## _cr11281 - 1. Summary Compliance with the BCP—Detailed Assessments ............................................16 ## Source details **Canonical URL:** [_cr11281 - 1. Summary Compliance with the BCP—Detailed Assessments ............................................16](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11281.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11281.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11281.pdf.json) --- ### I. SUMMARY, KEY FINDINGS, AND RECOMMENDATIONS - Banking supervisory framework and implementation in Sweden are in line with many Basel Core Principles’ essential criteria. - Since the global financial crisis FI has instituted a more robust supervisory approach with important advances and initiated a number of projects; further technical development required. - 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 Ministry of Finance (MoF). - Assessors found evidence of impairment of FI’s operational independence through the mechanism of the annual appropriations letter process. - FI’s ability to discharge supervisory and oversight functions adequately and effectively is significantly impaired by the coupling of inadequacy of independence and resource. - Recommendations highlighted: - Staffing levels at FI are an urgent concern to be remedied as soon as possible. - Consideration of a revised legal structure ensuring greater independence of FI. ### A. Assessment context and methodology - Assessment completed as part of a Financial Sector Assessment Program (FSAP) Update undertaken by the International Monetary Fund (IMF) in March 2011. - Assessment based on the Core Principles (CP) Methodology issued by the Basel Committee in October 2006; revised content and methodology compared with 2002 assessment. - Compliance assessed qualitatively using essential criteria (EC) and additional criteria (AC); four-part grading system: compliant; largely compliant; materially noncompliant; and noncompliant. - Assessment team: Keith Bell and Katharine Seal. - Definitions preserved: Compliant; Largely compliant; Materially noncompliant; Noncompliant. ### C. Institutional, macroeconomic setting and market structure — key facts - Financial system assets account for 550 percent of GDP. - 65 percent of those assets belong to four systemic banking groups. - Secondary banking sector represents at least 25 percent of the domestic system (FI estimate). - Household savings and pension savings significant; relatively lower level of domestic deposits in the Swedish banking system. - Low level of sovereign debt issuance implies challenges for Basel III liquidity framework (stable retail deposit base and stocks of high quality liquid assets, ideally government debt instruments). - FI actions on liquidity: - intensified supervision of liquidity risk management; - revised liquidity risk management standards (based on Basel and EU available guidelines); - trialing revised liquidity reporting requirements; - undertaking a major review of liquidity practices across a broad segment of the banking market. - Capitalization and profits: - The four major banks have a capital adequacy ratio (CAR) of 12.2 percent. - Major rights issues conducted in 2008 and 2009 contributed to capital strength. - Structural features: - Large banks operate in life insurance; 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. - Regional role and cooperation: - Sweden is a regional banking hub; fewer than half of consolidated assets of systemic groups are located in Sweden. - FI was an early adopter of supervisor colleges and a multilateral MoU with Nordic/Baltic peers. ### Preconditions for effective supervision — macro and infrastructure - Macroeconomic outlook and risks: - Swedish economy: strong growth 2002–2008, affected by global financial crisis, exited recession in mid-2009. - GDP growth projected to grow 2.5–3 percent in 2011–2012. - Public finances: projected to return to a surplus by 2012. - Public infrastructure: - Public infrastructure supporting effective banking supervision is well developed. - New cooperation arrangements among MoF, RB, FI, and Swedish National Debt Office (SNDO) established during the financial crisis; some gateways not fully opened and greater formalization outside crisis periods needed. - FI subject to the Public Access to Information and Secrecy Act of 2009. ### Financial sector safety net — deposit insurance and crisis measures - Deposit insurance: - Introduced in Sweden in 1996 in conformity with the EU directive on deposit guarantee schemes. - Since the end of 2010 deposits placed in credit institutions are protected to the maximum limit of € 100, 000. - Few failures leading to a payout: two in 2006 and one in 2010. - Scheme administered by the NDO since 2008; payout triggered only when the institution is placed into bankruptcy. - FI can revoke a license but cannot place an insolvent institution into bankruptcy. - Deposit protection scheme funded ex ante according to a fee structure sensitive to relative capital adequacy strength. - Deposits to deposit companies (Deposits Business Act): - Not covered by the deposit protection scheme. - Deposits limited to SEK 50,000 per individual. - Such deposit companies registered by FI but not supervised by it; limited reporting and AML requirements. - Crisis measures (2008 Government Support to Credit Institutions Act): - Measures included debt guarantee, recapitalization, and bank takeover; subject to European Commission scrutiny. - Authorities began exiting crisis-response measures in April 2010. - Banks in support schemes subject to restrictions on remuneration to senior management. - RB implemented liquidity measures, expanded its balance sheet, and established swap facilities with the U.S. Federal Reserve and European Central Bank (ECB). - NDO borrowed externally to boost international reserves. ### Main findings — governance, powers, and resources (CP 1) - Independence and operational autonomy: - FI needs operational independence to set priorities, make day-to-day decisions, allocate resources, and establish long-term supervisory strategy. - The annual appropriations letter can be amended during the year, introducing uncertainty and potentially impeding FI’s planning and execution. - The Minister of Finance can indirectly influence FI through the budgetary process. - Consideration: alternatives such as FI levying fees and financing its own budget directly, with subsequent government oversight of efficiency and budgetary performance. - Government involvement in supervisory decisions: - Legislation permits government involvement/control of supervisory decisions; government must make decisions on matters of principle (licensing). - Government empowered to decide on intervention, sanctions or revocation when FI refers a matter of principle. - 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 FI remains materially resource constrained. - Resource limitations affect depth and intensity of supervisory actions (e.g., on-site inspections), ability to launch proactive investigations, timeliness of follow up on remedial action, and supervision of the secondary banking market (which represents nearly one third of the banking sector in terms of domestic loans to the public). - Forthcoming international regulatory agenda will add to FI’s burdens. - Mandate clarity and accountability: - FI’s twin objectives are financial stability and consumer protection; prudential objectives are not stated explicitly. - It is unclear how FI should balance these objectives despite annual appropriations letters stating specific tasks and objectives. - Legal certainty and appeals: - Regulatory decisions by FI (remedial powers, sanctions, revocation) are subject to challenge and reversal in court; appeals can delay application of decisions and inhibit crisis management and supervisory effectiveness. - Recommendation: find alternative methods to satisfy right of appeal that remove such uncertainties. - Liability protection: - No direct or explicit protection for FI or its staff against liability for actions and omissions in discharging their duties; recommended remedy. - Information sharing and cooperation: - Extensive gateways for domestic and non-domestic information sharing, MoUs and colleges. - Enhanced domestic cooperation during the financial crisis; challenge is to maintain open and effective communication now the crisis peak has passed. ### Licensing and structure (CPs 2–5) — key weaknesses and recommendations - Deposit-taking: - Overwhelmingly located in entities licensed by and subject to FI supervision. - Deposit companies under the Deposits Business Act can take deposits up to SEK 50,000 per customer and are not covered by the deposit guarantee scheme. - Fit and proper powers: - Recommendation: grant FI power to assess fitness and propriety of all senior management members, not only the CEO and deputy (CP 2). - Recommendation: statutory power for FI to revoke a license obtained through deception or irregularity. - Recommendation: require credit institutions to notify FI promptly of material information that may negatively affect suitability of a major shareholder. - Acquisitions and investments: - FI approval currently required only above a quantum limit in excess of 25 percent of the investors’ capital base. - Consideration: require FI’s prior approval for investments in subsidiaries over a to-be-determined threshold and after-the-fact notification. ### Prudential regulation and risk areas (CPs 6–18) — supervisory capacity and priorities - Multiple issues need addressing across individual risk areas; some require urgency. - FI’s capacity to determine institutions’ oversight and management quality constrained by its own resource limits. - FI has prioritized major risk factors and launched initiatives to improve understanding and industry practice in: - liquidity, - trading book valuations, - operational risk. - Capital adequacy: - Implemented EU directives concerning CALE consistent with Basel II. - Minimum Pillar 1 capital ratio: 8 percent. - Regulatory prescription: capital base deduction of goodwill and deferred tax assets. - Permits in use: - Seven CIs have permits to apply the IRB Foundation approach for credit risk. - One the advanced approach Chapter One CI has a permit to apply the AMA. - Three CIs have permits to apply their own market value-at-risk (VaR) model. - Assessment: Compliant. ### Methods of ongoing supervision (CPs 19–21) — SREP, RAP, and on-site capacity - Supervisory approach: - Based on a risk-based process that allocates resources but needs further analytical development. - FI lacks a formalized analytical risk framework for assessing an institution’s risk profile. - Current supervisory effort focuses on the Supervisory Review and Evaluation Process (SREP) technique for capital adequacy. - SREP needs development to systematically incorporate other risks (environmental, business model, governance) including forward-looking elements. - Resource constraints and on-site supervision: - Lack of resource severely constrains FI’s ability to spend time on-site, deepening understanding and challenging firms. - Supervisors’ capacity to assess risk dimensions undermined by limitations on frequency, duration, and intensity of supervisory interactions. - Allocation between systemic and secondary banking sectors: - FI must balance attention between systemic banks and the secondary banking sector, which in aggregate represents a significant proportion of the banking system. - FI should reconsider whether it has the right balance. - Supervisory approach assessment: - Supervisory approach: Largely Compliant. - Supervisory techniques (Principle 20) assessment: Materially Non Compliant, citing severe weakness in on-site inspection capacity and consequent supervisory coverage gaps. ### Accounting, disclosure and auditors (CP 22) - Sweden has implemented International Financial Reporting Standards (IFRS). - Transparency supported by application of the “Pillar 3” disclosure framework implemented through CRD. - FI does not have the power to reject and rescind the appointment of an external auditor. - FI can often achieve this via pressure on an institution’s Board, but an unfettered statutory power would be preferable. ### Corrective and remedial powers (CP 23) - FI has a range of corrective and remedial powers but with gaps and limitations. - Sanctions on individuals: - FI can remove or bar an individual from the Board or position of managing director. - FI cannot remove senior management; it can remove only the Board or managing director. - This limits direct intervention efficiency and timeliness. - Legal uncertainty affects intervention and bank resolution: - Under Swedish system, liquidation of a non-systemic bank is triggered by a revocation decision, but revocation can be overturned and liquidation may be suspended pending appeal. - Recommendation: establish a robust and flexible early-intervention framework providing supervisory and resolution authorities tools and mandate to intervene and resolve ailing institutions earlier and resolve identified legal concerns. - Fines: - FI may levy fines up to SEK 50 million on a credit institution; assessors recommend review, including removal of the existing cap. ### Consolidated and cross-border supervision (CPs 24–25) - FI practices consolidated supervision according to EU legislative framework. - FI lacks direct powers to impose prudential standards on non-financial (and non mixed activity) parent companies of credit institutions. - Recommendation: consider going beyond banking directives’ requirements regarding scope of FI powers over parent entities. - Cross-border footprint: - Sweden is home jurisdiction to four systemically significant banking groups for the Nordic region, one of which is considered to be globally systemic. - Sweden hosts 45 foreign branches. - Colleges and MoUs: - FI has extensive MoUs and information exchange gateways; colleges in place and work in progress. - Progress would benefit from increased on-site visits to host/home jurisdictions, although resource constraints limit this option. - Assessment: Compliant for consolidated supervision and home-host relationships (with recommendations to broaden powers and increase on-site activity). ### Selected compliance gradings (aggregate) - Aggregate: Compliant (C)–8, Largely compliant (LC)–15, Materially noncompliant (MNC)–2, Noncompliant (NC)–0, Not applicable (N/A)–0. - Core Principle 1: Objectives, independence, powers, transparency, and cooperation — LC overall; - 1.2 Independence, accountability and transparency — MNC (concerns re appropriations letter, resource constraints, dual licensing power). - 1.4 Legal powers — LC. ### Key statistics and exact figures (as presented) - Financial system assets: 550 percent of GDP. - Four major banks’ CAR: 12.2 percent. - FI funding in 2010: 85percent of FI’s activities funded through appropriation-to-state-budget fee mechanism. - Supervisory resources: increased from 199 full time employees in 2005 to 228 by 2009. - FI staffing turnover rate: 15 percent. - Banking division staff positions: (70 positions) (not all filled). - SREP time for a large bank: approximately 3–4 months. - Total number of smaller institutions that will perform an ICAAP: approximately 300. - In 2010 FI performed 85 percent of the SREP reviews. - RAP frequency: performed three times a year. - On-site examinations 2008–2010: 74 on-site examinations focused on credit risk; nine (9) on-site examinations focused purely on Internal Control in the three years to December 31, 2010. - Liquidity reporting: new monthly reporting requirements planned from July 2011 for 45 credit institutions. - Deposit guarantee maximum protection since end-2010: € 100, 000. - Deposits allowed to deposit companies (not covered) limited to SEK 50,000 per individual. - FI liability insurance covers damage up to SEK 10 million. - FI fines cap on credit institutions: SEK 50 million. - Fines for late reporting: 2009: 14 fines; 2010: 2 fines. - Maximum fines stated for late reporting: SEK 100,000. - FI makes an average of one hundred calls post “due-date” to query anomalies in reporting. - Supervisory contact example: 30 supervisory meeting contacts with one of the systemic firms recorded in 2010. - CEU consists of ten analysts. ### Recommended Action Plan — prioritized measures (selected) - 1.1 Responsibilities and objectives: FI should articulate how it interprets its mandate including how it would respond if conflict arises between consumer protection and financial stability. - 1.2 Independence, accountability and transparency: - Ensure operational and legal independence of FI. - Remove duality of powers of FI and Government to determine licensing and revocation. - Increase scale of funding and consider alternative funding models for FI (e.g., grant FI full autonomy to set and collect fees directly). - 1.4 Legal powers: - Identify and implement alternative legal options compatible with right of appeal and redress to ensure FI can deliver regulatory decisions or sanctions, such as revocation, without risk of being overturned by the courts. - 1.5 Legal protection: - 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. - Delete provision enabling FI to seek damages from employees for errors (assessors recommend deletion). - Consider increasing liability insurance coverage (current SEK 10 million considered too small). - 2. Permissible activities: - Deposit taking should be permitted only to entities licensed and subject to supervision as banks. - 3. Licensing criteria: - FI should have power to assess fitness and propriety of all members of senior management. - Revise statute to provide power to revoke a license determined to have been obtained by deception. - 4. Transfer of significant ownership: - Amend regulations to obligate firms to notify FI forthwith upon becoming aware of any material information that may negatively affect the suitability of a major shareholder. - 5. Major acquisitions: - Laws/regulations should provide precise criteria to judge proposals; expand prior notification requirements; establish specific thresholds; introduce after-the-fact notification. - 7. Risk management process: - Ensure focus on corroborating firms’ risk management practices rather than only formal existence of policies and processes. - 14. Liquidity risk: - Continue planned implementation of liquidity initiatives and ensure review findings are incorporated into guidance and supervisory practice. - Ensure clarity of institutions’ obligation to inform FI of impending liquidity problems. - 20. Supervisory techniques: - Establish a formal analytical framework for risk assessment of firms and determine resources to ensure minimum effective oversight across CPs 7, 8, 9, 13, 14, 15, and 17. - 21. Supervisory reporting: - Consider requiring certification of filings by a CI’s CEO or CFO; obtain statutory authority to levy significant fines for misreporting; consider requiring external auditors to opine on filing accuracy; include related party exposure breakdowns in the Standard Report. - 22. Accounting and disclosure: - Grant FI power to reject or rescind appointment of an external auditor. - 23. Remedial action: - Ensure sanctions can be applied to senior management (in addition to Managing Director). Consider an early intervention framework. Remove legal uncertainties arising from possible overturning of revocation decisions. Review fines, including removal of cap of SEK 50,000,000. - 24. Consolidated supervision: - Ensure consolidated supervision powers can be applied to and enforced on a bank holding company. ### Authorities’ response (summary) - Swedish authorities welcome the assessment and intend to use recommendations to improve regulation and supervision. - Authorities generally share views and gradings of most BCPs but do not fully agree with MNC rating on BCP 1.2. - Authorities note governmental decision powers after referral from FI are circumscribed by law and preparatory works; in practice such decisions have been taken by FI rather than government. - Authorities emphasize FI’s current fee model passes fees to the state budget, ensuring parliamentary control and transparency pursuant to the Constitution and the Budget Act. - Authorities note other FSAPs in 2007–2008 resulted in higher ratings despite similar government decision-making powers; MoF letter of May 18, 2011 indicates proposed legislative revisions and a government proposal in the Budget Bill of 2012 for a substantial increase in FI resources over a period of three years. ### V. DETAILED ASSESSMENT — Principle 1: Objectives, autonomy, powers, and resources (selected findings) - Responsibilities and objectives (Principle 1(1)): - EC1: FI responsible for supervision, regulation and licensing of financial markets and firms; promotes financial stability; consumer protection objective included. - FI must ensure rules and routines are cost effective and simple. - Government issues an annual appropriations letter to FI which may be amended during the year and is publicly disclosed. - EC2: Minimum prudential standards set out in the Banking and Finance Business Act (2004:297); detailed provisions in Act on CALE (2006:1371). - FI can issue binding secondary regulation and non-binding guidelines. - EC3: Acts updated to keep pace with EU law; delay noted in transposing CRD2 due to MoF staff shortages; further amendments foreseen in 2011. - EC4: FI issues regular Risk Report and Supervisory Report; quarterly statistics; Pillar 3 data not posted directly on FI’s website. - Assessment: Largely Compliant. - Independence, accountability and transparency (Principle 1(2)): - EC1: FI is an independent government authority; Director General removable before six year term only for misconduct or disability. - EC2: Annual Report public; Director General makes statement to Parliamentary Finance Committee; activities scrutinized by Swedish National Audit Office. - EC3: FI has ethical standards and routines for staff conflicts and post-employment restrictions. - EC4: FI financing mainly through state budget appropriation; in 2010 85percent of activities funded this way. Remaining financing from fees for voluntary services; FI had discretion over use though fee levels determined by government. - Resources and staffing: - Supervisory resources increased from 199 full time employees in 2005 to 228 by 2009. - High degree of turnover, particularly in specialist risk areas; assessors consider FI salary scale insufficient to attract mid-career qualified staff. - On-site examinations relatively limited; travel budgets support cross-border college participation. - Assessment: Materially Noncompliant due to concerns regarding annual appropriations letter, supervisory decision making duality, and resource constraints. - Legal protection (Principle 1(5)): - EC1: BFBA contains no specific provisions on legal protection for supervisor or staff; general Swedish tort law and Damages Act (1972:207) apply. - Damages Act applies high threshold for negligence; FI has liability insurance covering up to SEK 10 million. - Assessment: Largely Compliant, with recommendation to provide explicit protection except in cases of gross negligence or willful misconduct and to delete employer’s right to seek recovery from employee except in exceptional circumstances. ### Conclusion (overall) - Taking into account: - influence over supervisory agenda via the appropriations letter; - lack of clarity over potential for government role in supervisory decisions; - constraints on resources limiting FI’s scope to influence; assessors conclude a rating of Materially Noncompliant (MNC) for independence, accountability and transparency (Principle 1(2)). - Assessors welcome MoF letter of May 18, 2011 and consider an upgrade to the rating appropriate once proposed changes are achieved. - Assessors note FI is progressing on regulatory and supervisory improvements (liquidity rules, liquidity reporting, operational risk guidance, model validation plans) but resource and independence issues are critical priorities. *Source: _cr11281 - 1. Summary Compliance with the BCP—Detailed Assessments ............................................16.* ### 1. Summary Compliance with the BCP—Detailed Assessments ............................................16 ### _cr11281 - 1. Summary Compliance with the BCP—Detailed Assessments ............................................16 ### I. SUMMARY, KEY FINDINGS, AND RECOMMENDATIONS - The banking supervisory framework and its implementation in Sweden are in line with many of the Basel Core Principles’ essential criteria. - Since the advent of the global financial crisis, Finansinspektionen (FI) has instituted a more robust supervisory approach with important advances and initiated a number of fruitful projects, but further technical development is needed. - 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 Ministry of Finance (MoF). - Assessors found evidence of impairment of FI’s operational independence through the mechanism of the annual appropriations letter process. - FI’s ability to discharge its supervisory and oversight functions adequately and effectively is significantly impaired by the coupling of inadequacy of independence and resource. - Recommendations highlighted: - Staffing levels at FI are an urgent concern to be remedied as soon as possible. - Consideration of a revised legal structure ensuring greater independence of FI. ### A. Introduction - Assessment completed as part of a Financial Sector Assessment Program (FSAP) Update undertaken by the International Monetary Fund (IMF) in March 2011. - Reflects the regulatory and supervisory framework in place as of the date of completion of the assessment. - Assessment requires review of the legal framework and detailed examination of policies and practices of institutions responsible for banking supervision. ### B. Information and Methodology Used for Assessment - Swedish authorities agreed to be assessed according to the Core Principles (CP) Methodology issued by the Basel Committee on Banking Supervision in October 2006. - Assessment performed according to revised content and methodological basis compared with the previous BCP assessment in 2002. - Compliance with each CP assessed qualitatively using essential and additional assessment criteria: - Essential criteria (EC) are the only elements on which to gauge full compliance with a core principle. - Additional criteria (AC) are suggested best practices; commented on but not reflected in grading. - Four-part grading system used: compliant; largely compliant; materially noncompliant; and noncompliant. - Assessment team reviewed laws, rules, guidance and held extensive meetings with FI, Riksbank (RB), MoF, and banking sector participants; met industry association and domestic and non-domestic institutions. - Assessment team comprised Keith Bell and Katharine Seal. - Definitions of grading: - Compliant: all essential criteria met without significant deficiencies. - Largely compliant: only minor shortcomings; clear intent to achieve full compliance within a prescribed period. - Materially noncompliant: severe shortcomings; supervision not effective. - Noncompliant: not substantially implemented; several essential criteria not complied with. - Non-applicable: reserved (though not used). ### C. Institutional and Macroeconomic Setting and Market Structure—Overview - Size and concentration: - Financial system assets account for 550 percent of GDP. - 65 percent of those assets belong to four systemic banking groups. - Over a hundred regulated banking entities in the non-systemic sector; secondary banking sector represents at least 25 percent of the domestic system (FI estimate). - Household savings and liquidity implications: - Trust savings and pension savings significant; relatively lower level of domestic deposits in the Swedish banking system. - Low level of sovereign debt issuance implies banks may face higher challenges to meet Basel III liquidity framework emphasizing stable retail deposit base and stocks of high quality liquid assets, ideally government debt instruments. - FI is monitoring closely: intensified supervision of liquidity risk management, revised liquidity risk management standards (based on Basel and EU available guidelines), trialing revised liquidity reporting requirements, and undertaking a major review of liquidity practices across a broad segment of the banking market. - Note: Basel has signaled that changes may be needed to its liquidity framework. - Capitalization and profits: - Capitalization of the Swedish banking sector is strong following the crisis. - The four major banks have 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. - Structural features: - Large banks operate in life insurance; 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. - Challenge: ensure sufficient management resource to assess banking and insurance risks interaction and avoid silo thinking. - Regional role and cooperation: - Sweden is a regional banking hub; fewer than half of consolidated assets of systemic groups are located in Sweden. - FI was an early adopter of supervisor colleges and a multilateral memorandum of understanding (MoU) on cross border financial stability, crisis management and resolution with Nordic/Baltic peers. - FI seeks active participatory college processes to achieve shared risk assessment of groups; college arrangements remain a work in progress. - Regulatory influences: - Basel II, including Pillar 2, implemented in Sweden through the Capital Requirements Directive (CRD). - FI uses this framework in a proportionate and differentiated manner to assess systemic banking groups and non-systemic institutions. - Supervisory approach: - Historically Swedish model relied on collegiate, consensual approach with high degree of trust that institutions would rectify deficiencies; not always the outcome. - FI is transitioning to a more assertive approach, more disciplined and formal in follow up, while retaining mature and constructive dialogue with supervised entities. ### II. PRECONDITIONS FOR EFFECTIVE BANKING SUPERVISION - A. Sound and Sustainable Macroeconomic Policies - Swedish economy: strong growth 2002–2008, affected by global financial crisis, exited recession in mid-2009. - Macroeconomic risks remain, including reliance on wholesale funding within the banking sector. - GDP growth projected to grow 2.5–3 percent in 2011–2012. - Public finances: projected to return to a surplus by 2012. - Financial system stabilized: increases in banks’ capital positions and lower loan losses; authorities began exiting crisis response measures since April 2010. - B. A Well-Developed Public Infrastructure - Public infrastructure supporting effective banking supervision is well developed. - New cooperation arrangements among MoF, RB, FI, and Swedish National Debt Office (SNDO) established during the financial crisis; experience of cooperation and information exchange in the crisis was positive. - Some gateways for exchange of information (e.g., with the SNDO) are yet to be fully opened and greater formalization of cooperation practices outside crisis periods is needed. - Swedish legal system is civil law-based; general courts and general administrative courts handle public administration and financial regulation proceedings. - State Aid to financial institutions is taken before a special Appeals Board specifically established for that purpose. - Much domestic legislation, including banking regulation, derives from EU regulations, directives and decisions which are frequently updated. - Principle of transparency is fundamental: in principle all information collected by or communicated from a public Swedish authority is open; exceptions require explicit decision and legal ground. - FI is subject to the Public Access to Information and Secrecy Act of 2009, which governs disclosure and confidentiality provisions. *Source: _cr11281 - 1. Summary Compliance with the BCP—Detailed Assessments ............................................16.