an overseer should explore with central banks in Denmark, Finland and Norway, whether they have an interest to participate in an oversight arrangement for NOMX DM.
  - Authorities’ response to the assessment (summary of authorities’ comments below).

### Authorities’ response to the assessment (selected paragraphs)
- Paragraph 159
  - The Swedish authorities welcome the detailed assessment of NASDAQ OMX Derivatives Markets carried out by the IMF. The recommendations are constructive and we look forward to using them in our supervisory and oversight processes. Work has already been initiated in response to many of the views expressed in the assessment and plans are being developed in order to analyze the remaining comments. The Swedish authorities have the following comments to the recommendations currently graded as not fully observed by IMF.
- Recommendation 2: Participation requirements (Paragraph 160)
  - The assessment correctly states that a process for setting specific requirements for direct pledge clients is under way. The Swedish authorities agree with the recommendation and are following the progress and development closely.
- Recommendation 4: Margin requirements (Paragraph 161)
  - NASDAQ OMX Derivatives Markets (NOMX DM) currently accepts bank guarantees as collateral for clearing, which according to the assessment is undesirable as they are illiquid and rely on institutions which are also members of NOMX DM. The recommendation is sensible and the Swedish authorities will enter into discussions with NOMX DM about the use of bank guarantees as accepted collateral.
- Recommendation 5: Financial resources (Paragraph 162)
  - In order to adjust to coming European regulation, NOMX DM is running a project to introduce a default fund. The Swedish authorities follow this project and will give recommendations to NOMX DM on how to set up its financial resources in the future. Furthermore, a review of the liquidity framework is also taking place. The Swedish authorities will further consider the recommendation given regarding legal separation of clearing and trading.
- Recommendation 7: Custody and investment risks (Paragraph 163)
  - NOMX DM is, as expressed in the assessment, currently in the middle of a project aiming to introduce a new collateral management system in 2012. Swedish authorities are monitoring the progress, which will address the current shortcomings.
- Recommendation 13: Governance (Paragraph 164)
  - Swedish authorities will, in line with the assessment, engage NOMX DM to ensure that members are appropriately involved in the governance, also when it comes to the clearing activities. Further involvement from the members will most likely also come natural due to other developments within NOMX DM.

*Source: _cr11172 - 6. A CCP default procedures should be*

### 165.     Relevant points were brought up in the assessment, and the comments are taken

### _cr11172 - 165.     Relevant points were brought up in the assessment, and the comments are taken

### Appendix I: Summary of key recommendations of the 2002 FSAP and their implementation — Banking
- Recommendation: Improve capacity to supervise particularly the more complex activities of the banks.
  - Reported: Enhanced resources, strengthening of specialist units and reorganisation of internal structure to focus on the more complex banks.
- Recommendation: Fit and proper tests to be applied to all members of a bank’s management. FI to have powers to require changes to board membership due to weakness of board members.
  - Reported: Scope of personnel covered by fit and proper tests has not changed since last assessment. Powers with respect to FI’s intervention with a board have been expanded.
- Recommendation: Enhanced FI’s powers, including to require a bank to strengthen its lending practices, provisions, reserves and apply limits to on connected lending.
  - Reported/Action: Powers now in place to require strengthening of lending practices and increased capital in instances of under provisioning. FI can use individual limits on connected lending as a sanction tool in case of unacceptable risk management.
- Recommendation: Reporting requirements and guidance to be enhanced, including on geographical concentrations, connected lending, country risk.
  - Reported: A draft proposal for enhanced reporting has been developed for IRB banks. Detailed guidance has not been issued on connected lending.
- Recommendation: Relevant MOUs to be agreed; lead supervision to be put in place; powers to circumscribe a firm’s foreign activities or establishment of a branch; powers to assess equivalence of host jurisdictions and prevention of incoming (non-EEA) branch where host is not equivalent or has not provided consent.
  - Reported/Action: Considerable progress on MOUs, active lead supervision role by FI; powers granted to limit activities or branching cross border; active assessment of non-EEA host jurisdictions.
- Recommendation: Supervisor to have a wider array of legally binding measures. Laws to exclude possibility of regulatory forbearance.
  - Reported: FI states that it has a wide range of tools but that the regulations were in place in 2002 also. Forbearance is not prohibited.