* ### 22. Sweden has implemented International Financial Reporting Standards (IFRS). ### Sweden has implemented International Financial Reporting Standards (IFRS) ### Implementation and market infrastructure - Sweden has implemented International Financial Reporting Standards (IFRS). - There is a full range of high-quality accountancy, audit, legal, and ancillary financial services available in the jurisdiction. - Transparency in the banking and financial sector is supported by application of the “Pillar 3” disclosure framework of the Basel Capital Accord, implemented in Sweden through the relevant EU legislation (CRD). ### Effective market discipline (CP: disclosure and transparency) - The principle of disclosure and transparency is well established in the Swedish context. - The public statement on FI’s website: FI discloses as much information as possible to give the public insight into what is happening on the financial market, but does not disclose sensitive information that can affect a firm's competitive positioning. - FI issues regular reports assessing and describing the risk environment. - The RB publishes a bi-annual financial stability report. - When Sweden implements the revision to the EU CRD (CRD2) it will widen and reinforce gateways for information exchange between supervisors and other relevant authorities, particularly in crisis management situations. ### Financial sector safety net - Deposit insurance: - Introduced in Sweden in 1996 in conformity with the EU directive on deposit guarantee schemes. - Since the end of 2010, deposits placed in credit institutions are protected to the maximum limit of € 100, 000. - Since the introduction of the scheme there have been few failures leading to a payout: two in 2006 and one in 2010. - The scheme was administered by the Deposit Guarantee Board until it was disbanded; the scheme has been managed by the NDO since 2008. - Payout under the deposit insurance scheme is triggered only when the institution is placed into bankruptcy. - FI can revoke a license but 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 relative capital adequacy strength of the individual institution. - Deposits made to deposit companies pursuant to the Deposits Business Act: - Are not covered by the deposit protection scheme. - Deposits that can be made to such companies are limited to SEK 50, 000 per individual. - Such deposit companies are registered by FI but not supervised by it, although there are limited reporting requirements and AML requirements. - Crisis measures (2008 Government Support to Credit Institutions Act): - Specific measures included debt guarantee, recapitalization, and bank takeover. - As a state-aid measure the Act and programs were subject to scrutiny by the European Commission. - Authorities began exiting crisis-response measures in April 2010. - Banks in support schemes were subject to restrictions on remuneration to senior management. - The RB implemented new liquidity measures by expanding its balance sheet and took measures to support banks’ capital and assure markets. - NDO borrowed externally to boost international reserves. - RB established swap facilities with the U.S. Federal Reserve and European Central Bank (ECB). ### Main findings — governance, powers, and resources (CP 1) - Independence and operational autonomy: - 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 can be amended during the year, introducing uncertainty and potentially impeding FI’s ability to plan and execute supervision. - The Minister of Finance can indirectly influence FI through the budgetary process. - Consideration: alternatives such as FI levying fees and financing its own budget directly, with subsequent government oversight of efficiency and budgetary performance. - Government involvement in supervisory decisions: - Legislation permits government involvement/control of supervisory decisions; for matters of principle the government must make licensing decisions. - The Government is empowered to decide on intervention, sanctions or revocation when FI refers a matter of principle. - 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 FI remains materially resource constrained. - Resource limitations affect depth and intensity of supervisory actions (e.g., on-site inspections), ability to launch proactive investigations, timeliness of follow up on remedial action, and supervision of the secondary banking market (which represents 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: - FI’s twin objectives are financial stability and consumer protection; prudential objectives are not stated explicitly. - It is unclear how FI should balance these objectives despite annual appropriations letters stating specific tasks and objectives. - Legal certainty and appeals: - Regulatory decisions by FI (remedial powers, sanctions, revocation) are subject to challenge and reversal in court. - Appeals can delay application of decisions and inhibit crisis management and supervisory effectiveness. - Recommendation: find alternative methods to satisfy right of appeal that remove such uncertainties. - Liability protection: - No direct or explicit protection for FI or its staff against liability for actions and omissions in discharging their duties; this should be remedied. - Information sharing and cooperation: - Sweden has extensive gateways for domestic and non-domestic information sharing, MoUs and colleges. - During the financial crisis Sweden enhanced domestic cooperation; challenge is to maintain open and effective communication now that the crisis peak has passed. ### Licensing and structure (CPs 2–5) - Licensing and structure generally appropriate but adjustments recommended. - Deposit-taking: - Overwhelmingly located in entities licensed by and subject to FI supervision. - Deposit companies under the Deposits Business Act can take deposits up to SEK 50,000 per customer and are not covered by the deposit guarantee scheme, posing reputational and consumer risk. - Fit and proper powers: - Recommendation: grant FI power to assess fitness and propriety of all senior management members, not only the CEO and deputy (CP 2). - Recommendation: statutory power for FI to revoke a license obtained through deception or irregularity. - Recommendation: require credit institutions to notify FI promptly of material information that may negatively affect suitability of a major shareholder. - Acquisitions and investments: - FI approval currently required only above a quantum limit in excess of 25 percent of the investors’ capital base. - Investments below the threshold may be made without informing FI. - Consideration: require FI’s prior approval for investments in subsidiaries over a to-be-determined threshold and after-the-fact notification. ### Prudential regulation and risk areas (CPs 6–18) - Multiple issues need addressing across individual risk areas; some require urgency. - FI’s capacity to determine institutions’ oversight and management quality is constrained by FI’s own resource limits. - FI has prioritized major risk factors and launched initiatives to improve understanding and industry practice in liquidity, trading book valuations, and operational risk. ### Methods of ongoing supervision (CPs 19–21) - Supervisory approach: - Based on a risk-based process that effectively allocates resources but needs further analytical development. - FI lacks a formalized analytical risk framework for assessing an institution’s risk profile. - Current supervisory effort focuses on the Supervisory Review and Evaluation Process (SREP) technique for capital adequacy. - SREP needs development to systematically incorporate other risks (environmental, business model, governance) including forward-looking elements. - FI is developing analytical tools for monitoring smaller firms and credit risk (internal ratings). - Resource constraints and on-site supervision: - Lack of resource severely constrains FI’s ability to spend time on-site, deepening understanding and challenging firms. - Supervisors’ capacity to assess risk dimensions is undermined by limitations on frequency, duration, and intensity of supervisory interactions. - Allocation between systemic and secondary banking sectors: - FI must balance attention between systemic banks and the secondary banking sector, which in aggregate represents a significant proportion of the banking system. - FI should reconsider whether it has the right balance. ### 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 via pressure on an institution’s Board, but an unfettered statutory power to rescind an external auditor appointment would be preferable. ### Corrective and remedial powers (CP 23) - FI has a range of corrective and remedial powers but with gaps and limitations. - Sanctions on individuals: - FI can remove or bar an individual from the Board or position of managing director. - FI cannot remove senior management; it can remove only the Board or managing director. - This limits direct intervention efficiency and timeliness. - Legal uncertainty affects intervention and bank resolution: - Under Swedish system, liquidation of a non-systemic bank is triggered by a revocation decision, but the revocation decision can be overturned and liquidation may be suspended pending appeal. - Recommendation: establish a robust and flexible early-intervention framework providing supervisory and resolution authorities tools and mandate to intervene and resolve ailing institutions earlier and resolve identified legal concerns. ### Consolidated and cross-border supervision (CPs 24–25) - FI practices consolidated supervision according to the EU legislative framework. - Applies prudential standards on a consolidated basis and oversees groups via college meetings and periodic on-site visits. - FI lacks direct powers to impose prudential standards on non-financial (and non mixed activity) parent companies of credit institutions. - Recommendation: consider going beyond banking directives’ requirements regarding scope of FI powers over parent entities to anticipate new corporate structures. - Cross-border footprint: - Sweden is home jurisdiction to four systemically significant banking groups for the Nordic region, one of which is considered to be globally systemic. - Sweden hosts 45 foreign branches. - Sweden’s role as a home supervisory authority is more significant than as a host authority, but potential for inward and outward spillovers exists. - FI has extensive MoUs and information exchange gateways; information exchange is intended as a step toward deeper understanding and effective supervision. - Progress would benefit from increased on-site visits to host/home jurisdictions, although resource constraints limit this option. ### Summary compliance with the BCP—selected detailed assessments (Table 1 excerpts) - Core Principle 1: Objectives, independence, powers, transparency, and cooperation — LC - 1.1 Responsibilities and objectives — LC - Statutory mandates open to interpretation and lack clarity on balancing prudential and consumer protection objectives. - 1.2 Independence, accountability and transparency — MNC - FI’s effectiveness may be compromised by annual appropriation letters; resources are constrained. - Both FI and the government have powers to issue or withdraw banking licenses, creating possibility of government involvement in institution-specific issues. - 1.3 Legal framework — C - FI is compliant with this criterion; see comments under CP 1(2). - 1.4 Legal powers — LC - Regulatory decisions by FI are subject to challenge and reversal in court; legal uncertainty is an impediment to effective supervision. *Source: _cr11281 - 22. Sweden has implemented International Financial Reporting Standards (IFRS).* ### 1.5 Legal protection ### 1.5 Legal protection ### Key findings on legal protection and supervisory powers - There is no direct or explicit protection afforded to FI or its staff against liability for actions and omissions in discharging their duties. - The FI does not have power to assess fitness and propriety of all members of senior management (EC8). - Obtainment of a license through false information or other irregularity is not in itself sufficient grounds for FI to revoke the CI’s license; this is a statutory weakness. - FI has only the power to remove or bar an individual from the Board or position of managing director. FI cannot remove senior management, only the Board or managing director. - Regulations are deficient with respect to setting clear obligations for an institution to inform FI of material information that may negatively affect the fitness and propriety of a Board member or a member of senior management. - The FI does not have power to reject or rescind the appointment of an external auditor (EC6). ### Supervisory coverage and compliance gradings (selected CPs and risk areas) - Aggregate: Compliant (C)–8, Largely compliant (LC)–15, Materially noncompliant (MNC)–2, Noncompliant (NC)–0, Not applicable (N/A)–0 - Permissible activities: Deposit taking is not reserved for entities licensed and subject to supervision as banks. (LC) - Licensing criteria: FI lacks full power to assess fitness and propriety of senior management; inability to revoke licenses obtained by deception. (LC) - Transfer of significant ownership: Recommendation that CIs be obliged to notify FI forthwith upon learning of material adverse information about a major shareholder. (C) - Major acquisitions: Notification limit is set at more than 25 percent of the CI’s capital base, allowing acquisitions/investments to escape FI review; no precise legal criteria or supervisory guidelines for approvals. (MNC) - Capital adequacy: No comments. (C) - Risk management process: Excessive emphasis on existence of policies rather than corroborating actual practice. (LC) - Credit risk: No comments. (C) - Problem assets, provisions, and reserves: FI’s information scope is questionable; FI cannot robustly determine quality of processes, policies, classification, and controls even within major institutions. (LC) - Large exposure limits: More granular reporting of exposures from major institutions recommended. (C) - Exposure to related parties: FI relies on general requirements; supervisory review has identified breaches—more specific requirements needed. (LC) - Country and transfer risks: Increasingly important due to cross-border activities of systemic players; close monitoring warranted. (C) - Market risks: Not considered a major sector-wide risk, but at least one bank failure was attributable to trading book weaknesses; FI cannot robustly determine quality of processes, policies, limits and controls in major institutions; timeliness in follow-up has been weak though recent initiatives may strengthen supervision. (LC) - Liquidity risk: Liquidity risk supervision has been very weak and is undergoing major revision; FI is revising liquidity risk management standards, liquidity reporting, and launching a major project to assess quality and implementation of liquidity risk policies across institutions and a targeted review at systemic institutions on liquidity pricing risk. Continued progress is required. (LC) - Operational risk: Emphasis on operational risk is not strong; lack of guidance to firms. (LC) - Interest rate risk in the banking book: No comments. (C) - Internal control and audit: Insufficient regulatory obligations for institutions to inform FI of material information affecting board or senior management fitness; nine (9) on-site examinations focused purely on Internal Control in the three years to December 31, 2010; where Internal Audit is part of themed inspections, reports do not clearly indicate findings. (LC) - Abuse of financial services: CIs are not obliged to implement screening procedures to ensure high ethical and professional standards when hiring staff and nor are they required to report to FI suspicious activities and incidents of fraud material to their safety, soundness or repute. (LC) - Supervisory approach: Existing risk-based framework needs enhancement and formalization of a risk-based methodology. (LC) - Supervisory techniques: Balance of on- and off-site supervision has not been achieved; severe weakness exacerbates deficiencies across seven risk and control aspects; more resources needed for on-site inspection across systemic and non-systemic institutions. (MNC) - Supervisory reporting: Frequent misreporting wastes FI resources; on-site program rarely includes validation of supervisory reporting accuracy; Standard Report should add a breakdown of exposures to related parties. (LC) - Accounting and disclosure: FI lacks power to reject or rescind external auditor appointments. (LC) - Corrective and remedial powers: Legal uncertainty in sanctions and revocations due to appeals process design; possibility of appeal and redress without overturning a revocation decision should be achieved. (LC) - Consolidated supervision: Consider widening legal framework to ensure FI powers apply to bank holding companies. (C) - Home-host relationships: No comments. (C) ### Recommended Action Plan — prioritized measures (selected items from Table 2) - 1.1 Responsibilities and objectives: FI should articulate how it interprets its mandate including how it would respond in the event that a conflict should arise between acting on the basis of consumer protection or financial stability. - 1.2 Independence, accountability and transparency: Ensure operational and legal independence of FI. Remove duality of powers of FI and Government to determine licensing and revocation. Increase scale of funding and consider whether there are alternative funding models for FI. - 1.4 Legal powers: Identify and implement alternative legal options compatible with the right of appeal and redress to ensure FI can deliver regulatory decisions or sanctions, such as revocation, without risk of being overturned by the courts. - 1.5 Legal protection: 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. Permissible activities: Deposit taking should be permitted only to those entities licensed and subject to supervision as banks. - 3. Licensing criteria: FI should have power to assess fitness and propriety of all members of senior management. Revise the statute to provide power to revoke a license determined to have been obtained by deception. - 4. Transfer of significant ownership: Amend regulations to obligate firms to notify FI forthwith upon becoming aware of any material information that may negatively affect the suitability of a major shareholder. - 5. Major acquisitions: Laws or regulations should provide precise criteria by which to judge individual proposals. Expand prior notification requirements, establish specific thresholds, and introduce after-the-fact notification. - 7. Risk management process: Ensure focus on corroborating firms’ risk management practices rather than only formal existence of policies and processes. - 9. Problem assets, provisions and reserves: Ensure adequacy of information on quality of assets from firms. - 11. Related parties: Consider developing more explicit rules and ensure adequate supervisory focus during reviews. - 13. Market risk: Continue initiatives on trading book valuation; ensure findings inform supervisory on-site reviews and feedback to internal and external auditors. - 14. Liquidity risk: Continue planned implementation of liquidity initiatives and ensure review findings are incorporated into guidance and supervisory practice. - 16. Operational risk: Continue developing guidance for firms and establish a systematic approach to on-site assessment of firms’ practices; ensure emphasis on business continuity and contingency plans. - 17. Internal control and audit: Remedy regulatory deficiencies regarding obligations on institutions to inform FI of material information affecting board or senior management fitness; ensure Internal Audit findings are reported when included in themed inspections. - 18. Abuse of financial services: CIs should be required to implement screening procedures for hiring and FFFS 2005:12 should be revised to provide for reporting of suspicious activity and high impact fraud to FI. - 20. Supervisory techniques: Establish a formal analytical framework for risk assessment of firms and determine resources to ensure minimum effective oversight across CPs 7, 8, 9, 13, 14, 15, and 17. - 21. Supervisory reporting: Consider demanding certification of filings by a CI’s CEO or CFO, obtain statutory authority to levy significant fines for misreporting, consider requiring external auditors to opine on filing accuracy, and include related party exposure breakdowns in the Standard Report. - 22. Accounting and disclosure: Grant FI power to reject or rescind appointment of an external auditor. - 23. Remedial action: Ensure sanctions can be applied to senior management (in addition to Managing Director). Consider an early intervention framework. Remove legal uncertainties that arise from possible overturning of revocation decisions. Review fines, including removal of the existing cap of SEK 50,000,000. - 24. Consolidated supervision: Ensure consolidated supervision powers can be applied to and enforced on a bank holding company. ### Authorities’ response (summary of paragraphs 47–51) - The Swedish authorities welcome the assessment and look forward to using the recommendations to improve regulation and supervision of the banking sector in Sweden. - Authorities generally share the views and gradings of most Basel Core Principles, but do not fully agree with the materially non-compliant (MNC) rating on BCP 1.2. - Authorities note that governmental decision powers after referral from FI are circumscribed by law and preparatory works; in practice such decisions have been taken by FI rather than by the government. - Authorities emphasize that FI’s current fee model passes fees to the state budget, ensuring parliamentary control and transparent handling of public funds pursuant to the Constitution and the Budget Act. - Authorities note that assessments of supervisory independence in other FSAPs during 2007 and 2008 resulted in higher ratings even where supervisory authorities were subject to government decision-making power on allocations, priorities, and staffing. *Source: _cr11281 - 1.5 Legal protection* ### 52. Finally, we would like to draw your attention to the fact that we are about to initiate ### Finally, we would like to draw your attention to the fact that we are about to initiate work aiming at revising our framework and welcome you back to a new assessment in a not too far distant future. ### V. DETAILED ASSESSMENT — Principle 1. Objectives, autonomy, powers, and resources - Principle summary: Clear responsibilities and objectives for each authority involved in supervision; operational independence; transparent processes; sound governance; adequate resources; accountability; legal framework for authorization and ongoing supervision; powers to address compliance, safety and soundness; legal protection for supervisors; information sharing and confidentiality arrangements. ### Description — Responsibilities and objectives (Principle 1(1)) - EC1: FI is the authority responsible for banking supervision in Sweden. General responsibilities and objectives set out in Government Ordinance 2009:93, namely: - Supervision, regulation and licensing of financial markets and financial firms (including banks) and coordination of supervision with respect to money laundering. - Financial stability, i.e., promotes a stable and sound financial system. - Consumer protection, i.e., endeavour to ensure solid consumer protection in the financial system. - FI must ensure its practices (rules and routines) are cost effective and simple for citizens and firms to understand and comply with. - Government issues an annual appropriations letter to FI which may set out specific responsibilities and tasks; the letter may be amended and revised during the year and is publicly disclosed. - Examples of objectives that may be set in the appropriations letter: - Contribute to a stable and well functioning financial system and to consumer protection in the financial system. - Contribute to the effective regulation of financial supervision in the EU. - Empower consumers in the financial market by information and initiate consumer education. - EC2: Minimum prudential standards for banks set out in the Banking and Finance Business Act (2004:297). The Act sets minimum requirements including: - minimum initial capital (Chapter 3, Section 5), - fit and proper tests, - solvency, liquidity, risk management, transparency and soundness. - Detailed provisions on capital adequacy requirements are contained in the Act on Capital Adequacy and Large Exposures (CALE) (2006:1371). - FI has mandate to issue binding secondary regulation and general (non-binding) guidelines; failure to conform to guidelines signals possible non-conformity with underlying law. - EC3: Banking and Finance Business Act and Act on CALE are updated to keep law abreast of EU law and developments; further amendments foreseen in 2011 to transpose CRD 2 and CRD 3 legislative packages. - Noted lag: Acts have not been updated to take account of CRD2 which should have been implemented by the end of 2010; delay due to staff shortages at the MoF. Elements of CRD2 implementable directly by FI were implemented on time. - FI has an established process to survey and assess need for changes within its regulatory mandate. - EC4: FI issues regular and ad-hoc reports, including: - annual Risk Report (overview of present situation and outlook; identification of main risks; basis for supervisory planning), - Supervisory Report (describes recent supervisory and regulatory activities). - Quarterly statistics from regular reporting by supervised entities (financial data, lending, capital adequacy). - Pillar 3 data not posted directly on FI’s website; access via database of authorized institutions; FI planning targeted assessment of firms’ liquidity risk disclosure later in 2011. - AC1: FI adopts a risk based approach to supervision; Risk Report and Supervisory Report used for prioritizing and planning; supervisors conduct individual risk assessments. ### Assessment and Key Findings — Responsibilities and objectives - Assessment: Largely Compliant - Comments / Findings: - FI has two core objectives in legislation: financial stability and consumer protection; responsibility for supervision and licensing clearly stated in law. - Lack of clarity in how FI should balance financial stability and consumer objectives; no clarity on balancing prudential and conduct of business duties as a unitary regulator. - Recommendation: FI should articulate how it interprets its mandate and how it would respond if a conflict arises between consumer protection and financial stability. - Annual appropriations letter provides specific tasks and assignments that can revise FI’s priorities within its mandate. ### Description — Independence, accountability, and transparency (Principle 1(2)) - EC1: FI is an independent government authority; decision-making capacity enshrined in the Instrument of Government; government or individual minister cannot influence or modify an FI decision. - Annual appropriations letter identifies objectives, assignments and reporting requirements; FI is consulted during preparation. - Director General removable before six year term only for misconduct or disability; removal reasons must be publicly disclosed. - EC2: Annual Report is public and evaluates activities and cost-effectiveness; Director General makes a statement at least once a year before the Parliamentary Finance Committee; activities scrutinized by Swedish National Audit Office; FI budget and supervisory measures against credit institutions are public. - EC3: FI has ethical standards for employees (confidentiality, loans from supervised entities, additional occupations, dealings in financial instruments); routines for handling employees leaving FI (removal from sensitive responsibilities for at least three months prior to taking a role in supervised institution). - EC4: FI financing: - Mainly financed through appropriation from state budget; FI levies fees on supervised entities and passes these funds to the state budget. - In 2010, 85percent of FI’s activities were funded in this manner. - Remaining financing from fees charged to firms for specific voluntary services; FI has had discretion over use of these fees though fee levels are determined by government. - Budget adoption process: government issues annual appropriation instruction; in burdensome cases additional funding may be provided. - FI has had freedom to dispose of resource allocation except for government-granted specific project resources. - Resources and staffing: - Supervisory resources increased from 199 full time employees in 2005 to 228 by 2009. - External experts have not been commissioned in the banking supervisory field. - On-site examinations are relatively limited in number; travel budgets support participation in cross border supervisory colleges; resource intensity and adequacy unclear. - High degree of turnover, particularly in specialist risk areas; assessors consider FI salary scale insufficient to attract mid-career qualified staff. - FI successful in attracting some experienced staff from industry where headline salary is not urgent. - AC1: Director General appointed by Government for minimum term of six years; FI Board members have minimum appointment of three years. ### Assessment and Key Findings — Independence, accountability, and resources - Assessment: Materially Noncompliant - Comments / Findings: - Transparency and lines of accountability are clear; concerns exist regarding independence in three areas: the annual appropriations letter; supervisory decision making; and resources. - The annual appropriations letter: - Can be amended during the year (in 2010 amended on multiple occasions); contains tasks and priorities FI must perform. - Introduction of tasks may not correspond with FI-set priorities and introduces uncertainty in FI’s resource planning. - Some government set tasks have necessitated delay in other supervisory projects, impairing FI’s ability to set its own supervisory agenda; assessors view that appropriations letters ought not to have any impact on FI’s ability to allocate resources. - Authorities remarked (comments of April 1, 2011) that “amendments in the appropriation letters hardly have a significant impact on the freedom of FI to allocate its staff independently.” Assessors disagree. - Supervisory decision making: - Both FI and the government have powers to issue a banking license; in practice rare but existence can impinge on FI operational independence. - No safeguards to ensure government would step in only at FI’s request. - Government confirmation (letter May18, 2011) that revisions will be proposed to clarify that FI will have sole authority regarding licensing welcomed by assessors. - Banking and Financing Business Act contains more than a dozen references where government may be involved in intervention, sanctions, mergers, revocation, etc., typically dependent on FI’s determination; such referrals can undermine FI independence. - Recommendation: enhance FI’s independence, consider establishing FI’s legal independence, and remove instances in BFBA where FI may refer matters of principle to government while preserving FI’s right to seek government opinion. - Resources: - Assessors welcome MoF statement (letter May 18, 2011) that proposals will be put forward in the Budget Bill of 2012 for a substantial increase in resources for FI over a period of three years. - However, need for government proposal underlines weakness in current resourcing and in FI’s independence. - Concern that level of resources for FI has been significantly underestimated given scale of Swedish banking sector relative to GDP and Sweden’s role as home state and global consolidated supervisor for regionally and globally significant banking groups. - Staffing and capacity concerns: - Staff numbers rose over a third since 2002; staff turnover remains 15 percent with vulnerability in specialist risk units. - 70 staff positions for the banking division (not all filled) divided between line, specialist risk, and legal units. - Loss of staff who implemented Basel II (CRD) regulatory package noted as significant loss of corporate memory and experience. - Comparative indicator: financial services sector in Sweden approximated median in size and complexity in Europe; FI total staff below median for EEA regulators (survey funded by FI, carried out by independent academic; indicator only). - Recommendation: conduct peer assessment with comparable jurisdictions and supervision of comparable systemic institutions; remedy any resource allocation deficiencies identified. - Future pressures on resources anticipated from changes to EU legislation and global agreements, especially for supervision of significant and globally significant financial institutions. - Funding model review suggested; consider alternatives including full autonomy for setting and collecting fees directly to signal institutional independence and preserve accountability; current Budget Act permits potential indirect influence via budgetary process. ### Recommendations and Actions Suggested - FI should articulate interpretation of its mandate and response protocol when conflicts arise between consumer protection and financial stability. - Authorities should consider enhancing FI’s legal independence and removing BFBA provisions that allow referral of matters of principle to government, while preserving FI’s right to seek government opinion. - Conduct a peer assessment with comparable jurisdictions to determine minimum resources required for adequate supervision of systemic and non-systemic banking sectors; remedy identified resource deficiencies. - Review funding model for FI; consider granting FI full autonomy to set and collect fees directly, or other alternatives to strengthen institutional independence. - Implement proposed legislative revisions to clarify that FI will have sole authority regarding licensing (noted confirmation from the MoF, letter May18, 2011). - Increase resources for FI as proposed in Budget Bill of 2012 for a substantial increase over a period of three years (per MoF letter May 18, 2011). *Source: V. DETAILED ASSESSMENT — Table 3. Sweden: Detailed Assessment of Compliance with the BCP (Principle 1), extracted from the provided content.* ### Conclusion ### Conclusion ### Overall conclusion - Taking the three main factors into consideration—the influence over the supervisory agenda via the appropriations letter; the lack of clarity over the potential for the government to play a role in supervisory decisions; and the constraint on resources in which FI has limited scope to influence—the assessors are of the view that a rating of MNC is warranted. - The assessors fully recognize and strongly welcome the statements made by the MoF in its letter of May 18, 2011 and consider that at such time as the proposed changes outlined in the letter are achieved that an upgrade to the rating will be appropriate. ### Principle 1(3). Legal framework - Description - Pursuant to Chapter 3, Section 8 of the BFBA (2004:297), FI is responsible for processing applications for a license to conduct banking business. FI may withdraw such licenses pursuant to provisions in Chapter 15 of the same Act. - Firms applying for license have to pay a cost-based fee. Detailed provisions concerning the licensing process are laid down in Chapter 2 of the Banking and Financing Business Ordinance (2004:329). - In addition government has the authority to directly process an application for banking license according to Chapter 3, Section 8 of the BFBA (2004:297). The supervisory authority confirms that in practice the government’s authority to license or revoke a license has never been used. The option exists, in practical terms, for FI to escalate a sensitive decision to government. However, the legislation is silent with respect to whether the government would only determine such matters “where they involve a matter of principle or particular importance” only in instances where FI had referred the matter to it. - EC2: FI has a mandate to issue binding regulations regarding prudential rules pursuant to Chapter 16, Section 1 of the BFBA (2004:297) and Chapter 5 of The Banking and Financing Business Ordinance (2004:329). FI also has a mandate to issue non-binding guidelines. - FI has established an explicit and transparent process for identifying the need for regulatory changes; consults market participants and other authorities; invites reference groups of industry representatives; publishes all binding regulations and non-binding guidelines in FI’s Regulatory Code and on FI’s website; since autumn 2009 provides public feedback with reasoning and analysis for new proposed rules; publishes important licensing or sanctions decisions on its website. - EC3: The BFBA (2004:297, Chapter 13, Section 3) requires that credit institutions shall provide FI with any and all information regarding their operations and related circumstances at the request of FI. Chapter 16, Section 1 at 5 provides that either the government or an authority determined by the government may issue regulations regarding information that a credit institution shall provide to FI. Chapter 5, Section 2 of the Banking and Financing Business Ordinance (2004:297) devolves regulatory authority on this matter to FI. - Assessment - Largely Compliant - Comments and recommendations - The existence of deposit taking companies which are not subject to a full authorization process or on-going supervisory process is a concern and should be remedied. - Although Sweden meets the literal terms of the criteria, because the dual powers of FI and the Government in respect of granting and withdrawing banking licenses are clearly established in law there is less de facto clarity on how the powers of the two institutions might operate or interact. - The Government has only rarely used its power even in the context of the recent financial crisis. It is recommended that the potential for lack of clarity in this area be resolved by deleting these powers. - The statement by the MoF (letter of May 18) indicating that legislative proposals will be made to clarify FI’s sole authority in the matter of licensing is strongly welcomed. ### Principle 1(4). Legal powers - Description - EC1: FI is responsible for supervision and rule making (Financial Supervisory Authority Instructions Ordinance (2009:93)) and has the power to impose a range of sanctions should a credit institution fail to comply with provisions under the BFBA (2004:297). These provisions are articulated, typically, in the form of high level principles thus giving FI full scope for intervention based on possible concerns. - Pursuant to Chapter 15, Section 1 of the BFBA (2004:297), FI has powers to intervene when a credit institution has violated its obligations pursuant to the Act, other legislation governing the operations of the institution, the institution’s articles of association, by-laws or regulations, or internal instructions based on legislation governing its operations. - FI must first determine whether intervention is necessary and may, where appropriate, pursue informal action to resolve issues. - EC2: Chapter 13, Section 3 of the BFBA (2004:297) stipulates that credit institutions are to furnish FI with such information as the authority requests, including Board Staff records. In practice the supervisory staff use review of Board minutes as a routine component of their assessment of firms. - EC3: FI may issue orders requiring prompt remedial action, including restriction or limitation of business; may act against senior management; may issue a warning, levy or a fine; revocation of license is possible in serious cases; a remark can be issued for less serious violations. FI need not proceed sequentially through remark, warning, revocation. - Chapter 15, Sections 2 and 3 set out specific conditions for revocation; Sections 7–9 concern fines. FI may levy fines of up to SEK 50 million (approximately US$8million) on a credit institution. - Assessment - Largely Compliant - Comments and recommendations - Regulatory decisions by FI (use of remedial powers, sanctions, revocation) are subject to challenge and reversal in court. Grounds for appeal set at a high level; petition for appeal must be made within three weeks of the decision. - Supplementary information from FI clarifies that if the CI appeals and demands that the court stay the execution and if the court decides to stay the execution, the decision cannot be applied until the court determines the appeal. Given that revocation leads to immediate liquidation, it appears probable that any appeal against revocation would be accompanied by an appeal that the court stays the execution. - It is recommended that due consideration be given to legal amendments to ensure legal certainty regarding FI’s regulatory decisions while protecting the right of redress and appeal of parties subject to FI’s decisions albeit in a different manner. - FI is examining ways to make better and greater use of the full range of its tools provided for under law. Contacts with banks suggested FI’s use of sanctioning powers is becoming more frequent and assertive. - The supervisory authority’s ability to apply qualitative judgment is not explicitly laid out in the legal framework, but nor is it explicitly restricted; Swedish law is often expressed at a high level and supervision practice makes necessary use of qualitative judgment. ### Principle 1(5). Legal protection - Description - EC1: The BFBA (2004:297) contains no specific provisions on legal protection for the supervisor or supervisory staff concerning actions taken in good faith in discharge of their duties. In the absence of specific legal provision, general Swedish tort law applies. General provisions on liability of public administrative authorities and their employees are set out in the Damages Act (1972:207). Under this legislation (Chapter 3, Section 2) public administrative authorities are liable for damages resulting from negligence in carrying out their duties; case law has set a very high threshold for what constitutes negligence—assessment must have been manifestly wrong for liability to arise. - Provisions on liability of FI’s employees for damages arising from actions taken in the discharge of their duty are covered by the Damages Act (Chapter 4, Section 1). The Damages Act protects the staff of FI against damages arising from their official duties. FI employees may be held liable only if extraordinary grounds for imposing liability exist. Academic commentaries hold this entails a presumption that the employee is not liable. - EC2: The Damages Act (1972:207, Chapter 4, Section 1) states that the employer normally has to bear the cost of compensation for damage caused by error or mistake by its employees although the employer may seek damages from the employee. FI state that an attempt at recovery would apply only in exceptional circumstances. - FI has liability insurance that covers damage up to SEK 10 million caused by negligence. - Assessment - Largely Compliant - Comments and recommendations - FI considers that it and its staff are afforded protection against liability for actions and omissions in discharging their duties. However, there is no direct or explicit protection and the possibility exists that staff could be held liable. - The assessors recognize high thresholds for successful legal action and that Sweden is not strongly litigious; no indication FI staff feel vulnerable currently. Nonetheless, legal/cultural changes could increase litigation risk over time. - It is recommended that authorities review the legal position and provide FI with explicit protection for its official actions as an institution, except in cases of gross negligence or willful misconduct, in line with practice in many neighboring countries. Similar protection is recommended for State and resolution trustees in resolution actions. - The provision granting FI permission to seek damages from the employee if it has incurred costs in compensating a person for damage caused by error or mistake by its employees is inappropriate and should be deleted. - The liability insurance policy covering only up to SEK 10 million is noted as too small; such coverage would be negligible in the event of recovery actions arising from a failed bank, insurance company or securities firm. ### Principle 1(6). Cooperation - Description - EC1: The Financial Supervisory Authority Instructions Ordinance (2009:93) imposes duties of cooperation with the RB and the Swedish Civil Contingencies Agency on issues relating to the Crisis Management and Enhanced Preparedness Ordinance. FI shall consult with the RB on significant issues relating to stability of the payment system or to the RB’s responsibility for currency and credit policy and for the payment system. FI shall also consult with such foreign authorities as have competence to supervise financial markets and companies. RB has obligations to consult with FI in matters of major importance concerning payment systems or FI’s supervisory activities (RB Act, 1988:1385, Chapter 4, Section 3). - FI has an agreement with the SNDO, which administers the deposit guarantee system, clarifying information FI will pass to the Debt Office. - There is a MoU between the tripartite authorities (FI, RB, and the MoF) last updated in 2005. In 2009, on the basis of revisions to EU legislation, the MoU was enhanced and signed by FI, the MoF, and the SNDO. The 2005 MoU sets the framework for cooperation concerning financial stability, crisis resolution and information exchange. The Domestic Standing Group (DSG)—a non-decision making body formed on the basis of the MoU—was broadened to include the Debt Office. The MoU establishes seniority of attendance and frequency of meetings; during the financial crisis the DSG met often daily but periodicity has extended; its minimum frequency is quarterly. - FI also has a MoU with the Swedish Consumer Agency. - EC2: Under EU legislation gateways exist for provision of supervisory information between EU supervisory authorities. Gateways governing exchange of information were made at EU level in directive 2009/111/EC (“CRD2”) which Sweden will implement in the course of 2011, further widening gateways for provision of information between authorities in the EU. CRD2 also creates a requirement for supervisory authorities to establish colleges of supervisors for EEA banks. - With respect to non-EEA countries, a bilateral cooperation agreement is not a precondition to exchange information with an authority of another country given that FI may, on request, disclose information to an authority if the Public Access to Information and Secrecy Act does not hinder disclosure. A bilateral agreement facilitates exchange and may specify how information may be exchanged on a regular basis, as for example with the Nordic Baltic MoU. Sweden has a range of MoUs with non-EEA countries. - A cooperation agreement on cross-border financial stability, crisis management and resolution was signed in August 2010 between relevant Ministries, Central Banks and Financial Supervisory Authorities of Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden, establishing a Nordic/Baltic Stability Group (NBSG). The NBSG held its first meeting in November 2010 and established four working groups addressing identification and data gathering on systemic institutions, resolution tools, consideration of financial stability and crisis prevention and burden sharing. - EC3: FI is an integrated supervisory authority and thus has no domestic supervisory authority with whom it needs to exchange information. - The BFBA (2004:297) states FI shall cooperate and exchange all information necessary as provided for in EU-legislation which is binding in Sweden. EU directive provisions ensure confidentiality of information must be protected and that information provision must be for supervisory purposes. - Information FI has received in accordance with an agreement with a foreign state and where the agreement (including EU directives) is approved by Parliament is governed by the confidentiality provisions of the Public Access to Information and Secrecy Act (2009:400). This means information provided to FI by virtue of EU-created information gateways, whether the other authority is EEA or non-EEA, are protected by Swedish law confidentiality provisions and do not require individual MoUs to be approved by Parliament. - Both confidential and non-confidential information is exchanged on an on-going basis within colleges of supervisors; assessors reviewed information packages and noted regularity and frequency of college meetings. - EC4: General secrecy provisions regarding financial markets are set out in the Public Access to Information and Secrecy Act (2009:400). A large proportion of information held by FI is confidential under this Act and may not be disclosed. Non-confidential information must be disclosed to citizens. - Assessment and operational notes - FI has established domestic and international cooperation frameworks (MoUs, DSG, NBSG, EU gateways/CRD2, colleges of supervisors) to facilitate information exchange and crisis coordination. - The minimum frequency of DSG meetings is quarterly; during the financial crisis DSG met often daily. - Sweden will implement directive 2009/111/EC (“CRD2”) in the course of 2011, widening information gateways and creating a requirement to establish colleges of supervisors for EEA banks. *Source: _cr11281 - Conclusion* ### Chapter 6, Section 5) to another Swedish authority upon request. There is no corresponding ### _cr11281 - Chapter 6, Section 5) to another Swedish authority upon request. There is no corresponding ### Information sharing, confidentiality, and gateways - The Public Access to Information and Secrecy Act (2009:400) determines whether information is confidential. - Confidentiality provisions explicitly include: - information pertaining to business affairs of a supervised entity, and the business or personal affairs of someone who has dealings with the supervised entity (Section 4); - information about an individual’s business or personal affairs in the context of fit and proper tests (Section 5); - information given to FI by other competent authorities pursuant to an agreement (Section 7); - information related to deposit guarantee (Section 10); - information on state support of credit institutions (Section 12). - Gateway provisions exist in particular situations (Chapter 10, Section 15) allowing disclosure despite secrecy provisions. - FI cannot deny information to the Government unless a legal restriction applies (e.g., restrictive provisions in certain international agreements). - Confidential information can be given to a prosecuting authority in the context of a criminal investigation; secrecy provisions do not prohibit disclosure to prosecutors or police if a penalty of imprisonment may be imposed for the crime under investigation. - In relation to foreign authorities, FI may use its own discretion. - Confidential information received from another competent authority in an EEA country is protected by general secrecy provisions concerning confidential information received from other states (see prop. 2006/07:5 s. 349 f. and prop. 2006/07:115 s. 516). - Assessment: Compliant. - Comments and implementation context: - Gateway provisions exist for exchange of information among principal domestic authorities with responsibilities for financial stability. - Sweden intends to implement the revision to the EU CRD (CRD2) in 2011, which will widen and reinforce gateways for information exchange between supervisors (domestic and non-domestic) and other relevant domestic authorities, particularly for crisis management situations. - Information gateways in the EU have been broadening, with recent focus on cooperation in financial stability, crisis management and resolution, both domestic and cross-border. - The 2010 CEBS peer review found Sweden to “have fully applied the requirements for information exchange.” - The effectiveness of cross-border cooperation agreements is commented on in CP25. ### Principle 2 — Permissible activities and use of the word “bank” - Definition and distinctions: - The term “bank” is defined in the BFBA (Chapter 1, Section 5) as comprising banking companies, savings banks and memberś banks. - “Banking company” is defined as “a limited liability company licensed to conduct banking business.” - The term “bank” is distinct from “credit institution” (CI), which is broader; a CI is a bank or a credit market undertaking (Sw. kreditmarknadsföretag). - Banks—but not credit market undertakings—may carry out “banking business” (BFBA Chapter 1, Section 3). - Both banks and credit market undertakings may carry out “financing business” (BFBA Chapter 1, Section 