### Appendix I: Summary of key recommendations of the 2002 FSAP and their implementation — Insurance
- Recommendation: Strengthen staff resources in order to fulfil FI’s legal tasks.
  - Reported: While staff resources have increased since 2002, more may be needed in certain areas.
- Recommendation: Introduce reporting requirements on outsourcing arrangements and guidelines to auditor.
  - Reported/Action: Not implemented. FI review insurers outsourcing, especially in major insurers or groups.
- Recommendation: Enhance licensing requirements including clarifying and extending fit and proper test to senior management/key persons of insurers.
  - Reported/Action: Not implemented. Requirements apply only board members and the CEO.
- Recommendation: Require mandatory annual reports on risk management report by insurers.
  - Reported/Action: Submission is not mandatory. FI reviews such information in supervising major groups and undertakings.
- Recommendation: Review the normal distribution assumption used for analysing technical provisions of non-life insurers.
  - Reported/Action: FI’s current practice is no longer dependent on any probability distribution.
- Recommendation: Establish disclosure requirements for derivatives and off-balance sheet items.
  - Reported/Action: Not implemented. Work is in progress.
- Recommendation: Implement supervisory procedures to ensure compliance with market conduct requirements.
  - Reported/Action: Compliance is part of FI’s supervisory focus. Insurers have to appoint compliance officers.
- Recommendation: Set up a legal basis for issuing a formal criticism.
  - Reported/Action: FI is empowered to do so.
- Recommendation: Enhance reporting by actuaries.
  - Reported/Action: Not implemented. The role of the responsible actuary is limited by the insurance Act.
- Recommendation: Supervise branches of Swedish insurers in the EEA.
  - Reported/Action: Swedish branches in the EEA are supervised subject to resources available.

### Appendix I: Summary of key recommendations of the 2002 FSAP and their implementation — Securities Markets
- Recommendation: Need for greater powers for FI over licensees.
  - Reported/Action: Done. FI can now levy fines, restrict a firms business, require more capital, etc.
- Recommendation: Need for greater powers for FI over third parties when conducting investigations.
  - Reported/Action: Largely done though the power to compel information is lacking.
- Recommendation: FI should increase its resources in the supervision and inspection of licensees, exchanges and clearing systems.
  - Reported/Action: Done. Risk based supervision has also been introduced.
- Recommendation: Need to improve licensing and supervision of collective investment schemes with particular regarding management of conflicts of interest and asset valuations.
  - Reported/Action: Done. More resources are applied to this area. Board members and CEOs are subject to an initial fit and proper test, conflicts management is reviewed and supervised, scheme rules must address over-the-counter (OTC) asset valuations.
- Recommendation: Improve risk management in the clearing and settlement entity and strengthen supervision.
  - Reported/Action: Done. Euroclear (Sweden) has corrected the problems identified. Annual assessments against the ESCB/CESR Principles for securities settlement system are carried out jointly by FI and the RB.
- Recommendation: Strengthen supervision of the Stockholm stock exchange (now NOMX) with particular regard to its role as supervisor of listed companies.
  - Reported/Action: Done. Significantly more resources devoted to this area. Prospectus review by FI has also been strengthened.
- Recommendation: Review powers and processes for managing a licensees failure for possible weaknesses.
  - Reported: Specific identified areas are not commented on.
  - Reported/Action: MOU for crisis management signed with RB and MOF. Cross border scenario/stress situations regularly undertaken re Nordea and NOMX. System successfully tested in the recent crisis.