4). - Both banks and credit market undertakings are CIs for the purposes of the EU legal framework and are subject to the BFBA’s prudential requirements. - A credit market undertaking is a form of CI that meets the terms of the EU directive (accepting deposits from the public and making loans) but is not a bank under Swedish law. - Scope of “banking business”: - Includes (i) payment services via general payment systems and (ii) receipt of funds which, following notice of termination, are available to the creditor 30 days or less. - Banks may engage in activities other than banking business (BFBA Chapter 7, Section 1). - Permitted activities for a CI (financing operations and naturally connected operations) include: 1. borrow funds, for example by accepting deposits from the general public or issuing bonds or other comparable debt instruments; 2. grant and broker loans, for example in the form of consumer credit and loans secured by charges over real property or claims; 3. participate in financing, for example by acquiring claims and leasing personal property; 4. provide payment services; according to the Payment Services Act (2010:751); 5. provide means of payment; 6. issue guarantees an assume similar obligations; 7. participate in the issuance of securities; 8. provide financial advice; 9. hold securities in safekeeping; 10. conduct letters of credit operations; 11. provide bank safety deposit services; 12. engage in currency trading; 13. conduct securities operations subject to the conditions prescribed in the Securities Market Act (2007:528); and 14. provide credit information subject to the conditions prescribed in Credit Information Act (1973:1173). - Definition of “financing business” (BFBA Chapter 1, Section 4): (i) to accept repayable funds from the public and (ii) to grant loans and guarantees. Firms carrying out only financing business are “credit market undertakings.” - Use of the word “bank”: - The word “bank” may only be used by banks, RBen, the General Mortgage Bank of Sweden and foreign CIs (BFBA Chapter 1, Section 9). Minor exceptions exist. - BFBA (Chapter 10, Section 35) provides that banking companies shall use the word “bank” in their name. - No corresponding legal provisions govern use of “credit market undertaking.” - Deposit-taking and coverage: - The substantial majority of all deposits (98.0 percent) are held by banks. - Other categories allowed to take deposits primarily include credit market undertakings (BFBA Chapter 1, Section 4) and, in securities business, securities firms (SMA Chapter 2, Section 2) to the extent necessary for facilitating securities trading (prop. 2006/07:115 p. 326). - Deposits with all these institutions are covered by the Deposit Guarantee Scheme. - Deposits (up to SEK 50,000) may be taken by deposit companies under the Deposits Business Act; such deposits (extremely limited) are not covered by the Deposit Guarantee Scheme. - Registration and public lists: - The Companies Registration Office keeps records of banks, savings banks, memberś banks and foreign banks with branches in Sweden. - FI’s website lists licensees (banks and credit market undertakings as well as foreign CIs active in Sweden). - Assessment: Largely Compliant. - Comment: Permitted activities are clearly defined and use of the word “bank” is protected. However, deposit taking is not reserved exclusively for entities licensed and subject to supervision as banks. ### Principle 3 — Licensing criteria and process - Licensing authority and process: - FI is responsible for processing applications for a license to conduct banking business (BFBA Chapter 3, Section 8). - The government determines certain matters relating to licensing or approval of amendments to a CI’s articles of association if these involve a matter of principle or of particular importance; where the Government decides, FI shall submit its opinion (BFBO Chapter 1, Section 4). In practice, decisions on applications for a banking license are always taken by FI; the government has not decided on any license application since the BFBA’s enactment (2004). - Detailed provisions on the licensing process are laid down in the Banking and Finance Business Ordinance (BO Chapter 2). - FI’s guideline FFFS 2004:9 sets out required information and documents for banking license applications; FFFS 2005:1 lays down requirements on internal controls and risk management; FFFS 2007:1 provides criteria concerning the capital base (and supplements the CALE Act). - Statutory licensing criteria and supervisory scope: - BFBA (Chapter 3, Section 2) sets out principle-level criteria for license eligibility. - FI’s scope of supervision (BFBA Chapter 13, Section 12) requires supervision to ensure the business is conducted in accordance with: - this Act; - other statutes governing the operations of the institution; - the institution’s articles of association, by-laws or regulations; and - internal instructions based on statutes that govern the operations of the institution. - FI shall ensure that owners and management fulfill suitability requirements in the Act. - Grounds for rejection and objectives: - A banking license may only be approved if general conditions in the BFBA, the BO and FI’s regulations and guidelines are met; otherwise, the application is to be rejected (example: an application was rejected in June 2010 because owners and Board members did not meet “fit and proper” requirements). - An overarching objective in examining an application is to ensure the proposed legal, managerial, operational and ownership structure will not hinder effective supervision, both on a solo and consolidated basis (FI will not accept unclear or non-transparent ownership or outsourcing of all core business). - Assessment of major shareholders and suitability: - FI identifies and determines the suitability of major shareholders (a “major shareholder” is one with a direct or indirect ownership in an entity representing 10 percent or more of the equity capital or of all voting participating interests or otherwise rendering it possible to exercise significant influence). - “Suitability” assessment considers reputation and financial strength; FI assesses ownership transparency and source(s) of initial capital and the intending acquirer's economic and financial condition, focusing on ability to finance the acquisition and maintain or promote a financially sound structure. - Initial capital requirements: - Banking companies: not less than five million euros (Chapter 3, Section 5). - Savings banks: not less than one million euros (Chapter 3, Section 6). - Memberś banks and credit market undertakings: not less than five million euro (those intending small-scale operations may be allowed lower initial capital, but not less than one million euro) (Chapter 3, Section 7). - Fit and proper requirements: - Under BFBA (Chapter 3, Section 2) any person to serve on a CI’s Board or as Managing Director (CEO), or be an alternate, must possess sufficient insight and experience and be suitable (reputation and financial strength considered). - Swedish rules transpose relevant EU legislation (e.g., fit and proper tests under EU Directive 2007/44/EC). - FI’s regulation FFFS 2009:3 details the fit and proper test; assessment includes skills and experience commensurate with the CI’s intended activities, potential conflicts of interest, and any record of criminal activities or adverse regulatory judgments. - FI gathers information from the Tax Authority, Police and the Companies Registration Office. - Not all members of CI senior management (e.g., senior executives at the c-level, CFO, CRO, COO) are subject to such fit and proper tests. FI considers a legislative amendment is required to enable assessment of senior management beyond the CEO. - Application content and review: - The entity’s application must include business statutes and operating plan and, inter alia, an organization chart, description of outsourcing arrangements, proposed Board and CEO information, written procedures on internal governance, information and control and AML/CFT procedures. - FI reviews monitoring and management of credit, operational, interest rate, foreign exchange and liquidity risks and uses a checklist to ensure accurate review. - Financial projections and capital analysis: - Pro forma financial statements and projections for the next three years for the CI and, if applicable, the group must be presented for FI’s review. - An analysis of capital requirements must be included and reflect the scope and nature of the planned business. - FI assesses major shareholders’ current financial strength and capacity to support the proposed strategic plan. - Cross-border entrants and passporting: - CIs from EEA countries may conduct business in Sweden under the “passporting” regime (BFBA Chapter 4, Sections 1–3). - A CI from a non-EEA country may be granted a license to operate through a branch in Sweden provided it is subject to satisfactory supervision in its home state and that authority consents to such establishment (BFBA Chapter 4, Section 4). - A license is needed to establish a subsidiary CI in Sweden, whether the parent is based in an EEA state or not. A license may only be approved if the close relation to the parent does not obstruct FI’s supervision; FI will consult the competent authority within the EEA where the parent is a CI. - A MoU with a foreign authority is needed for exchange of information and is integral to FI’s assessment of whether the home supervisor practices global consolidated supervision. - Legal gap and administrative remedies: - There are no explicit grounds under the BFBA for FI to revoke a license where a CI obtained a license through false information or other irregularity, contrary to CRD Article 17(1)(b). FI notes that if the false information still applies—and particularly if correct information would put the CI in breach of laws or regulations—FI can order corrections or decide sanctions via a warning, penalty or license revocation. - FI considers that general principles of Swedish administrative law enable action if the original decision was based on false information; on this basis, a favorable licensing decision could be overturned if obtained through false information or deception. - Ongoing evaluation and monitoring: - Both during licensing and thereafter FI evaluates the competence of the Board (collectively) and the CEO. If criteria are no longer met, FI may appoint a new person as Board member or CEO or, in extreme cases, revoke the CI’s license. - Information for the fit-and-proper test must be provided in the license application and whenever a change takes place during on-going business. FI reviews the work done by the Board and CEO during on-going supervision. - FI monitors new entrants’ performance against projections by on-site investigations within a year from start-up. FI mainly collects information from companies' periodic reporting but there is no specific process for new entrants. - Assessment: Largely Compliant. - Comments and identified weaknesses: - FI has power to set criteria and reject applications from entities that do not meet set standards. The licensing process includes assessment of ownership structure and governance, fitness and propriety of Board members and CEO (but not other senior management), strategic and operating plan, internal controls and risk management, and projected financial condition, including capital base. - Significant weakness: FI does not have powers to assess individual senior management (EC8); this should be remedied. - Where the proposed owner or parent is a foreign bank, FI contacts the home country supervisor for comments on the licensing application. - The absence of explicit statutory grounds for license revocation when a CI obtained a license through false information is a weakness, despite general administrative law principles that FI considers applicable. ### Principle 4 — Transfer of significant ownership (introductory text) - The BFBA (Chapter 1, Sections 5 and 14) defines a “qualifying holding” as a “direct or indirect ownership in an undertaking, where the holding calculated in the manner set forth in *Italic: Source: _cr11281 - Chapter 6, Section 5) to another Swedish authority upon request. There is no corresponding (source PDF content provided).* ### Section 5a represents 10 percent or more of the equity capital or of all voting participation ### _cr11281 - Section 5a represents 10 percent or more of the equity capital or of all voting participation ### Qualified holdings, notification and FI powers - Legal trigger: “Section 5a represents 10 percent or more of the equity capital or of all voting participation interests or otherwise renders it possible to exercise a significant influence over the management of the undertaking.” - Terminology note: BFBA’s unofficial translation uses different English terms (“qualified holding”: Chapter Sections 5 and 5a; “qualifying holding”: Chapter 14, Section 1) for the same Swedish term (“kvalificerat innehav”). - Prior consent and control: - With minor specified exceptions, the intending acquirer must file an application for FI’s prior consent to obtain a qualifying holding and to increase any qualifying holding to above 20, 30, and 50 percent of the share capital or voting rights (BFBA Chapter 14, Section 1, 2, and 6). - FI has power to reject any proposal for a change in a qualifying holding or prevent exercise of voting rights in connection therewith if it does not meet criteria comparable to those used in approving new CIs. - Notification and reporting by CIs: - When a CI learns that its shares or participation interests have been acquired/divested so that a buyer’s or seller’s holdings go above or below the numerical limits, it must forthwith notify FI. - A CI must file an annual report on those with qualified holdings; FI is entitled to request such information from a CI at any time. - FI remedies and enforcement: - FI may decide that “unapproved” owners of qualified holdings may not represent the shares at the shareholders’ meeting and can apply to a district court to appoint a trustee to represent such holdings (BFBA Chapter 14, Sections 6, 7, and 9). - FI may order divestiture of shares sufficient to render a holding as no longer “qualifying.” - Assessment and supervisory comment: - A1. There is no requirement in law or regulation—and nor does FI ensure—that CIs must notify FI upon becoming aware of any material information that may negatively affect the suitability of a major shareholder. - Assessment: Compliant - Comment: It would be constructive for CIs to have an obligation to notify FI forthwith upon becoming aware of any material information that may negatively affect the suitability of a major shareholder. ### Major acquisitions (CP5) — scope, limits, and supervisory gaps - Scope of FI prior authorization: - FI’s prior authorization is only required when the consideration for an acquisition exceeds 25 percent of a CI’s capital base (BFBA Chapter 7, Section 12). - Legal standard for authorization: - Authorization rule: “Authorization shall be granted unless it can be assumed that the acquisition will result in the violation of this Act or other statutes.” (BFBA Chapter 7, Section 12) — no explicit, detailed criteria provided in law or regulation for judging proposals. - Inference: This references BFBA Chapter 6 general provisions regarding safe conduct of business (e.g., internal controls, risk identification/management/reporting). - Statutory limits on non-financial holdings: - The value of shares in a single non-financial undertaking may not exceed 15 percent of the CI’s capital base. - The total holdings in non-financial undertakings must not exceed 60 percent of the capital base. - If the value after acquisition exceeds these amounts the CI is obliged to dispose of the excess (BFBA Chapter 7, Section 9). - Reporting and post-acquisition constraints: - Specific acquisitions/investments described do not require reporting to FI, either before or after the event (subject to the quantitative limits above). - A CI may only engage in “financing operations and operations naturally connected therewith” (subject to non-financial acquisition limits). - Risks from non-financial activities are addressed via the CI’s ICAAP; FI seeks to evaluate every CI’s ICAAP annually (target sometimes missed). - If FI considers non-financial activities render the CI non-compliant on risk management/transparency/soundness, FI may impose a higher capital requirement or an order to reduce the risks (BFBA Chapter 15, Section 1) (CALE Chapter 2, Section 2). - Supervisory limitations and practical concerns: - The notification threshold of “more than 25 percent” of the CI’s capital base gives broad latitude for acquisitions/investments to escape FI review. - There are no precise criteria to judge proposals that must be referred to FI for prior approval. - FI cannot formally prohibit banks from making fairly major acquisitions/investments (including establishing subsidiaries) in countries with secrecy laws or other restrictions that impede information flows necessary for consolidated supervision. - FI’s corrective means are largely “after the fact” (e.g., divestiture), which may cause reputational damage, book losses, and practical difficulties in finding buyers. - Assessment and conclusion: - Assessment: Materially Non-Compliant - Comments: Although FI’s supervisory relationship makes informal consultation likely, the statutory notification limit and lack of explicit approval criteria create substantive supervisory gaps—particularly for cross-border strategic investments and establishment of subsidiaries in non-EEA jurisdictions. Reliance on after-the-fact remedies is problematic in practice. ### Capital adequacy (Principle 6) — regulatory framework and supervisory practice - Regulatory alignment: - Sweden has implemented the EU directives concerning CALE (2006/48/EG and 2006/49/EG), which closely track the Basel II framework for calculation of capital requirements and capital composition. - Swedish definition of capital base requires deduction of both goodwill and deferred tax assets. - Pillar 1 and minimums: - The capital base is to be at all times more than or equal to the sum of the capital required for each of the Pillar 1 risk types (credit, market and operational). - The minimum Pillar 1 capital ratio: 8 percent. - Application at solo and group level: - Capital adequacy regulations apply to all CIs (and additionally to investments firms) on a standalone basis and at the level of financial group. - For application at group level there are rules to determine which individual firm in the group is responsible for calculation of the capital base, capital requirements and supervisory reporting. - Where a non-Swedish entity in a Swedish financial group is in a country that does not apply Basel II, different capital adequacy requirements are applied for that entity on a solo basis. - Risk-weighted exposure and models: - Risk weighted exposure amounts follow Basel II specifications and are set out in FI’s Regulations and General Guidelines governing CALE (FFFS 2007:1 Chapter 11, – 61). - Both on and off-balance-sheet items are included in risk weighted exposure amounts (e.g., FFFS 2007:1 Chapter 15, Section 3; Chapter 22 standardized method; Chapter 40 IRB; Chapter 13, Section 66 off-balance-sheet in trading book). - Limits and reporting related to property and realisations: - Property acquired to secure a claim must be reported to FI and disposed of as soon as deemed appropriate in light of market conditions and, in any event, within three years, unless FI approves otherwise (BFBA Chapter 7, Section 6–8). A list of such properties is to be provided annually to FI. - Supervisory powers and remedies: - FI has power to order a CI or financial group to limit its operations in any respect, including requiring exit from a business line. - If a material risk is not adequately covered by Pillar 1 rules, FI can demand more capital by decision or via SREP. - Where CALE (Chapter 2, Section 2) or BFBA general requirements are breached and other measures are unlikely to suffice, FI must determine a minimum capital base higher than that resulting from general rules (CALE Chapter 12, Section 1–3); FI has not used this formal power to date. - Use of internal models and supervisory oversight: - FI permits internal models: IRB for credit risk (CALE Chapter 4, Section 7), own risk calculation models for market risk VaR (Chapter 5, Section 3), and AMA for operational risk (Chapter 6, Section 6). - CIs must meet qualifying standards to receive permits; failure to meet standards can lead to revocation. - To make significant changes in an internal model, CIs must apply for a method change to FI and receive a permit before implementing any change. - Supervisory actions regarding internal models: - FI will, from 2011, annually conduct supervision to see that every CI with an IRB method permit continues to meet its qualifying standards (minimum analysis of model validation results and internal audit reports). - Only one AMA has been approved in Sweden and is to be validated annually. - VaR models are primarily supervised by FI via analysis of quarterly reports filed by CIs holding VaR permits. - Experience: To date FI has never had to revoke an internal model as observed deficiencies have received prompt attention. - Permits in use (exact counts): - Seven CIs have permits to apply the IRB Foundation approach for credit risk. - One the advanced approach Chapter One CI has a permit to apply the AMA. - Three CIs have permits to apply their own market value-at-risk (VaR) model for position, forex and /or commodity risks. - Supervisory review and forward-looking capital: - A3. BFBA Chapter 6, Section 3 requires CIs to have methods enabling them to regularly value and maintain capital sufficient to cover risks to which they are, or may become, exposed; this includes Pillar 1 and an open-ended span of Pillar 2 risks. - SREP (Method for Supervisory Review and Evaluation Process (SREP), March 1, 2008) uses scenario analyses and stress tests; FI does not permit institutions to recognize diversification effects in their stress tests and will assess and comment on stress test severity and assumptions. - FI can demand higher capital (Pillar 2) and uses SREP to assess Pillar 2 requirements. - Capital monitoring and remedial practice: - FI tracks quarterly prudential reporting and contacts approximately 15 CIs annually approaching the minimum requirement to ensure an updated capital adequacy plan is in place. - Breaches of capital requirements are reportedly rare and there is no recent case where an order has been made; some entities have briefly fallen below but corrected immediately. - FI requires CIs to have a margin between actual capital base and absolute minimum level. - Assessment and supervisory comment: - Assessment: Compliant - Comments: - Overall level of capitalization of the Swedish banking system is high. - Given concentration in a handful of firms, robustness of supervisory processes assessing internal models (nine firms have IRB approvals) is of high importance. - It is welcome that FI will monitor IRB permissions annually from 2011, but such assessments should already have been routine practice. - FI is encouraged to maintain momentum on documenting internal guidance to ensure consistency in model assessment. - SREP is FI’s main supervisory process and FI aims to perform SREP annually for all CIs; while coverage is high it has not been complete. For systemic institutions SREP is more intensive and is concluded with a sign off letter detailing findings and expected remedies. - Capital add-on techniques are used but uncommon; FI should be ready to apply differentiated capital requirements promptly when warranted. ### Risk management process (Principle 7) — statutory requirements and licensing scrutiny - Statutory requirement: - BFBA (Chapter 6, Section 2) requires that a CI must identify, measure, manage, internally report and have control over the risks associated with its operations, ensuring satisfactory internal controls so that credit, market, operational and other risks together do not jeopardize the CI’s ability to fulfill obligations. - Requirements apply in proportion to the type and scope of the CI’s operations and to their degree of complexity (BFBA Chapter 6, Section 4a). - Licensing scrutiny: - During the licensing process FI collects and carefully reviews extensive information about the proposed CI’s risk management process. - The business plan should contain a description of how the CI will handle risks (credit, market, liquidity, operational) associated with its business. - A CI shall, at a minimum, have methods enabling it to regularly evaluate and maintain capital sufficient to cover current and prospective risks. *Italic: Source: _cr11281 - Section 5a represents 10 percent or more of the equity capital or of all voting participation* ### Chapter 6, Section 2). ### Chapter 6, Section 2 ### Supervisory Review (SREP) and ICAAP - Risk management policies and processes are reviewed at least annually in the SREP. - The CI’s ICAAP should include information about: - Financial position, capital buffers and stress tests - Strategies and processes for risk management - The organization and structure of the risk management function - The scope and nature of risk reporting and measurement systems - The assessed capital requirement for the overall operation as well as for each separate risk - FI conducts an annual SREP to evaluate whether a CI’s target level of capital is adequate and whether it has adequate methods to identify, measure, govern internally, report and have control over the risks that its business is associated with (FI’s memorandum “Method for Supervisory Review and Evaluation Process (SREP)” March 1, 2008). - A CI must prepare an ICAAP at least annually; the ICAAP is one of several sources underpinning FI’s SREP. FI’s general guidelines for ICAAP submission outline how a CI can inform FI regarding its ICAAP and its calculations. ### Board Responsibility, Senior Management, and Risk Governance (EC2, 4) - FI’s General Guidelines governing CALE (FFFS 2007:1) require all CIs to have a risk management process covering all risk areas. - Board responsibilities: - Approve policies and instructions - Set overall limits - Define the risk appetite - Monitor senior management - Senior management responsibilities: - Implement policies and instructions - Establish an organizational structure with a risk control function having capacity and resources to implement tools to identify and evaluate risk - Ensure reporting lines and timely reports for managing and mitigating risks - FI assesses Board involvement and role in deciding risk appetite and strategy via reading Board minutes, reviewing risk reporting to the Board, and Board-established risk policies, mandates and limits as part of the annual SREP. ### On-site Examinations and Internal Audit (EC3) - FI reviews CI risk management processes through on-site examinations of different risk or business areas; signals of weaknesses typically trigger an on-site follow-up. - For the four systemic institutions, FI holds regular biannual meetings with Internal Audit and Compliance functions to discuss findings on compliance with regulations and internal policies and instructions. - For smaller institutions, Internal Audit and Compliance functions are interviewed during on-site examinations or the annual SREP. - In on-site examinations FI checks: - Level and appropriateness of risk management documentation - Whether responsibility for updating and reviewing documentation is satisfactorily stated in Board-approved policies - FI’s most common method to verify correct handling of exceptions is by reading the annual internal audit report. ### Documentation Requirements and Handling of Exceptions (IRB override example) - For each risk area, FI has defined documentation requirements for policies, processes and distribution of responsibilities. - Example for CIs permitted to IRB for credit risk (FI: Regulations and General Guidelines governing CALE (FFFS 2007:1 Chapter 44, Section 17)): - “The institution shall have documented principles for when it is permitted to override a mechanically calculated rating as well as for the approval procedures for such departures. Institutions shall individually document all overrides from the mechanically calculated risk grade. The institution shall in particular analyze and document the outcome of these overrides in accordance with the same principles as prescribed in section in Section 28. With respect to exposures to governments, institutions and corporations, the credit officer shall at all times make a qualitative assessment of the suitability of the grade indicated by the mechanical method.” ### Powers to Require Remedial Action - If necessary FI has the power to require a CI to: - Strengthen risk management processes - Raise more capital - Scale down or exit some activities to reduce its risk profile (BFBA Chapter 15, Section 15 1–3; CALE Chapter 2, Section 2). ### Capital Assessment and Internal Capital Adequacy (EC5) - A CI is required to have sound, effective and complete strategies and processes to assess and maintain on an ongoing basis the amounts, types and distribution of internal capital adequate to cover its risks (BFBA Chapter 9, Section1: CALE Chapter 2, Section 1). - These strategies and processes must be subject to regular internal review to remain comprehensive and proportionate to the nature, scale and complexity of the CI’s activities. - FI evaluates whether a CI has adequate methods to identify, measure, govern internally, report and control risks as part of the annual SREP (FI’s memorandum “Method for Supervisory Review and Evaluation Process (SREP)” March 1, 2008). ### Model Validation Requirements (EC6) - Any CI permitted to use models to measure components of risk must: - Regularly conduct internal validation of the risk measurement system, considering both quantitative and qualitative factors - Document the validation - Ensure internal audit verifies that the validation is done by independent functions in the CI - FI assesses validation processes and routines in on-site examinations. - There must be an annual independent validation performed internally and an annual verification performed by internal audit (FI Regulations and General Guidelines governing CALE (FFFS 2007:1) (Chapter 60, Sections 9–10)). ### Information Systems for Risk Measurement and Reporting (EC7) - FI determines in on-site examinations whether CIs and their groups have adequate information systems for measuring, assessing and reporting on the size, composition and quality of exposures. - CIs must deliver to FI for review all policies and instructions regulating reporting and examples of such reporting. - Policies, instructions and reports are reviewed regarding size, composition and quality of exposures; this assessment is integral to the SREP. - For CIs allowed to use more advanced models, there are defined requirements for information systems; conformity with those requirements is assessed in the annual SREP (FI Regulations and General Guidelines governing CALE (FFFS 2007:1) (Chapter 44, Sections 22–23)). ### Operational Risk Supervision and New Product Approval (EC8) - FI assesses whether the Board and senior management are aware of operational risk exposure and whether the risk area is under control. - FI verifies whether the CI has instructions and an organization for new product approval as part of the assessment. - FI Regulations and General Guidelines governing CALE (FFFS 2007:1) (Chapter 30, Section 2 and Chapter 60, Sections 3 and 6) require: - “The institution shall have processes for handling its exposure to operational risks. The institution shall have policy documents approved by the Board... for management and assessment of its exposure to operational risks. Policy documents shall also cover tail risk events with severe impact on the activities of the institution. In addition to stating the institution's applied definition of operational risk, the policy documents shall state which forms of operational risk are relevant in the operation. The institution shall have an internal reporting structure up to and including the Board.... and management. This structure shall be designed such that the involved functions in the institution receive regular and pertinent information about exposures to operational risks and about losses related to operational risks. The institution shall have procedures in place to take appropriate corrective actions based on this information.” - FI does not have any regulation governing a new product process for CIs. *Source: Chapter 6, Section 2).* ### Section 2, and Chapter 60 Sections 4–6) provides that, for CIs as a general rule, a risk control ### _cr11281 - Section 2, and Chapter 60 Sections 4–6) provides that, for CIs as a general rule, a risk control ### Independent risk control function (governance and resources) - Board responsibility: The responsibility for establishing the risk control function lies with Board. - Functional independence: - A risk control function must be established which is not involved in risk taking. - Duties should not be carried out by employees who are engaged in the day-to-day business operations. - The function may structure work differently depending on the undertaking's operations and may engage other functions to compile data, but remains responsible for coordinated reporting and analyses and for ensuring that underlying data is correct. - Scope of explicit requirements: - For the three main risk areas credit, market and operational risk, there are explicit requirements for independent risk evaluation and reporting to the Board and senior management if a CI uses an advanced methodology for calculation of capital adequacy. - CIs that do not use such a methodology are to apply principles set out in FI General Guidelines regarding Governance and Control of Financial Undertakings (FFFS 2005:1) (Chapter 5, Sections 1–4). - On-site verification: FI in its on-site examinations determines whether CIs have risk evaluation, monitoring and control or mitigation functions with duties clearly segregated from risk taking functions and which report directly to senior management and the Board. ### Standards, specialization, and internal audit - FI standards and planned guidance: - FI has issued specific standards for credit risk, market risk, liquidity risk and interest rate risk in the banking book. - Operational risk is only covered in the Regulations and General Guidelines regarding CALE (FFFS 2007:1). - FI plans to issue a standard in the current year based on the BCBS document “Sound Practices for the Management and Supervision of Operational Risk.” - BFBA / specialized units: - BFBA presents requirements for more complex CIs to have independent and specialized units for risk control. - Larger and more complex CIs using more advanced models for risk assessment and capital adequacy are required to have dedicated units for risk control. - Internal control monitoring: - The Board should ensure a function monitors and evaluates internal control (including the risk control and the compliance function). - In CIs with an internal audit function (e.g., the four systemic institutions) such duties are performed by that function. - The function should possess sufficient resources and personnel who possess: - sound knowledge of the CI’s risks and the regulations applicable to it; and - particular expertise in auditing and evaluating the development, operation and management of the undertaking's information systems. - The function should report directly to the Board and be entirely separated from the operations that are being audited. - FI has confirmed this to be the case for the four systemic institutions. ### FI supervisory structure and coordination - FI internal structure: - At FI there is a specialized unit for the largest and most complex credit institutions. - For each of the four major groups there is a Group supervisor responsible for coordinating supervision of that group, including coordination of risk experts, legal experts, accounting experts and supervisors of insurance, mutual funds and market conduct. ### Stress testing and other risks - Stress testing requirements: - CEBS CP 32 concerning stress tests and FI’s SREP guidance set out the conditions for stress testing, which FI evaluates in the annual SREP. - Broader risk assessment: - FI requires CIs to have policies and processes for assessing other risks; BFBA (Chapter 6, Section 2) stipulations about risk management and capital are not restricted to a fixed set of risks. - Credit risk, market risks and operational risk are singled out for minimum capital requirements, but other material risks must be treated correspondingly. - The capital need and processes are assessed in the annual SREP. ### Supervisory assessment, practice, and identified weaknesses - Assessment summary: Assessment Largely Compliant. - Supervisory practices and limitations: - FI’s processes touch on all elements of the criteria but supervision places too great a focus on procedures and documentation rather than meaningful corroboration of quality of implementation. - On-site inspections are discussed in context of CP20; FI notes there will be an on-site visit for all major risk areas of a systemic institution on an annual basis. - FI’s program of on-site inspection is not equivalent to an intrusive examination cycle that should be combined with frequent review of internal management reporting and continuous dialogue with control functions and external auditors. - Supervisory interaction with systemic institutions: - For the four systemic institutions FI fields the relationship manager plus a team of experts in quarterly risk review meetings with each bank; banks provide updates on credit, market and liquidity risk. - Operational risk reviews are performed in a separate meeting, normally twice a year. - Weaknesses identified: - Board minutes and risk reporting may be insufficient to confirm senior management’s understanding of “the nature and level of risk being taken by the bank and how this risk relates to adequate capital levels”; examinations and frequent dialogue are necessary. - Dialogue with Audit and Compliance is regular but insufficiently frequent (the supervisory contact schedule for one systemic firm indicated an annual meeting). - Dialogue with Audit, Compliance and Risk Management should be continuous, at least for the four systemic institutions. - Emphasis on documentation must be matched by emphasis on ensuring policies are adhered to in practice through spot checks, file reviews, and exception checks based on monthly and quarterly management information rather than solely an annual internal audit report, at least for systemic firms. - Resources constraint: - Ensuring compliance with essential criteria for non-systemic institutions falls within the SREP process; the depth and breadth applied to systemic firms is not available for non-systemic firms largely due to resources for on-site inspections. - For a developed country such as Sweden, the level of compliance, particularly for systemic institutions, needs to be enhanced. ### Principle 8 — Credit risk: framework and supervisory practice - Principle statement: Supervisors must be satisfied that banks have a credit risk management process that takes into account the risk profile of the institution, with prudent policies and processes to identify, measure, monitor and control credit risk (including counterparty risk). - Regulatory responsibilities and expectations: - FI’s General Guidelines regarding Credit Risk Management in Credit Institutions and Investment Firms (FFFS 2004:6) make the Board ultimately responsible for a CI’s credit risk management (Section 7) and stress the importance of a clear credit strategy (Section 9). Minimum requirements for credit policies/instructions are provided (Section 15). - CEO responsibilities: FFFS 2005:1 (Chapter 2, Section 4) stipulates the CEO shall handle day-to-day management in accordance with the Board’s guidelines and instructions. - FI risk-based supervision and inspection frequency targets: - FI’s approach is risk-based; CIs are required to report risks regularly and inspections focus where CIs carry increased risk. - FI plans on the basis of two examinations a year for each of the systemic banks and fifteen examinations for non systemic banks within the course of a year. - Over the period of 2008–2010 FI performed 74 on-site examinations focused on credit risk. - For on-site inspections adherence to FFFS 2004:6 is assessed; FI verifies presence of policies and instructions and how they are implemented and monitored. - In the annual SREP each CI’s risk profile is assessed with credit risk as a main focus area; the risk profile is compared to the institution’s capital strength. - In connection with SREPs and on-site inspections all major policies and instructions (including credit-related) are checked and Board minutes are studied. - Credit assessment and monitoring requirements: - BFBA (Chapter 8, Sections 1–3) requires credit assessment based on applicant’s repayment capacity, decisions based on appropriate information, and documentation of all credit decisions. - FFFS 2004:6 (Sections 6, 12, 14, 15, 16, 17, 18, 20) requires sound judgment, ongoing identification and monitoring of credit risk, risk classification of exposures, a management information system, approval authorities and limits, credit proposals based on a true picture of applicant’s economic conditions, a process for early detection and handling of problem loans, and guidance for a sound credit culture and credit administration. - FI uses an on-site inspection template modeled on FFFS 2004:6; for 9 of the CIs which have applied to use an IRB including the four systemic institutions a review of the credit process was performed as part of the on-site assessment of the IRB approach. - Conflicts of interest and segregation: - BFBA (Chapter 8, Section 5) lists categories potentially having a conflict of interest: (i) Board members, (ii) a person in senior management who alone or with a third party is authorized to determine lending matters otherwise determined by the Board, (iii) an employee who holds a senior position, (iv) shareholders or holders of participating interests with holdings equal to at least three percent of the CI’s outstanding capital, (v) a spouse or cohabiter of a person in the categories above, or (vi) a legal person in which any of the persons above holds a significant financial interest as owner or member; a CI may not enter into a services agreement on unusual or commercially unjustified terms with these persons. - FFFS 2004:6 (Section 17) requires anyone taking part in a credit decision to ensure credit proposal quality and adherence to credit policy; FFFS 2005:1 (Chapter 3, Section 4) mentions separation of duties to avoid conflicts. - FI actively looks for potential conflicts of interest during on-site inspections and conducts special investigations from time to time. - Information powers: - BFBA (Chapter 13, Sections 3–4) sets out CI obligation to provide information that FI requires and FI’s right to conduct on-site inspections; FI’s experience is that there is no problem obtaining necessary information, on site or off site. - During the financial crisis FI demanded a major step-up in both coverage and frequency of information reporting and CIs co-operated. - Delegation of authority and limits: - FFFS 2004:6 (Section 15 a) and b) stipulate governance documents should include units that may make credit decisions and conditions/authorizations for making credit decisions including monetary limits. - In practice CIs apply segregated levels of decision depending on risk; each CI determines delegated credit authority levels; no hard regulatory limits are set, but FI can require correction if credit decisions are not made at suitable organizational levels (BFBA Chapter 6, Section 2). - FI checks that delegation of authorities exists and that credit decisions of a certain size are referred to the Board; threshold for Board referral should be indicated in CI’s credit instructions. - Counterparty credit risk: - All CIs must calculate counterparty credit risk for their derivatives exposures. - Regulation provides different methods for calculating exposure values; the most advanced method (internal model) requires FI approval. - Details are described in FI Regulations and General Guidelines governing CALE (Chapters 18, 40, and 61); all methods cover potential future exposure. - FFFS 2004:6 applies to all forms of credit risk, including counterparty credit risk; guidelines must be adapted to size and complexity (FFFS 2004:6 Section 1). - The annual SREP captures all forms of outstanding credit risk in a CI, including counterparty credit risk. - Monitoring obligor’s total exposure: - Credit policies/instructions are checked against FFFS 2004:6 (Section 16) requiring credit assessment based on information providing a good overall view of applicant’s economic status. - FI expects use of database/register UC (Sw. Upplysningscentralen) for private individuals and small/medium companies and annual reports for listed companies; for clients outside these sources CI should form opinion based on best available information and perform follow-up at relevant intervals. - Assessment outcome for Principle 8: Compliant. - Comments on on-site activity and resource constraints: - FI has increased frequency of on-site activity over past three years. - Three of the four Essential Criteria (ECs 1, 2, and 3) for this Core Principle use wording “The supervisor determines/requires and periodically confirms that...” and FI’s number of on-site inspections in recent years has fallen short of desired standard due to resources available for on-site inspections of CIs. ### Principle 9 — Problem assets, provisions and reserves - Principle statement: Supervisors must be satisfied that banks establish and adhere to adequate policies and processes for managing problem assets and evaluating the adequacy of provisions and reserves. - Regulatory requirements and reporting: - FFFS 2004:6 requires a CI to have policies and procedures to identify and manage problem assets and assets with deteriorating credit quality (FFFS 2004:6 Sections 12, 15, and 18). - FFFS 2008:14 contains the template for CIs’ mandatory quarterly reporting to FI (the “Standard Report”). - FI issued guidance (Standard Report – guidelines for credit institutions and investment firms, December 2009) providing a definition for what should be considered a problem asset for reporting purposes. - FFFS 2007:1 requires that all exposures be subject to some form of asset classification; for IRB users, new information substantially influencing assessment of counterparty’s credit risk triggers a risk classification review (FFFS 2007:1). *Source: _cr11281 - Section 2, and Chapter 60 Sections 4–6) provides that, for CIs as a general rule, a risk control* ### Chapter 44, Section 16). For those using the standardized approach, FFFS 2007:1 implicitly ### Chapter 44, Section 16). For those using the standardized approach, FFFS 2007:1 implicitly ### Risk-weight changes and revaluation - FFFS 2007:1 implicitly requires that changes that would lead to a different risk weight for exposures are to be captured on a daily basis unless otherwise provided (example: less strict requirements for the revaluation of residential property collateral Chapter 16, Section 28. para 2). - CIs using the standardized approach must implement daily capture of changes affecting risk weights unless a specific provision states otherwise. ### Provisioning and IFRS / IAS 39 requirements - All CIs must use International Financial Reporting Standards (IFRS) for their external financial reporting. - Each CI must apply International Accounting Standards (IAS) 39 Financial instruments: Recognition and Measurement which requires management to assess whether there is objective evidence that a financial asset or group of financial assets measured at amortized cost is impaired. If such evidence does exist, then the CI must apply IAS 39 p. 63 to determine the amount of any impairment loss. - FI assesses whether CIs are making realistic assumptions in the valuation of important portfolios or individual large exposures. - FI’s experience from the Baltic crises: the CIs involved (primarily the four systemic institutions) did make both early and sufficient provisions regarding their Baltic exposures, in line with IFRS. ### Supervisory review processes and risk classification - CIs’ risk classification is assessed and discussed in the annual SREP. - Risk classifications may also be reviewed in the course of on-site examinations. - For each of the four systemic institutions, FI reviews the provisioning at quarterly meetings where it requires presentation of a list of the 20 largest problem assets. - A sample of the problem asset files are usually selected for more thorough examination, including checks of handling against the CI’s policies and procedures and the risk classification procedure. ### FI investigations during the financial crisis and aftermath - FI conducted special investigations of problem assets and provisioning during the financial crisis and its aftermath: - During 2008–09 the Swedish bankś exposures in the Baltic countries were reviewed by FI in cooperation with Ernst & Young, in order to assess the level of distress in the portfolios; - Reviews regarding portfolio quality were also conducted at two four systemic institutions banks’ Swedish operations; - During 2008–09 an investigation was also carried out at one savings bank where FI had discovered that a distressed portfolio was under provisioned. The bank corrected its provisioning and no further action was required. - The investigations were extraordinary: FI does not routinely confirm the adequacy of CIs classification and provisioning policies and processes, or their implementation. ### Off-balance sheet exposures and conversion factors - FFFS 2007:1 (Chapter 40, Section 31) requires all off-balance sheet exposures to be converted using a Credit Conversion Factor (CCF) with the CCF taking into account the risk for further drawings by a counterparty after an event of default has occurred (2007:1. Section 39). - There are CCF for different off-balance sheet items to be used by CIs not having an IRB permit (2007:1 Chapter 17). - The amounts of the off-balance sheet exposures after the application of the conversion factors are added to any other exposures on the same counterparty and thus subject to the same risk classification and provisioning in the CI’s processes and systems. - FI has not performed any supervisory activity in recent years directed to the specific area of how CIs handle off-balance sheet exposures in their risk measurement. ### Early detection, reporting, and supervisory powers - FFFS 2004:6 (Section18) prescribes that a CI be properly organized for the early detection of deteriorating credit risk and well prepared for the handling thereof; past due credits and credits with increased risk should be handled rapidly to avoid a worsened outcome. - FI regularly receives and reviews information regarding supervised CIs’ credit portfolios and management of problem assets, and has full access to all relevant information. Problem assets are reported at an aggregate level, but not by portfolio or by class of asset. Only assets that are over ninety days past due are reported. - FI would require a CI to change its procedures/policies and organizational resources if it had serious concerns about their fitness for purpose. - Under FFFS 2008: 14, FI receives a quarterly Standard Report from each CIs based on IFRS. Lending to CIs and lending to the “general public” are separately disclosed and distributed among different subcategories (see FFFS 2008:14 rows C1–C16). The CI’s total provisions are specified for a number of different subcategories and for a number of different kinds of loans (see Standard Report, rows C 68–C91). - If, in light of the level of problem assets, FI deems a CI’s level of provisions and/or overall financial strength to be insufficient, then FI has power to intervene and demand that the CI rectify the situation through setting higher capital requirements BFBA (Chapter 15). *Source: _cr11281 - Chapter 44, Section 16). For those using the standardized approach, FFFS 2007:1 implicitly* ### Section 1). This also follows from the provisions of CALE (Chapter 12, Section 1). ### _cr11281 - Section 1). This also follows from the provisions of CALE (Chapter 12, Section 1). ### Asset classification, collateral and provisioning (IFRS / IAS 39 / FI guidelines) - IAS 39.63: "the amount of a loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (including the net realizable value of collateral)." - IAS 39 AG 84: the present value calculation for collateralized financial assets "reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable." - FI’s General Guidelines regarding Credit Risk Management in Credit Institutions and Investment Firms (2004: 6) require (Chapters 12, 15c, and 20) that a CI shall: - regularly measure and follow up the consolidated credit risk to which it is exposed, - have adopted governance documents in writing for its credit risk management, - include information about the extent to which different assets can be accepted as collateral and how they shall be valued, and - have a sound credit culture. - FI notes that CI policies must reflect current accounting practices as provided in IFRS, including IAS 39. ### Supervisory responsibilities, governance and Board oversight (BFBA / FFFS) - BFBA (Chapter 6, Section 2) prescribes that a CI shall identify, assess, monitor, control and report the risks inherent in its operations; the Board shall ensure fulfillment (BFBA Chapter 6, Section 4b). - FFFS 2004:6: - ultimate responsibility for a CI’s credit risk management rests with the Board (Section 7), - requires the CI, on a continuing basis, assess and follow up on the aggregate credit risk to which it is exposed (Section 12), - requires the assessment process to enable: a) analysis of the credit portfolio’s composition from a risk perspective; b) continuous monitoring of the credit risk development both for an individual credit and for the whole credit portfolio (Section 13). - FI’s practical determination of whether Board reporting meets these prescriptions: - For non-systemic institutions: made during on-site inspections where Board minutes and Directors’ packages are reviewed. - For four systemic institutions: made via quarterly presentations that closely resemble senior management presentations to the Board. ### Definition of default and past-due items (FFFS / IAS 39) - FFFS 2007:1 defines “Past due items” (Chapter 16, Section 31) and lists criteria/indicators for default for IRB purposes (Chapter 41, Section 7); a 90-day overdue limit is mentioned as a strong criterion in both. - IAS 39 p. 59: objective evidence that a financial asset or group of assets is impaired includes observable "loss events" such as: - a. significant financial difficulty of the issuer or obligor; - b. a breach of contract, such as a default or delinquency in interest or principal payments; - c. the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; and - d. it becomes probable that the borrower will enter bankruptcy or other financial reorganization. - Although IAS 39 no longer defines “doubtful exposure” (previously defined among other criteria as past due for 60 days or more), the term is still used in FI’s Standard Report and in several CIs’ external and internal credit instructions. ### Assessment of supervisory implementation (Assessment: Largely Compliant) - Five of twelve Essential Criteria (ECs 2, 4, 5, 8 and 11) use wording requiring the supervisor to "determine/confirm/assess that..." regarding: - (i) adequacy of classification and provisioning policies and their implementations; - (ii) provisions and write-offs reflecting realistic repayment/recovery expectations; - (iii) appropriateness of policies and processes and organizational resources to identify and manage problem assets; - (v) adequacy of Board reporting. - FI self-assessment said "confirmation of the adequacy of classification and provisioning policies and processes as well as their implementation is not carried out on a routine basis." - Authorities later stated that "reading provisioning policies and going through reserves, name by name, is performed in all FI’s credit risk inspections." - Assessors could