### Appendix II: Risk Assessment Matrix — Main threats, likelihood, and expected impact
- Strains in wholesale funding
  - Likelihood (Staff assessment): Medium
  - Description: Sovereign and financial sector risks in vulnerable economies lead to broad contagion across borders, and strains in wholesale funding markets may worsen.
  - Expected impact (Staff assessment): High
    - If market strains severely intensify, Swedish banks may face risks of refinancing, including lower refinancing and higher funding rates. The Riksbank’s ability to support a foreign currency liquidity shortage is limited.
    - To comply with the new liquidity regulations, Swedish banks may need to extend the maturity of funding, leading to an increase in lending rate, a reduction of lending, or lower profitability for banks.
- Sharp “double dip” recession
  - Likelihood (Staff assessment): Medium
  - Description: Global growth momentum, notably in the United States and Europe, deteriorates sharply due to various factors such as sovereign risk, bank funding, unfinished regulatory reform, weakness in real estate, markets, diminishing fiscal stimulus, or high unemployment. This will reduce demand for Swedish exports, and jeopardize consumer and business confidence, resulting in persistent high unemployment, a decline in corporate profits, and an increase in bankruptcies in Sweden and countries where Swedish banks operate.
  - Expected impact (Staff assessment): Medium
    - As a small open economy, with deep trade sector and external financial sector linkages, Sweden is highly exposed to the global economy.
    - Due to its extensive cross-border operations, the financial system itself is highly exposed to global economic and financial conditions.
    - Bank asset quality would be adversely affected through various transmission channels including increased unemployment, deteriorating corporate earnings, and a sharp correction in real estate prices.
- Housing price correction in Sweden
  - Likelihood (Staff assessment): Medium
  - Description: By some measures, house prices are moderately overvalued. Already high levels of household indebtedness with loans taken at a variable interest rate. Household debt service capacity may deteriorate when interest rates increase.
  - Expected impact (Staff assessment): High
    - Banks’ loan losses increase moderately through a direct impact from an increase in nonperforming mortgage loans, and an indirect impact through weaker economic growth.
- Severe recession in the Baltic region
  - Likelihood (Staff assessment): Medium
  - Description: The Baltic economies have recovered with GDP growth forecasted to be above 3 percent annually for the coming three years. However, the recovery may be halted if European economy significantly slows down.
  - Expected impact (Staff assessment): Medium
    - Asset quality deteriorates, directly raising Swedish banks’ loan losses, although concentrated in two banks.

### Appendix III: Sweden — Stress tests for banks (solvency, liquidity, scenario and sensitivity)
- Who performed the tests
  - Solvency Stress Tests: Two sets of stress tests conducted by i) the FSAP team; and ii) the authorities.
  - Liquidity Tests: Riksbank (RB).
- Institutions covered
  - Four largest banks, 90 percent of bank assets.
- Assessment date and type of data
  - Q3 2010 supervisory data and Moody’s KMV data. Liquidity data collected by a private company.
- Risk horizon
  - Solvency: 5 years (2011-15)
  - Liquidity: Instantaneous. 3 months and 1 year
- Metrics (hurdle rates)
  - Solvency: 8 percent CAR, 4 percent Tier 1, and 6 percent Tier 1 ratios.
  - Liquidity: Similar measures to Basel III LCR and NSFR.
- Positions and risk factors included
  - Solvency: All on- and off-balance sheet positions. Risks include credit risk, sovereign market risk (banking and trading books), funding risk, and contagion/spillover risks (captured by the systemic CCA). Credit risk arising from interbank exposures. Credit risk arising from the largest three exposures.
  - Liquidity: Funding and liquidity risks arising from an outflow of short-term funds and structural maturity mismatches between assets and liabilities.
- Severity of macro-scenarios (Solvency)
  - Baseline: October 2010 World Economic Outlook (WEO).
  - Scenario 1: Deviations in GDP growth by 2.7 percentage points in 2011 and 3.2 percentage points in 2012 compared to WEO baseline.
  - Scenario 2: Twice the deviations of scenario 1 from baseline.
  - Scenario 3: Prolonged low-growth similar to 2008–09 downturns.
  - Additional shocks: Default of another bank; Default of the largest three exposures.
- Methodology
  - Solvency: Balance sheet approach and systemic CCA. Mission model: expected losses calculations were based on the elasticities used in the CEBS stress testing exercise in 2010, and RWA calculations were based on the Basel II AIRB approach. Credit growth assumption: 0 percent, payout ratio: 0 percent. Authorities’ model: expected losses, RWAs, and credit growth calculations were based on the authorities’ satellite models. Payout ratio: 40 percent. Bank stress profits/losses were estimated as market consensus net operating income (after applying a haircut on fees and commissions income) less the estimated stressed funding cost, losses generated by the sovereign yield shock, and expected loan losses.
  - Liquidity: Authorities’ routine stress tests for large exposures and contagion risk. Assumptions on deposit withdrawal rates and refinancing of wholesale funding. Haircuts applied to liquid assets.

*Italic: Source — _cr11172 - 165.     Relevant points were brought up in the assessment, and the comments are taken*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11172.pdf_