not independently resolve the conflicting accounts. - Concerns: - Frequency or adequacy of checking may be offset for the four systemic institutions by quarterly meetings, but not for smaller institutions where contact is less frequent. - Aggregate data indicating claims more than 90 days past due is insufficient for FI to monitor or analyze portfolio quality or assess potential deterioration across firms. ### Principle 10 — Large exposure limits: legal framework and supervisory practice - CALE Act (Chapter 7, Section 4) defines "group of connected clients" and "client" for exposures. - CALE Act large exposure limits (Chapter 7, Sections 3, 5): - limit of 25 percent of the institution’s capital base for exposures to a single client or group of connected clients; - limit of 20 percent where the client or group is a parent undertaking or subsidiary of the institution or subsidiary of the parent institution; - aggregate limit of 800 percent of capital base for total value of the institution's large exposures may not exceed 800 percent of the institution's capital base; - a large exposure is defined as an exposure where the value is 10 percent or more of the institution's capital base (Chapter 7, Section 5). - FI may permit trading book exposures to exceed limits (power never exercised); exemptions subject to regulation (Chapter 35, Section 15). - The Act’s definition of “exposures” (Chapter 1, Section 3 at 4) covers balance sheet assets, derivative contracts reported as liabilities or off balance sheet obligations; exemptions listed in Chapter 7, Sections 6 and 7. - Supervisory review and reporting: - FI reviews management policies via SREP (Pillar 2) annually; internal policies must include senior management duties and MI system instructions. - FI’s ability to assess management systems heavily depends on ICAAP/SREP submissions and FI’s processing capacity. - Since 2010 FI introduced mandatory measurement of the “Herfindahl index” for all credit institutions; its rudimentary analysis can lead to additional capital requirements for large exposures judged higher risk. - FI obtains quarterly large exposure reports via the Capital Adequacy report (Appendix 2 to FI’s Regulations on CALE). Standard reporting includes: - number and total amount of exposures exceeding 10 percent of capital base; - breakdown of lending across public sector, financial/non-financial companies, credit institutions and households, and Swedish and non-Swedish counterparties (for non-systemic firms); - more detailed sectoral and geographical data obtained separately for the four major banking groups. - From Q2 2011 reporting of an institution’s 20 largest exposures and 15 largest corporate exposures (irrespective of thresholds/exemptions) will be instituted. - Immediate notification to FI required on breach of large exposure limits; FI can specify time to reduce exposure (Chapter 10, Section 15 CALE Act) and may sanction failures. - Crisis-era temporary enhanced reporting (Nov 2008–Dec 2009) for four major banking groups included: - 15 largest exposures to credit institutions and 25 largest exposures to corporations; - required information: name, country, management credit limit, external rating, internal risk classification, probability of default (PD) value, total amount and balancing day, exposures split by transaction type and amount, existence of guarantees, provisions, and expected loss during 2008 and 2009 split into sector and geographical exposures. - Current gaps and supervisory powers: - FI has no specific regulation requiring preventive actions when concentrations present significant risk of breaching large exposure limits, but FI can require additional reporting to judge whether additional Pillar 2 capital should be required. - FI has not conducted recent specific investigations on large exposure management systems. - Assessment: Compliant - Comments and considerations: - FI implemented recent EU CRD changes removing potential exemptions to large exposures. - Enhancements to regular LE reporting are welcome. - FI may consider re‑instituting more granular reporting for systemic institutions (as during the crisis) and whether tighter large exposure limits are appropriate for the Swedish market. - New EU reporting standards will soon be in force. ### Principle 11 — Exposures to related parties: legal framework and supervisory expectations - Definitions and conflict-of-interest rules: - BFBA Chapter 1, Section 6 defines when a related party relationship exists between a credit institution and external/affiliated parties. - FI general guidelines on credit risk management (Section 8) state no one shall participate in decisions concerning granting credit to a related party or where conflict of interest exists. - BFBA Chapter 8, Sections 5 and 6 set requirements on conflict of interest, related-party definitions, and FI’s powers to determine potential conflicts. - The Act lists persons considered potentially having conflicts: (i) board members, (ii) delegates in senior management with lending authority, (iii) employees holding senior positions, (iv) shareholders or holders of participating interest with holdings equal to at least three percent of outstanding capital, (v) spouse or cohabiter of persons above, (vi) a legal person in which any of the persons above holds significant financial interest as owner or member. - Related-party transaction rules: - BFBA Chapter 8, Section 5: a credit institution may not enter into a services agreement (including granting credits) on unusual or commercially not justified terms with persons mentioned above. - BFBA Chapter 8, Section 5: a credit institution may not enter into services agreements (including granting credits) with related parties (excluding subsidiaries and affiliates) on more favorable terms than those granted to non-related counterparties. - Transactions with subsidiaries/affiliates regulated by the Companies Act (Chapter 17, Sections 1 and 2) define "transfers of value," stipulating allowed transfers; all other transfers decreasing net value and not justified for purely commercial reasons are prohibited. - Board approval and internal governance: - BFBA Chapter 8, Section 6 requires prior Board approval for all exposures with related parties defined in Section 5; FI observed most cases are referred. - Companies Act Chapter 8, Section 23: a board member shall not be involved in matters where a conflict of interest may arise. - BFBA (Chapter 6, Section 5) requires policies/processes for Board transparency and internal control; FFFS 1998:22 (Sections 2 and 4) requires each credit institution to have Board-established ethical guidelines for lending practices, including instructions on granting credits and product provision to comply with laws and regulations. - Capital treatment and limits: - CALE Act does not specify treatment of credits to related parties in capital adequacy measures. - BFBA does not explicitly set limits for exposures to related parties or collateralization requirements for related-party exposures. - FI may take measures against institutions extending credit to related parties inconsistent with sound business practices under its mandate to supervise soundness criteria in Chapter 6 of the BFBA. - CALE Act Chapter 7, Section 3: exposures to a client or group of interrelated clients may not exceed 25 percent of the credit institution’s capital base; if the client(s) are members of the same group as the credit institution, the aggregate exposure may not exceed 20 percent of the capital base. *Source: _cr11281 - Section 1). This also follows from the provisions of CALE (Chapter 12, Section 1).* ### Chapter 10, Section 17 of the BFBA stipulates that a credit institution may grant a loan or ### _cr11281 - Chapter 10, Section 17 of the BFBA stipulates that a credit institution may grant a loan or ### Lending and security to parties acquiring equity stakes - Chapter 10, Section 17 of the BFBA stipulates that a credit institution may grant a loan or security to an outside party acquiring a stake in the credit institution or a company in the same group as the credit institution. - After deduction of the lent/secured amount(s) the restricted capital of the credit institution must remain fully covered. ### Regulatory gaps on related-party exposure limits - FI has not issued any regulations regarding limits for exposures to related parties (except the abovementioned regulation regarding parties related to the credit institution itself). ### Board recordkeeping and responsibility requirements - EC6. Chapter 8, Section 6 of the Banking and Financing Act requires that the Board of the credit institution keeps a written record of all agreements entered into with related parties. - Chapter 2, Section 1 of FFFS 2005:1 stipulates that an undertaking’s Board bears the ultimate responsibility for the undertaking’s organization and management of its affairs. *Source: _cr11281 - Chapter 10, Section 17 of the BFBA stipulates that a credit institution may grant a loan or (PDF).* ### Section 4 stipulates that the managing director shall handle the day-to-day management in ### _cr11281 - Section 4 stipulates that the managing director shall handle the day-to-day management in ### Related-party credit exposures and credit review - Inspection: FI carried out an inspection involving seventeen selected credit institutions, focusing solely on related-party issues, in the autumn of 2010. - Findings: - Institutions have policies and processes to identify individual exposures to related parties and the total amount of such exposures, and to monitor and report on them. - Monitoring and reporting is made as part of the normal credit review process but decisions are made separately. - Exceptions to policies, processes and limits should be reported to the Board according to inspected credit instructions. - Related Party transactions are reviewed by senior management, the Board and in some cases by the Internal and External Audit functions. - EC7: assessors saw working papers relating to the review of exposures to related parties detailing the initial stages of planning for follow up action. - Assessment: Largely Compliant - Comments and policy recommendations: - Requirements are in place obliging institutions to identify related parties and manage conflicts of interest, but FI relies on general requirements for sound and ethical processes for credit granting and review. - FI has been diligent within supervisory capacity and has active follow up work in progress with at least one institution. - Recommendation: FI should draft more specific regulations to ensure clarity of requirements that institutions must meet. - FI intention: FI has indicated that it intends to review the credit risk guidelines in 2012 and plans to use this opportunity to impose more specific guidelines regarding exposures made to related counterparties. ### Principle 12 — Country and transfer risks - Context and exposures: - Sweden is a major regional banking hub; country risk is concentrated largely in the major four systemic groups. - Credit institutions other than the four major banks have exposures almost only to European countries, primarily to Nordic countries; transfer and country risk for these institutions is low on an individual basis. - Regulatory framework and practice: - Country risk is not explicitly defined in regulations or guidelines but is considered a component of credit risk subject to requirements in FFFS 2004:6 and FFFS 2007:1. - Liquidity regulations (Chapter 1, Section 2, Chapter 4, Sections 4 and 5 of the FFFS 2010:7) address transfer risk by requiring institutions to minimize transfer risk via reliable liquidity reserves. - FI uses “ongoing supervision” to determine institutions have policies and processes for identifying, measuring, monitoring and controlling country and transfer risk. - FI conducts targeted investigations when needed (e.g., exposures towards Baltic countries investigated in 2007 and 2009). - Reporting and capital treatment: - The four major banks report exposures where exposure per country is defined on a quarterly basis; FI analyses these reports. - In conjunction with SREP/ICAAP credit institutions report exposures by country and may be required to hold Pillar 2 capital for concentration or specific country risk. - At present five countries have been classified as high risk; extra capital need under Pillar 2 is added for large exposures to these predefined high risk countries. - FI conducts annual stress tests, more frequently when needed; results published at least yearly in “Risks in the financial system.” - Major institutions report country exposures to the RB on a quarterly basis using BIS standards; FI can obtain this data from the RB. - Assessment: Compliant - Comments and policy recommendations: - Lack of explicit regulations and absence of relevant guidelines for country risk should be reconsidered given Sweden’s role as a regional banking hub and concentration in a few institutions. - Recommendation: More direct treatment of country risk, including articulation of supervisory expectations, to ensure identification and assessment on a sufficiently regular and penetrating basis. ### Principle 13 — Market risk - Scope and resources: - Approximately a dozen institutions, including the four major banks, are engaged in trading activities to a significant extent. - FI has two specialist market risk personnel; these specialists participate in quarterly risk reviews. They are located in a joint market and liquidity risk unit comprising five experts in total. - Other market risk staff exist in other units but are not fully available for market risk supervision. - Regulatory framework and supervisory activity: - FI implemented EU directives and issued regulations embodying the Basel Market Risk Amendment and revisions; the July 2009 revisions are contained in “CRD3,” to be implemented in 2011. - FI issued a guideline concerning the management of market risks in 2000. - Supervisory contact: regular quarterly meets cycle with ten institutions; quarterly risk reviews incorporate Board minutes and information packages; two quarterly reviews each year focus on market risk. - Between 2008–2010 FI recorded 5 on-site examinations focused on market risk; 2008 inspections into complex products addressed boards’ oversight, policies, instructions, reports to boards and risk limits. - For banks approved to use VaR-models for capital calculation, FI requires model use as basis for limit structure and imposes stress test requirements in ICAAP/SREP. - Investigations and follow-up: - Since 2008 targeted onsite inspections covered the four big banks and three other credit institutions regarding trading in complex instruments. - In the wake of significant losses due to incorrect valuations in one smaller institution, FI is launching a major investigation into valuation practices in trading books covering all firms with significant trading activity. The project team comprises eight to nine persons and is cross disciplinary. - Planned 2011 investigations will have broader scope and particular focus on valuations and control environment. - Assessment: Largely Compliant - Comments and policy recommendations: - Market risk guidelines have not been updated since 2000 despite Basel changes dating from 2005. - Failures occurred (including a prominent recent banking failure related to trading book valuation). Delays in follow up were largely due to limited resources and competing urgent priorities. - Recommendation: Update market risk guidelines and increase specialist resources to move from reactive to more proactive supervision, improve timeliness of follow up, and reduce reliance on ICAAP and annual reports alone. ### Principle 14 — Liquidity risk - Regulatory changes and timelines: - FI issued revised liquidity regulations in 2010 (FFFS 2010:7), replacing guidelines and instructions from 2000; they came into force January 1, 2011. - Forthcoming international standards (LCR and NSFR) are being prepared for implementation in reporting. - Requirements and supervisory work: - FFFS 2010:7 requires credit institutions to establish a Board-approved documented risk tolerance, a liquidity strategy and a funding strategy; Chapter 4 contains guidelines, liquidity risk control and independent review and emphasises Board responsibility. - Chapter 3, Section 8 requires stress tests based on the institution’s and its customers’ risk exposure; Section 9 requires the institution to use stress test results to adjust strategies. - FI has regular discussions with the four big banks (quarterly risk reviews and SREP) and conducted sectoral examinations in 2008 and 2009 for various groups. - Reporting and data initiatives: - FI instituted test-reporting from the 45 biggest credit institutions in preparation for new international standards; new monthly reporting requirements will apply from July 2011. The reporting requirements will apply to 45 credit institutions; small banks and local savings banks are not included. - New reporting will include liquidity reserves, intraday reserves, cash flow forecasts, redemption schedules for issued securities, outstanding debt to credit institutions and outstanding covered bonds, and requirements covering LCR and NSFR as agreed in the Basel liquidity framework. - FI requires composition of liquidity reserve and currency breakdown at least in euro, USD and other currencies for test-reporting. - Specific practices and gaps: - Two types of “foreign currency liquidity transformations” identified: (1) issuance of foreign currency covered bonds/interest bearing securities to finance mortgage lending in Swedish kronor (generally fully hedged), (2) lending in Euro to clients in Lithuania and Latvia where borrower FX income mismatch increases lending institution credit risk. - EC6: FFFS 2010:7 requires contingency plans but there is no specific requirement to inform FI of upcoming liquidity problems; FI references FFFS 2005:12 general reporting obligation for events causing significant financial damage or badwill but advises more specific guidance is advisable. - Assessment: Largely Compliant - Comments and policy recommendations: - FI has made liquidity risk a major priority and launched a major survey addressing the 45 most significant institutions in three stages: (1) assess liquidity risk management policies and instructions (all policies received), (2) assess size and composition of liquidity reserve, (3) determine Pillar 3 disclosures on liquidity positions, risk management and strategy. - Recommendation: FI should ensure clarity of institutions’ obligation to inform FI of impending liquidity problems, consider establishing a comprehensive liquidity regime with qualitative and quantitative aspects including a liquidity reporting regime applying to all institutions, and ensure sufficiently granular currency reporting to permit appropriate stress testing. - FI intends to introduce new reporting requirements from July 2011 and adopt EU standards from January 2012; FI must ensure sequential introduction avoids duplication. ### Principle 15 — Operational risk - Regulatory framework: - Requirements on operational risk policies and processes are set out in FI’s Regulations and General guidelines governing CALE (FFFS 2007:1). - Credit institutions using or applying to use the standardized approach or advanced measurement approach for operational risk must fulfill specific requirements in FI’s instructions on these approaches. - As part of license applications, FI reviews descriptions of organization, policies and processes for identifying, assessing, monitoring and controlling/mitigating operational risk as set out in FFFS 2004:9 and FFFS 2005:1. - BFBA (Chapter 6, Sections 2 and 5) imposes obligation on the board of directors to approve strategies, policies and processes for management of operational risk; this is reinforced in FI’s governance and control guidelines (Chapter 4). - Assessment and implications: - FI applies established regulatory requirements and licensing reviews to ensure operational risk frameworks are in place and board-approved; additional requirements apply for institutions using advanced methods for regulatory capital calculation. *Source: _cr11281 - Section 4 stipulates that the managing director shall handle the day-to-day management in* ### Chapter 30 and 60). ### _cr11281 - Chapter 30 and 60) ### Operational risk (Principle 15) - Ongoing assessment approaches: - On-site examinations: seven focused on operational risk in the period 2008–2010. - Annual SREP includes assessment of policies and processes (FI guideline, “Method for Supervisory Review and Evaluation Process (SREP)” March 1, 2008). - Assessment is based on the size, the complexity and the nature of the credit institution’s business. - For the four major groups, there are biannual meetings with the head of operational risk management covering reporting to the board, incidence of major losses (causes, and remedial action taken), changes to policies, organization or reporting, and the bank’s annual risk assessment of exposure to operational risk and changes in the exposure. - FI follows up noteworthy items through on-site examinations focused on high operational risk units (trading unit, IT Department). - IT supervision and standards: - FI uses an internationally accepted supervisory methodology based on CoBit, IIL and ISO 17799. - Onsite inspection, joint with other Nordic supervisors, and enhanced risk analysis for operational risk was limited to the four major banking groups in the 2009/10 period. - FI uses an IT-examination methodology built on CoBit, Information Technology Infrastructure Library (ITIL) & ISO 17799: 2009. - At point of application for a license (FFFS 2004:9), an institution must present processes and policies on information security commensurate with the size and complexity of their operations. - FI plans to issue a specific regulation concerning operational risk in 2011 based on Basel “Sound Practice for the Management and Supervision of Operational Risk.” - Business resumption and contingency: - Requirements set out in the BFBA (2004:297, Chapter 6, Section 4) and FI Regulations on CALE (FFFS 2007:1 Chapter 30 and 60). - FI verifies existence, implementation and testing of business resumption and contingency plans in the course of model approval and through on-site IT-examinations (IT is a subset of broad business contingency). - Failure to provide plans could be seen as grounds for a determination of unsound business, leading to intervention by FI and, in worst case scenario, revocation. - Reporting and legal risk: - Reporting requirements in relation to operational risk are imposed through the CALE Act (Chapter 10, Section 16). - FI’s guidelines regarding reporting of events of material significance (FFFS 2005:12) require credit institutions to report major incidents that could affect operational risk exposure. - FI’s guidelines and instructions stipulate that legal risks are part of operational risks; FI checks that institutions include legal risk in their operational risk definition, that legal/compliance informs operational risk management, and that legal risk loss events are incorporated in the loss database and self-assessments/scenarios. - Outsourcing: - FI assesses outsourcing policies and practices and relies on major banking groups to inform it when they plan to undertake outsourcing. - Regulations require institutions to notify FI in advance when intending to outsource a significant part of licensed operations (FFFS 2005:1, Chapter 7, Section 4). - FI assesses if institutions fulfill requirements in the regulation (FFFS 2005:1, section 1), uses international IT-standards for assessment, and has undertaken close monitoring and on-site completion assessment of outsourcing projects. - Advanced measurement approach (AMA) readiness: - Through on-site processes, bi-annual meetings, and SREP, FI checks that risk management policies and processes address major aspects of operational risk on a group-wide basis required for AMA use. - Relevant regulations: BFBA (2004:297) and FI’s General guidelines regarding governance and control ((FFFS 2005:1). - Assessment: Largely Compliant - Comments: - Operational risk specialists (four in total) are embedded in two line-side supervisory units after restructuring rather than a specialist unit; coordination and consistency must be maintained. - FI needs to issue operational risk guidance (planned for 2011) — delay notable given Basel sound practices available since 2003. - FI should emphasize business continuity and contingency more strongly. - Resources are targeted to the four major institutions. - Operational risk contacts are bi-annual rather than quarterly; seven on-site operational risk examinations occurred in 2008–2010. - By end of 2011 all the systemic firms will have had an onsite examination in this area. - Formal meetings with internal audit for a systemic firm were only annual per the meeting schedule. - FI urged to consider risks in the secondary banking sector and continue pressing smaller firms to reassess capacity and caution in consultant selection. ### Interest rate risk in the banking book (Principle 16) - Regulatory framework and practices: - FI’s guidelines governing management of market risks cover all types of market risks including interest rate risk in trading and banking book; guidelines address risk measurement and valuation (Sections 8 and 9) and evaluation of risk models and use of limits (Section 12). - Interest rate risk is discussed in detail in quarterly risk reviews with the four major institutions; on-site examinations to assess quality and appropriateness of interest rate risk strategy, policies and processes have not taken place within the last five years. - Firms with permission to use internal VaR models for capital calculation for market risks also use VaR-models for internal calculations of interest rate risk in the banking book; FI has checked validation of these models through risk reviews, on-site checks and specific reporting. - For non-VaR approved institutions, investigations have not focused on comprehensive interest rate risk measurement systems except as covered in quarterly meetings or market risk assessments. - Stress testing and reporting: - FI Regulations regarding reporting of interest rate risks in non-trading activities (FFFS 2007:4 Chapter 2) require credit institutions to perform a stress test where an interest rate shock corresponding to a sudden and sustained parallel shift by 200 basis points applies to all positions. - If such shock results in a decline in the firm’s economic value by more than 20percent in relation to its own funds the firm shall submit a statement to FI describing measures required to reduce the potential decline in economic value. - Results of the stress tests are reported quarterly to FI. - To date there has been no reporting of a potential decline in economic value above the 20 percent limit. - All credit institutions reporting a change in value due to interest rate risk higher than 10 percent are required to submit a written description of the business features driving the result. - Stress test results are discussed in detail at quarterly risk reviews with major institutions. - Assessment of supervisory powers and practices: - AC1: FI has power to obtain results of internal interest rate risk measurement systems expressed as threat to economic value using a 200 basis points shock; FI uses a 10 percent change in value as alert threshold for further review. - AC2: Regulation (FFFS 2000:10, Section 8; Section 12) requires VaR models to be evaluated and validated; FI has inspected major institutions’ VaR validation processes; other credit institutions have not been priority. - FI considers regulations weak regarding internal capital measurement systems for interest rate risk in the banking book; remedy recommended to enhance such regulations. - AC3: Regulation (FFFS 2000:10, Section 12) briefly covers stress tests; FI does not explicitly require stress tests to be based on a reasonable worst case scenario including breakdown of critical assumptions, but prescribed 200 basis points parallel shift arguably represents a reasonable worst case given low interest rate levels in Sweden. - AC4: Governance and control regulation (FFFS 2005:1, Chapter 4) addresses independence of risk management and reporting lines but provides no specific guidance on mitigants absent independent risk management where conflict of interest exists. - Assessment: Compliant - Comments: - Formally compliant, but interest rate risk in the non-trading portfolio warrants higher supervisory priority on a risk-assessed basis. - Adequacy of risk control depends on effective integration of interest rate risk control into market rate risk regime and careful handling for institutions lacking market risk capacity. - FI should enhance regulations on internal capital measurement systems for interest rate risk in the banking book. ### Internal control and audit (Principle 17) - Board and CEO responsibilities: - Sweden’s Companies Act (Chapter 8, Section 4): Board responsible for company’s organization, management of its affairs and assessing financial position regularly; CEO attends to day-to-day management pursuant to Board guidelines (Chapter 29). - FI’s General Guidelines Regarding Governance and Control of Financial Undertakings (FFFS 2005:1) addresses: “Governance: The Board’s responsibilities and duties; The Managing Director’s responsibilities and duties” (Chapter 2); “Internal governance and control” (Chapter 3); “Management and Control of Risks” (Chapter 4); “Compliance” (Chapter 5); “Independent Monitoring Function” (Chapter 6). - A CI’s Board consists of not less than three members, majority not employed by the institution, and all must have “sufficient insight and experience to participate in the management of a credit institution” (BFBA Chapter 3, Section 2). - FI’s supervisory approach to internal controls: - FI largely relies on the external auditor’s work to determine existence and adequacy of accounting policies/processes and safeguarding assets/investments, though it is not yet standard to receive the external auditor’s “management letter/internal control memorandum.” - FI targets organization and checks and balances via on-site examinations (9 focused exclusively on internal control during 2008–2010) using purpose-built checklists. - FI determines if organization is well defined and responsibilities covered; in credit risk assessments covers credit granting levels and independence for credit control; similar procedures applied for market risk and operational risk. - Principles of segregation of duties are included in assessments. - Fit and proper requirements: - BFBA (Chapter 3, Section 2) sets requirements that a Board (and CEO) meet fit and proper standards; FI assesses Boards and CEOs against prescriptions in the BFBA. - Assessment: (assessment text continues beyond supplied content) *Source: Chapter 30 and 60) from provided IMF content unit* ### 1. A credit institution’s operations shall be conducted in such a manner that the institution’s ### _cr11281 - 1. A credit institution’s operations shall be conducted in such a manner that the institution’s ### Internal controls, risk management and ICAAP - Principle: "A credit institution’s operations shall be conducted in such a manner that the institution’s ability to perform its obligations is not jeopardized." - Requirement: "A credit institution shall identify, measure, manage, internally report and have control over the risks associated with its operations. In such context the institution shall ensure that it possesses satisfactory internal controls. A credit institution shall specifically ensure that its credit risks, market risks, operational risks and other risks taken together do not entail that the institution’s ability to fulfill its obligations is jeopardized." - Supervisory reliance: FI relies extensively on the quality of the ICAAP to assess a Board’s understanding of the CI’s risk profile; "a deficient ICAAP has often signaled more substantial problems in risk management." - Board/senior management fitness: - If Board members or the CEO lack "sufficient insight and experience to participate in the management of a credit institution" (BFBA Chapter 3, Section 2), FI may order that that person no longer may serve as a Board member or CEO. - FI has no power to require changes in senior management except the CEO and Deputy CEO. - There is no legal/regulatory requirement that a CI inform FI as soon as it becomes aware of material information which may negatively affect the fitness and propriety of a Board member or a member of senior management. - FFFS 2005:12 obliges firms to report to FI when they are aware of an "event which may result in significant financial damage to a large number of customers or events which may result in significant badwill for the undertaking," but this is unlikely to be interpreted as covering Board/senior management fitness issues. ### Internal audit, compliance and independent monitoring function - FFFS 2005:1 (Chapter 6) addresses the internal risk function ("internal audit") and makes the Board responsible to ensure a function is in place which monitors and evaluates internal control (including the risk control and compliance function) and whose work is documented. - The Independent Monitoring Function should possess sufficient resources and personnel who possess, inter alia: - sound knowledge of the CI’s risks; and - particular expertise in auditing and evaluating the development, operation and management of the CI’s information systems. - Regulations require skill, resource and independence but are not explicit on access and communication to all records and data for internal audit, its methodology, preparation of audit plan or authority to assess outsourced functions. - FFFS (2005:1) places the function directly answerable to the Board; major Swedish CIs typically have the function report to an audit committee composed of experienced non-executive directors. - FI supervisory practice: - Regular meetings with internal audit are essential for largest banks and used ad-hoc for smaller banks. - FI judges quality and competence of internal audit by examining its reports and follow-up of recommendations. - All on-site examinations concerning internal control include assessment of internal audit, review of annual audit plan and underlying risk assessments, and review of the audit report to the Board for frequency and content. - Assessment: Largely Compliant. ### Deficiencies and supervisory resourcing concerns - Identified deficiencies: - FI lacks power to require changes in senior management other than CEO and Deputy CEO. - No clear legal/regulatory requirement for immediate CI notification to FI of material information adversely affecting fitness and propriety of Board or senior management (beyond general guidance). - Recommendation: FI should not rely on indirect powers of suasion; it is "not sufficient and is in any case directly inefficient" to pressure CEO/Deputy CEO to effect removal of other senior managers. - Additional recommendation: FI should routinely obtain a copy of the external auditor’s "management letter/internal control memorandum" and review it as part of overall assessment of supervised institutions. - On-site inspection practice and resource notes: - Of 141 on-site examinations performed in the three calendar years ended December 31, 2010, there were 9 focused on Internal Control. - Internal Audit performance is frequently addressed in themed inspections (e.g., credit risk or market risk). - Assessors recommend inspection reports include findings on all areas addressed (including those performing adequately). - Assessors believe resources for on-site supervision are inadequate, particularly for assessment of institutions outside of the four systemic institutions. ### AML/CFT framework, responsibilities and governance - Supervisory responsibility: - FI is responsible for supervision of CIs' compliance with the Money Laundering and Terrorist Financing (Prevention) Act ("AML/CFT Act") (Chapter 6, Sections 1 and 2). Criminal proceedings rest with the Swedish Economic Crime Authority, the Swedish Prosecution Authority and the Police. - Implementation and regulation: - The AML/CFT Act (adopted March 15, 2009) implements EU Directive 2005/60/EC and Commission Directive 2006/70/EC. - FI issued Regulations and Guidelines (FFFS 2009:1) on May 15, 2009. - AML/CFT requirements include: internal governance and control; management and control of risks; customer identification procedures and customer due diligence (CDD) requirements; risk management; monitoring and reporting of suspicious transactions; record keeping; staff training; protection against threats towards staff. - MLRO and CDD: - CIs must designate a Money Laundering Reporting Officer (MLRO) and establish risk based internal procedures and policies (AML/CFT Act Chapter 5, Section 1; FFFS 2009:1 Chapters 2, 3, 5, 6). - The Board or CEO must appoint a MLRO responsible to provide information and monitor transactions and report to the Board or CEO (AML/CFT Act Chapter 3, Section 1; FFFS 2009:1 Chapter 5 and Chapter 6, Section1). - CIs shall monitor transactions and report suspicious transactions to the Police, the Financial Intelligence Unit (AML/CFT Act Chapter 3, Section 1). - At the Police’s request, all information needed in an investigation must be provided promptly. - Risk assessments and CDD specifics: - Each CI must make a risk assessment analyzing customers, products, services, distribution channels and geographical areas (FFFS 2009:1 Chapter 2, Section 3). - Prohibitions and obligations: anonymous accounts prohibited (AML/CFT Act Chapter 2, Section 14); prohibition of business with shell banks (AML/CFT Act Chapter 5, Section 3). - CDD requires "normal," "simplified" and "enhanced" procedures; identification of beneficial ownership for both natural and legal persons (AML/CFT Act Chapter 2, Section 3 para 2; FFFS 2009:1 Chapter 4, Section 9 para 10f). - For legal persons: verify direct and indirect natural owners if holding exceeds 25 percent and any natural persons exercising determining influence (FFFS 2009:1 Chapter 4, Section 9, para 2). - Monitoring systems: maintain procedures so CI "fully discharges its monitoring obligations" and pay special attention to transactions involving special risk (FFFS 2009:1 Chapter 3, Section 2, para 4; AML/CFT Act Chapter 3, Section 1; FFFS 2009:1 Chapter 5, Section 1). - Escalation and enhanced measures required for high-risk accounts such as PEPs (AML/CFT Act Chapter 2, Sections 6–7; FFFS 2009:1 Chapter 3, Section 1). - Records retention: at least 5 years after the transaction, or for business relationships, five years after termination of the relationship (AML/CFT Act Chapter 2, Section 13). - Cross-border risk: Unless circumstances dictate otherwise, a high risk of money laundering or terrorist financing is deemed to prevail for relationships between a CI and one located outside the EEA (AML/CFT Act Chapter 2, Section 6). Enhanced measures must include: - obtaining sufficient information about the other party to understand its activities and assess reputation and quality of supervision; - assessing the other party's controls to prevent money laundering and terrorist financing; - documenting respective responsibilities and measures taken. - Sanctions and enforcement: - FI may do off- or on-site inspections and has power to compel production of—and obtain access to—all records, documents or information (BFBA Chapter 13, Section 3). - Range of sanctions includes fines, the power to remove a Board member or the CEO and, in extreme cases, removal of a CI’s license (BFBA Chapter 15). - FI has "adequate powers of enforcement and sanction for failure to comply with or properly implement AML /CFT requirements" (BFBA Chapter 15). ### AML/CFT supervisory activity and results (selected inspections and sanctions) - 2006: - On-site inspections of 13 credit market undertakings. One credit market company was fined SEK 500 000 for non-compliance with the AML/CFT Act. - 2007: - (i) On-site inspections of six smaller banks. Several had to make corrections to internal procedures for AML/CFT (no sanctions were applied). - (ii) Off-site inspections of ten banks. A public report was published (no sanctions were applied). - (iii) On-site inspection of one smaller bank. The bank was sanctioned with a warning and a fine of SEK 1,000,000 (US$163, 000) for non-compliance with the AML/CFT regime. - 2008: - (i) On-site inspection of one smaller bank. The bank received a warning and a fine of SEK 50,000,000 (US$8,150,000) for major non-compliance with the AML/CFT regime. - (ii) On-site inspection of one large investment-style bank. The bank received a warning and a fine of SEK 50 million (US$8,150,000) for major non-compliance with banking and investment regulations as well as AML/CFT deficiencies. - 2010: - (i) On-site inspections of one credit market undertaking. - (ii) Off-site inspections of 68 foreign bank branches. - (iii) On-site inspections of the four major banks. - (iv) On-site inspection of two banks (one sanction follow-up). ### Assessment against Core Principles and specific gaps - Relation to CP17 and CP18: - Five of the eight Essential Criteria (ECs 2, 5, 6, 7, and 8) for the relevant Core Principle use wording "The supervisor determines that..." to assess effective internal controls, balance of front/back office, effective compliance function, and internal audit function. - FI’s Self Assessment describes on-site examinations as integral to supervisory processes; of 141 on-site examinations in the three calendar years ended December 31, 2010, 9 focused on Internal Control. - Inspectors note internal audit is frequently covered in themed inspections but recommend that inspection reports include findings on all areas addressed. - Specific points under EC8: - (a) Internal audit reports would target AML/CFT risk management policies, processes and controls and such reports would be available to FI (BFBA Chapter 13, Section 3). - (b) CIs are expected to have an independent compliance function or explain alternative arrangements (FFFS 2005:1 Chapter 5); MLRO appointment is mandatory. - (c) Neither laws nor regulations impose formal obligations on CIs regarding screening procedures to ensure high ethical and professional standards when hiring employees. - (d) CIs must have effective internal information and communication systems and employee-training program regarding AML/CFT matters (FFFS 2009:1 Chapter 7). ### Key recommendations (explicit) - FI should have explicit powers to require changes in senior management beyond CEO and Deputy CEO to avoid reliance on indirect powers of suasion. - Establish a clear legal/regulatory requirement for CIs to inform FI promptly of material information affecting fitness and propriety of Board members and senior management. - FI should routinely obtain and review external auditor’s "management letter/internal control memorandum" as part of supervisory assessments. - Inspection reports should include findings on all areas addressed (including areas performing adequately) rather than only those where issues are raised. - Address resource shortfalls for on-site supervision, particularly for institutions outside of the four systemic institutions. *Source: _cr11281 - 1. A credit institution’s operations shall be conducted in such a manner that the institution’s (PDF).* ### Section 1). The training must give all employees dealing with relevant areas of concern a sound ### _cr11281 - Section 1). The training must give all employees dealing with relevant areas of concern a sound ### AML/CFT training, internal rules and monitoring - Training must give all employees dealing with relevant areas of concern a sound AML/CFT education and be adapted to the specifics of operations. - Employees must be kept informed of changes and developments in AML/CFT regulations and on new methods for money laundering and financing of terrorism. - Through licensing and off/on-site inspections, FI determines that a CI’s Board or CEO has established internal rules for measures against money laundering and terrorist financing (FFFS 2009:1 Chapter 3, Sections 1 and 2). - CIs must maintain a system or procedure for monitoring obligations (AML/CFT Chapter 3, Section 1 and FFFS 2009:1 Chapter 5, Section 1). - CIs must have efficient communication systems or procedures for transmission of internal information so that relevant knowledge obtained from monitoring and reporting of suspect transactions is reported continuously to the relevant business areas (FFFS 2009:1 Chapter 8, Section 2). ### FI inspections and frequency - On-site inspections are at a low frequency, although plans for off-site reviews are increasing. - Number of on-site inspections by FI (including banks, investment banks and credit market companies): - 6 on-site inspections in 2007 - 2 in 2008 - 3 in 2009 - 7 in 2010 - No on-site inspections were planned for 2011 in the banking field at the time of the assessors visit. ### Legal protections and notification obligations - A natural or legal person providing information per AML/CFT Act reporting requirements may not be held liable for having neglected professional secrecy if the person had cause to anticipate that the information ought to be provided (AML/CFT Act Chapter 3, Section 5). This protection also applies to a director or employee providing information on behalf of the natural or legal person. - If FI discovers circumstances that may be related to or constitute money laundering or terrorist financing it must immediately notify the National Police Board (AML/CFT Act Chapter 3, Section 6). - FI has regular information exchange with other national authorities: FIU, National Economic Crime Bureau, Tax Authority, Security Police and others. These national authorities maintain international cooperation within their responsibilities. - A special coordinating body for supervision relating to the AML/CFT Act comprises representatives from FI, the Swedish Board of Supervision of Estate Agents, the National Gaming Board, the Supervisory Board of Public Accountants, the Swedish Bar Association and three county administrative boards (Ordinance on Measures against Money Laundering and Terrorist Financing Sections 13–15). - FI shall provide any and all information that a competent authority in an EEA state requires for its supervision (BFBA Chapter 13, Sections 6a and 8). - Public Access to Information and Secrecy Act (Chapter 8, Section 3) governs information sharing with competent authorities inside and outside the EEA: - For states inside the EEA, FI is obliged to share information. - For states outside the EEA, Sweden must assess (i) whether the information in a corresponding case would be disclosed to a Swedish authority and (ii) whether it is clear that a disclosure, according to FI’s review, to the foreign authority or international organisation is in Sweden’s interest. ### Assessment: AML/CFT framework - Assessment: Largely Compliant - Comments and identified gaps: - Laws and regulations require CIs to have adequate policies and processes (including strict “know-your-customer” rules) to promote high ethical and professional standards and prevent misuse for criminal activities. - No formal obligation exists requiring CIs to implement screening procedures to ensure high ethical and professional standards when hiring staff. - FI uses seminars (alone or with the FIU) and FI’s AML/CFT Markets unit periodically confirms CIs have adequate policies and processes proportionate to their scale of operations. - CIs are not required to report to FI suspicious activities and incidents of fraud whenever material to the CI’s safety, soundness or reputation; FFFS 2005:12 (Section 8) directs CIs that “upon suspicion of any crime, the undertaking should file a report with the police authority or prosecutor.” - FI notes it is unusual to receive notifications and has yet to investigate the cause of this low incidence. - Recommended: FI should require institutions to differentiate their approach on the basis of dedicated risk assessments that go beyond a geographic criterion, avoiding automatic equivalence for all relationships within the EEA (EC5). ### Principle 19 — Supervisory approach (overview) - Principle objective: supervisors must develop and maintain a thorough understanding of individual banks, banking groups, and the banking system focusing on safety, soundness, and stability. - FI has adopted a risk based approach to supervision with two stages: - Stage 1: Differentiate firms to identify those subject to closer, more intensive “ongoing supervision.” - Stage 2: Other firms receive limited supervisory contact focusing on the annual Pillar 2 process (ICAAP submission and SREP) and monitoring of returns. - The major four banking groups and some smaller institutions are subject to ongoing supervision. Ongoing supervision includes a more intensive SREP, quarterly risk review, and regular contact with internal audit. ### Risk Assessment Process (RAP), SREP and CEU role - FI carries out a RAP to generate a risk profile for each supervision department and a combined risk profile for FI; RAP prioritizes risks and informs planned supervisory activities and resource allocation. - The RAP is used as a prioritization tool, not as an estimate of impact should risks materialize. - Risk profiles are divided into risks relating to consumers, financial stability, and confidence/efficiency. - Risk assessment meetings occur twice a year: once in September prior to the Risk Report and again in April. - The Chief Economist Unit (CEU) summarizes the complete risk picture and proposes prioritization for FI, discussed by the management group headed by the Director General. - The most important risks are publicly disclosed in the “risk matrix” published in the Risk Report. - EC1: Risk profiles for all supervised firms are monitored; supervisory approach is tailored depending on institution risk profile; methodology predominantly based on the SREP. - FI publishes its internal SREP method and provides guidance for ICAAP preparation. - FI has enhanced focus on capital adequacy and capital planning using stress testing; increased focus on liquidity risks and interaction between liquidity and capital. - Cross-border banking groups: joint assessment via supervisory colleges chaired by FI for the four major Swedish banks; college activity includes information exchange, national ICAAPs, meetings and bank meetings. - CEBS (forerunner of EBA) reviewed functioning of EU colleges in 2010; colleges chaired by FI were assessed as fully compliant with essential standards. - FI participated in a 2010 pilot for bottom-up joint risk assessment and adopted CEBS guidelines for joint risk assessment. ### CEU responsibilities and resources - CEU main responsibility: monitor and analyze overall risks to the financial system and macroprudential risks. - CEU has been expanded and currently comprises ten analysts. - CEU participates in bi-annual risk assessment meetings with the three FI departments (Bank, Insurance and Markets) and authors the macroeconomic chapter in the annual Risk Report. - FI has hired three professors part-time as academic advisors; each Risk Report includes a panel of 4–6 internationally distinguished professors giving views on macroeconomic risks and regulatory developments. - CEU participates in BCBS main committee, the Advisory and Technical Committee under the European Systemic Risk Board, and the Nordic Baltic Stability Group. - CEU normally participates in “4-part” stability meetings with other authorities and exchanges views continuously with the RB. ### EC3–EC6: RAP, offsite review, reporting and data - EC3: The RAP replaces an older firm/product risk classification; it is a continuous bottom-up process by supervisory departments assessing probability and potential impact on stability and consumer protection. RAP is an input to individual risk profiles and the SREP; methodology for underlying risk analysis is not documented but carried out by skilled staff. - EC4: FI conducts offsite review of regulatory returns, ad hoc data requests (e.g., sovereign exposures, liquidity positions), board minutes, risk management policies and processes; on-site examinations where performed include interviews with management and staff in risk management, review of reporting lines, policies, internal reporting, size/composition/quality of exposures, and meetings with internal audit. - Inputs to annual assessment include ICAAP and institutions’ annual reports which must disclose: - strategies and processes for risk management, - how the risk management function is organized and structured, - the scope and nature of risk reporting and measurement systems, - guidelines for hedging and mitigating risk and strategies/procedures to monitor effectiveness of hedges and mitigants. - EC5: General Guidelines regarding Reporting Events of Material Significance (2005:12) expect credit institutions to report events that may jeopardize stability or protection of customers’ assets (“events which may result in significant financial damage to a large number of customers or events which may result in significant badwill for the undertaking”). This guideline does not impose an obligation to report a material change that does not have an expected adverse impact or outcome; criterion not fully met. FI has the mandate to issue binding regulation but has not yet done so. - For major firms, ongoing supervision includes frequent contact (example: 30 supervisory contacts took place in 2010 for one of the systemic firms). - There are no obligations on firms to notify FI of substantive changes in their activities, structure or overall condition. - EC6: Data submitted to FI comprises standard prudential information and ad hoc reporting. For the systemic sector, FI relies on individual bank management information, ad hoc reporting and non-standard reports agreed with banks; major institutions submit risk-focused information for quarterly risk meetings including stressed assumptions. - FI is developing IRB reporting models internally though some technical difficulties exist. - FI is assessing data needs and internal data manipulation for smaller financial institutions to generate key indicators; new trial reports aim to monitor trends, identify outliers, enable peer group analysis and interrogate smaller firms’ business models; material is intended to signal need for further investigation rather than comprehensive company analysis. - Thematic reviews and focused investigations (e.g., trading book evaluation and liquidity risk) are part of FI’s follow up activity. ### AC1: Proactive supervision and forward-looking indicators - FI management priority: deliver proactive supervision. - CEU with banking department analysts undertakes continuous analysis and stress testing of credit institutions. - RAP and supervisory process intended to deliver early identification of risks and ensure proactive supervision. - Indicators used include household indebtedness, credit growth, and sector exposures to assess long-term risks for individual banks and the system. - New templates for liquidity reports from credit institutions are being finalized and are considered important for forward-looking risk assessment. ### Assessment: Supervisory approach — Largely Compliant - Comments and key challenges: - FI’s supervision has a risk sensitive foundation focusing majority of effort on major systemic banking groups; priority is to be forward looking and proactive. - Secondary tier represents nearly one third (30 percent) of the banking sector in terms of domestic loans to the public; tail risk exists where problems in smaller institutions could cause loss of market confidence or reputational risk for FI. - Three main areas of concern: resources, coverage and intensity of supervisory approach, and analytical techniques. - Resources: - Banking division staff positions: (70 positions) - Consolidated assets of the four major groups alone represent nearly four times GDP. - FI has limited capacity to create individual teams for each major bank; line staff are supplemented by specialist risk units. - FI turnover rate: 15 percent. - FI has lost the majority if not all staff who implemented the Basel II (CRD) regulatory package. - FI estimates active supervision constitutes 45 to 65 percent of staff activity. - Coverage and intensity: - Limited resources restrict FI’s ability to spend time on-site, impairing proactive supervision and the ability to penetrate “below the skin” of significant institutions. - Supervisory planning focuses on negative indicators; more time on site would enable preventative rather than remedial supervision. - In several cases weaknesses were identified because the institution or a third party alerted the supervisor. - FI’s ability to maintain pressure in follow up supervisory activity has on occasion been delayed by competing priorities. - In 2010 FI was unable to complete its annual supervisory process (SREP) for all institutions; 15 percent of SREPs were not completed (those were very low risk institutions), indicating pressure on resources. - Analytical techniques: - FI lacks a formalized analytical risk framework to assess institution risk profiles (e.g., a “RATE” process). - FI relies on Basel “Pillar 2” framework: firm submits ICAAP and supervisor performs SREP; this is the core approach for both systemic and secondary institutions. *Source: _cr11281 - Section 1). The training must give all employees dealing with relevant areas of concern a sound* ### conclusions of which are fed back to the firm. FI differentiates the scale and intensity of its ### _cr11281 - conclusions of which are fed back to the firm. FI differentiates the scale and intensity of its ### SREP scope, purpose, and practice - SREP is a supervisory technique designed to assess capital adequacy; it was designed to assess whether a firm has adequate capital to its risk profile. FI’s own guidance on how to perform a SREP adopts a capital adequacy focus. - The SREP process can be used to examine a wider range of risks and factors (environmental—economic and competitive environments; business model risks and controls; oversight and governance risks), many of which are relevant to assessing capital adequacy (for example risk management), but the SREP or the EU joint assessment process will not automatically create a platform for effective review of the wider risks a supervisor needs to assess. - Assessors found FI’s actual approach is broader than a “pure” SREP given the inputs it receives and outputs it produces; SREP is not limited to a narrow capital perspective for larger or smaller firms. - For systemic firms there is a wider supporting framework of regular “on-going supervision” for the SREP. - Time spent conducting a SREP for a large bank is approximately 3–4 months. - For smaller credit institutions SREP is performed either as: - light off-site investigation based upon reported figures, official annual reports and reported ICAAP, or - full-scale investigation based on the ICAAP, reported figures, official annual reports, meetings with institution and onsite visit. - The total number of smaller institutions that will perform an ICAAP, based on which FI will perform a SREP, is approximately 300. In 2010 FI performed 85 percent of the SREP reviews. - Assessors recommend that FI formalize and document analytical risk assessment practices (not limited to specialist areas such as model approval) to ensure consistency between institutions and over time, build a baseline for improvement, and protect against loss of skilled staff. - A supplementary framework to the SREP is needed; formalization can “wrap around” existing SREP use and associated standards. ### Supervisory techniques and ongoing supervision (Principle 20) — practice, findings, and concerns - FI’s definition of “ongoing supervision” is performed on the four large banks and on some smaller institutions depending on risk-based prioritization. The greatest intensity of supervision including on-site supervision is focused on the four major banking groups. - Main supervisory activities generating on-site activity: 1. ongoing supervision, 2. SREP, 3. thematic investigations, 4. ad hoc inspections. - Ongoing supervision for risk-priority firms contains the highest levels of systematic on-site contact; for non-priority firms most activity is off-site, with an annual meeting typical for low risk firms. - For major/high-risk firms off-site analysis is complemented with: - meeting with risk control for a quarterly risk review (credit, market, interest rate, liquidity and operational risks); - IRB model approval, assessment of roll-out, ongoing assessment (depending on stage of development); for cross border firms IRB approvals are handled jointly and non-domestic subsidiaries and branches will be visited; - meeting with internal audit to discuss findings; - meeting with compliance to discuss findings. - Thematic investigations include reviews driven by CEBS, valuation practices in the trading book, and planned reviews of liquidity risk. - Ad hoc investigations range from quick off-site investigations to full on/off-site investigations; on-site time rarely exceeds 3–4 days. - The RAP, performed three times a year, is the basis for planning supervisory activities; there is a clearly articulated process from planning through final evaluation, including documented sanction/remedial processes if sanctions are required. - On-site and off-site inspections often performed by the same FI experts; planning and coordination are integrated. - FI does not normally rely on external experts for on-site inspections despite having the power to commission reports. - On-site inspections are used to: - investigate areas of concern identified in the RAP; - get a better understanding of the credit institution’s business and governance; - follow up on FI’s earlier sanctions or banks’ own action plans; - focus on areas where risks are high and/or risk management is insufficient. - Contact with Boards and senior management: - For systemic institutions the Director General of FI will meet at least annually with the Board. - Senior management of FI maintains relationships with major institutions at the most senior levels but this does not form an integrated part of the supervisory process. - For firms within “ongoing supervision” there is regular contact in addition to the annual SREP (e.g., 30 supervisory meeting contacts with one of the systemic firms were recorded in 2010). - FI has begun a new routine for more systematic meetings between credit institution Boards and FI senior management. - FI has legal power to replace board members, CEO and deputy CEO when they are no longer fit and proper. - Meetings with internal audit are routine for institutions subject to “ongoing supervision.” - Assessment result for Principle 20: Materially Non Compliant. - Key concerns and commentary: - Assessors identified weaknesses in seven core principles (risk management, credit risk, problem assets, market risk, liquidity risk, operational risk and internal audit) because FI cannot satisfy itself that firms comply with minimum standards; inadequate on-site supervision and inspection in these areas. - FI’s on-site capacity is limited given staff numbers; larger supervisory agencies have likewise acknowledged gaps in specialized expertise. - FI needs to ensure proper supervisory coverage either by increasing staffing budgets or using external experts; costs will accrue directly or indirectly to supervised institutions. - FI has increased on-site supervision substantially in the past two years but assessors question whether the on-site work is sufficient to match the scale and complexity of major systemically significant firms (systemic to Sweden, Nordic region, and in one case potentially globally systemic). - FI’s ability to provide consistent coverage of the secondary banking sector (all but the four largest institutions) is in doubt. - Suggested “resource effective” approaches for smaller institutions include wider use of external experts, enhanced reporting requirements, self-assessments by the industry, and higher financial buffers. - Assessors welcome the statement by the Ministers of Finance (letter of May 18, 2011) that the government will propose in the Budget Bill of 2012 a substantial increase of resource for FI over a period of three years. - FI should increase contact with non-executive Board members and consider enhancing contact with external auditors to obtain independent perspectives and to probe business direction and risks. ### Supervisory reporting (Principle 21) — frameworks, reporting items, validation, and assessment - Legal and regulatory basis: - BFBA, BO, and CALE Ordinance authorize FI to require CIs to submit information on both solo and consolidated basis. - FI’s regulations require CIs to submit information on performance, financial condition, capital adequacy, risks, etc., normally quarterly. - Information collected through regular reports includes: - FFFS 2008:14 - balance sheet, income statement, equity capital with detailed breakdowns (Standard Report) - FFFS 2008:13 - CALE - FFFS 2007:4 - interest rate risk exposure in non-trading activities - FFFS 2007:3 - liquidity risk (for CIs with assets above SEK 5 billion) - FFFS 2004:17 - significant ownership - Reports are, with few exceptions, submitted quarterly on both solo and consolidated (group) basis. - Market risk reporting: - Only interest rate risk is captured through quarterly regulatory reporting. - Other market risks (equity, currencies, commodities) are evaluated in the annual SREP, inputs coming from CIs’ ICAAPs and annual reports. - For firms subject to “ongoing supervision” there are quarterly market risk reviews and special reporting for VaR models that FI has approved. - There is no reporting of related party transactions except for a category “Group receivables” in the Standard Report. - No FI-mandated granular reporting of CIs’ asset concentrations by geography or currency, though four systemic institutions often include this in annual reports and SREP inputs. - Reporting governance and quality control: - Under FFFS 2008:14 standard prudential report shall correspond to a CI’s annual and interim statements. - CIs’ annual and interim financial statements and consolidated financial statements must comply with the Annual Accounts Act for Credit Institutions and Securities Companies (1995:1559). - FI has regulatory power under the Annual Accounts Ordinance for Credit Institutions and Securities Companies (1995:1600) (Sections 4-8) to issue binding accounting regulations; FI has used this power. - RAP performed three times a year feeds into planning; regular and ad hoc analytical reports include: - fast track report: quarterly check of compliance with prudential regulations (e.g., capital requirements); - review memorandum: more extensive report on current status and changes within credit institutions; - quarterly analysis of banks’ exposures towards risks (credit, market, liquidity and operational risk). - Ad hoc analysis has included exposures to vulnerable European countries and impact of Basel 3. - Reporting responsibilities and enforcement: - CIs required to identify person responsible at operational level for reporting; ultimate responsibility rests with CI’s Board. - FI can impose fines for late reporting; fines levied: 2009: 14 fines; 2010: 2 fines. Maximum fines (SEK 100,000) are rarely levied. - CIs are responsible for accuracy of submitted information. - FI has a documented 8-step routine for quality control implemented the day immediately following report “due date.” - FI makes an average of one hundred calls post “due-date” to query anomalies in reporting. - FI does not have power to levy fines for misreporting; sanctions available for serious infractions. - FI performs selective validations against external public company information. - FI can validate accuracy during on-site inspections and can contract external experts to verify routines guaranteeing correct reporting (FFFS 2004:10 Section.2). - Despite systematic routines FI very rarely validates accuracy of reported information on-site or engages external experts to do so (a reflection of resource constraints). - Auditing and external experts: - BFBA (Chapter 13, Section. 9) provides FI entitlement to appoint one or more auditors to participate in a CI audit “together with the other auditors.” FFFS 2004:10 Section 2 notes FI may issue instructions relating to auditing. - FI concluded in Board discussion that appointing auditors to conduct supervisory tasks is not the most effective tool due to substantial direct and administrative costs; such appointments are very rare. - Where external experts are engaged and are not auditors, assignments are defined through a written agreement; FI funds the work and monitors performance; external experts must report material violations to FI. - Assessment result for Principle 21: Largely Compliant. - Key recommendations and considerations: - FI faces challenges: average of 100 enquiries each quarter is wasteful and indicative of reporting deficiencies by CIs. - FI may wish to consider: - requiring certification of filings by a CI’s CEO or CFO, and - obtaining statutory power to enable levying of significant fines for misreporting. - FI is considering requiring external auditors to opine on accuracy of filings, with fee borne by the CI. - FI has established a working group to investigate fines for misreporting; fines for late reporting have been an effective tool. - FI is reflecting positively on potential to task external auditors with ensuring and auditing reporting quality and is in ongoing dialogue with auditing firms regarding expectations. - The standard report would benefit from adding a breakdown of exposures to related parties in “C. Specifications: Balance Sheet.” - The granularity and frequency of reporting should be improved; supervisory reporting regimes in the EU will be harmonized by January 2013, which should remedy existing deficiencies. ### Accounting and disclosure (Principle 22) — frameworks, audit, and disclosures - Legal duties and accounting standards: - Companies Act (Chapter 8, Section 4) duties for Board and CEO to ensure reliable financial record-keeping. - CIs should have at least one auditor elected by shareholders (Chapter 9). - FI’s regulations and general guideline concerning annual reports (FFFS 2008:25) stipulate application of international accounting standards approved by the EU unless law requires otherwise. - Under FFFS 2008:25, CIs shall in consolidated financial statements apply IFRS approved by the EU. - IASB Framework (September 2010) concepts: Relevance; Faithful Representation; Comparability; Verifiability; Timeliness; Understandability. - Conflicts and special rules: - A few valuation requirements in the Annual Accounts Act for Credit Institutions and Securities Companies (1995:1559) conflict with IFRS (example: (1995:1559) requires goodwill to be amortized while IFRS tests goodwill for impairment). - In rare cases where (1995:1559) conflicts with IFRS specific formats (income statement, statement of financial position) are applied instead of IFRS. - Audit standards and FI powers: - FAR SRS standards and Revisionsstandard i Sverige (RS) provide generally accepted auditing standards relevant to auditing material items (e.g., RS 320, RS 200, RS 540, RS 545, RS 500, RS 501). - BFBA (Chapter 13, Section 9) provides FI entitlement to appoint auditors to participate in CI audits; FI may issue instructions to appointed auditors (FFFS 2004:10). - FI does not have legal power to reject and rescind appointment of an external auditor (Supervisory Board of Public Accountants has this power); when FI is not satisfied, dialogue with CI Board has so far led to appointment of another auditor. - Disclosure timeliness and requirements: - Annual financial statements and audit report must be submitted to registration authority within one month after balance sheet and income statement are determined; annual financial statement, audit report and consolidated financial statement become public. - Interim financial statement required at least once during a financial year and to be delivered within two months after end of reporting period to registration authority. - Listed companies prepare interim financial statements every quarter; disclosure no later than two months after period end. - Interim group statements based on IFRS (IAS 34); interim parent company statements based on Annual Accounts Act for Credit Institutions and Securities Companies (1995:1559). - Assessment and commentary: - FI requires annual audited financial statements and consolidated financial statements based on IFRS; auditing standards RS are based on ISA. - FI’s powers to issue binding accounting regulations (Sections 4–8 in Annual Accounts Ordinance for Credit Institutions and Securities Companies (1995:1600)) have been exercised via FFFS 2008:25. - FI requires audited statements that reflect true financial condition; valuation rules in IFRS are consistent, realistic and prudent and show profits net of appropriate provisions. - Where national law (1995:1559) conflicts with IFRS, national law is applied in the rare cases specified. ### Key statistics and exact figures (as presented in source) - SREP time for a large bank: approximately 3–4 months. - Total number of smaller institutions that will perform an ICAAP: approximately 300. - In 2010 FI performed 85 percent of the SREP reviews. - RAP frequency: performed three times a year. - Example supervisory contact: 30 supervisory meeting contacts with one of the systemic firms recorded in 2010. - On-site ad hoc investigations on-site time rarely exceed 3–4 days. - Regulatory reporting examples and thresholds: - FFFS 2007:3 - liquidity risk (for CIs with assets above SEK 5 billion). - Fines levied for late reporting: 2009: 14 fines; 2010: 2 fines. - Maximum fines stated: SEK 100,000. - FI makes an average of one hundred calls post “due-date” to query anomalies in reporting. - Government commitment: Ministers of Finance letter of May 18, 2011; government will propose in the Budget Bill of 2012 a substantial increase of resource for FI over a period of three years. - IASB Framework referenced: September 2010. ### Actionable recommendations (drawn from source findings) - Formalize and document FI’s analytical risk assessment practices (including model approval techniques) to ensure consistency between institutions and over time and to protect against staff loss. - Enhance intensity and intrusiveness of supervisory contact so that firm-provided information and presentations are rigorously challenged; require firms to rectify identified deficiencies according to specified and tight timetables. - Increase staffing for FI or make systematic use of external experts to ensure proper supervisory coverage for both systemic and secondary banking sectors. - For smaller institutions adopt “resource effective” approaches: greater data analysis, peer group assessment, use of external auditors/experts, enhanced reporting requirements, industry self-assessments, and higher financial buffers. - Consider requiring certification of supervisory filings by a CI’s CEO or CFO. - Obtain statutory power to levy significant fines for misreporting and finalize the working group’s proposals on fines for misreporting. - Consider requiring external auditors to opine on the accuracy of supervisory filings (with fees for the account of the CI). - Improve the standard report by adding a breakdown of exposures to related parties in “C. Specifications: Balance Sheet.” - Increase granularity and frequency of supervisory reporting, consistent with upcoming EU harmonization by January 2013. - Increase systematic contact with non-executive Board members and external auditors to enhance independent perspectives on management effectiveness, business models, strategies, and governance. *Source: _cr11281 - conclusions of which are fed back to the firm. FI differentiates the scale and intensity of its* ### Section 2) (FFFS 2008:25 Chapter 8). Listed legal entities not included in a group shall in their ### _cr11281 - Section 2) (FFFS 2008:25 Chapter 8). Listed legal entities not included in a group shall in their ### Interim financial statements — application of IAS 34 and legal alignment - Listed legal entities not included in a group shall in their interim financial statements apply IAS 34 as far as those requirements do not conflict with the law (the Annual Accounts Act for Credit Institutions and Securities Companies (1995:1559)), other regulations or FI’s regulations and general guidelines in FFFS 2008:25. - According to IFRS: - interim financial reports shall adequately reflect the credit institution’s true financial condition (IAS 34 p 28, IAS 1 p 15). - IFRS requirements promote comparability (IAS 34 p 20, 28 and 43), relevance (IAS 34 p 28, IAS 1 p.17 b) and reliability of the information disclosed (IAS 34, p 28, IAS 1, p.17, b). - According to the Annual Accounts Act for Credit Institutions and Securities Companies (1995:1559) and Annual Accounts Act (1995:1554): - the interim financial report shall adequately reflect the credit institution’s true financial condition (1995:1559) (Chapter 9). - the requirements promote comparability (the Annual Accounts Act (1995:1554), Chapter 9, Sections 3 and 4), relevance (the 1995:1559 Act, Chapter 9, Section 3, and Chapter 2, Sections 2 and 3), and reliability of the information disclosed (the Annual Accounts Act (1995:1554) Chapter 9, Section 3, and Chapter 2, Section 4). ### Pillar 3 disclosures — frequency and timeliness - Periodic information regarding own funds and capital requirement for banks and other CIs is to be disclosed at least four times a year (regulations and general guidelines regarding public disclosure of information concerning capital adequacy and risk management (FFFS 2007:5) Chapter 2, Section 2). - The information is to be disclosed as soon as possible, at the latest two months after the balance sheet date. ### Annual financial statement and consolidated financial statement — scope of required disclosures - CIs must in their annual audited financial statements and the consolidated financial statements disclose the information required under IFRS (FI’s regulations and general guidelines regarding annual reports at credit institutions and investment firms (FFFS 2008:25)). - Additional disclosures are required under the Annual Accounts Act for Credit Institutions and Securities Companies (1995:1559). - The required disclosure under IFRS and (1995:1559) include both qualitative and quantitative information on a CI’s: - financial performance (IAS 1.10 b and e, 1.13, 1.112–138, Annual Accounting Act (1995:1554)); - financial positions (IAS 1.10 a and e, 1.13, 1.112–138); - risk management strategies and practices (IFRS 7.31–42, Annual Accounting Act (1995:1554), Chapter 6, Section 1, Paragraph 3); - risk exposures (IFRS 7.33–42, Annual Accounting Act (1995:1554) Chapter 6, Section 1, Paragraph 3); - transactions with related parties (IAS 24); - accounting policies (IAS 1. 117–124 and IAS 8); and - basic business (IAS 1.138 b, IFRS 8). ### Management, governance and scope across CIs - Disclosures of management and governance are only required for banks and credit market undertakings whose shares, warrants or debt securities trade on a regulated market in Sweden (The Annual Accounts Act for Credit Institutions and Securities Companies (1995:1559), Chapter 6, Section 1 which refers to the Annual Accounts Act, Chapter 6, Section 1a, 2a, and 6–9). - In practice the disclosure regarding management and governance are applicable for about 95 percent of the CI market. - For the disclosure requirements mentioned above, except for management and governance, the scope and content provided and the level of disaggregation and detail are the same for all CIs regardless of the size and complexity of operations. - Disclosures about capital adequacy and risk management are also required according to FI’s Regulations and General guidelines regarding public disclosure of information concerning capital adequacy and risk management (FFFS 2007:5). ### FI supervision, publications and statistical reporting - FI performs ad hoc supervision of CIs’ annual financial statements. If information required by the disclosure standards is missing or not in compliance with the disclosure standards, FI requires the credit institution to correct the error in accordance with IAS 8. - FI has since Q4 2005 quarterly published quarterly statistics on credit institutions (Kreditmarknadsbarometern). The data cover all banks and credit market companies and divide companies into subgroups: “major banks,” “other banks,” “savings banks,” “mortgage institutions,” “smaller credit market companies,” and “securities companies.” - Main areas covered in FI’s quarterly statistics: earnings, lending, credit quality, deposits and capital ratios. - The major four banks’ lending portfolio is broken down both by sector and geography. Credit losses for the major banks are also presented by geographical area. - FI also publishes an annual Risk Report that: - highlights the major risks for the banks in the coming year; - describes the current situation and the outlook for banks’ operations; - publishes stress tests individually for the four major banks, based on publically available data. - RBen publishes a financial stability report twice a year with a focus on the four major banks (group level). The majority of the data used is publically available and the banks are assessed individually. - In 2006 RBen first published a method for stress testing the four major banks, using publically available data and model. ### Auditor interaction and reporting obligations - AC1: As needed, FI meets with a CI’s auditor to discuss a particular issue or to get the auditor’s general picture of the firm. Historically, FI frequently used the right to appoint an auditor to monitor changes and to be part of the auditing process. Since 2008 this is only done exceptionally; FI is in negotiation to reform the level of exchange of information between the auditor in charge and FI. - FI arranges a seminar once a year to inform and have a dialogue with the auditors. - AC2: External auditors, whether or not utilized by the supervisor for supervisory purposes, have the duty to report to the supervisor matters of material significance, for example failure to comply with the licensing criteria or breaches of banking or other laws, or other matters which they believe are likely to be of material significance to the functions of the supervisor (BFBA). *Source: _cr11281 - Section 2) (FFFS 2008:25 Chapter 8).* ### Chapter 13, Section 10 and FI general guidelines for auditors appointed by FI (FFFS ### Chapter 13, Section 10 and FI general guidelines for auditors appointed by FI (FFFS 2004:10) ### Auditors, disclosure, and access to working papers - The law ensures that auditors who make any such reports in good faith cannot be held liable for breach of a duty of confidentiality (Rev U14, The auditor’s obligation to report in financial companies). - For CIs whose transferable securities trade on a regulated market, the external auditor (either the firm or individuals within the firm) must be rotated after seven years (Companies Act (2005:551) Chapter 9, Sections 21–22). - CIs must disclose the information required by IFRS in their annual reports (FI regulations and general guidelines regarding annual reports at credit institutions and investment firms (FFFS 2008:25), Chapter 2, general guideline number 1). - CIs must have written guidelines and instructions for how they should fulfill the requirement for publication of information regarding their capital adequacy and their strategies for managing their risks and exposures (CALE, Chapter 8, Section 3). - FI does not have the legal power to access external auditors’ working papers. The Supervisory Board of Public Accountants has the power to access external auditors’ working papers (Accountants Act (2001:883) Section 28). - FI can request specific cases from the Supervisory Board of Public Accountants which can comply or not, depending on its judgment. To date, FI has not made any requests. - Assessment: Largely Compliant - Comments: - FI does not have the power to reject and rescind the appointment of an external auditor (EC 6). - FI conducts ad hoc checks on firms’ annual financial statements (EC10), which may duplicate external auditor work; recommendation to cultivate a stronger relationship with the auditing profession and increase frequent contact with individual institutions’ auditors. *Assessment and comments extracted from the source.* ### Corrective and remedial powers of supervisors - Principle: Supervisors must have an adequate range of supervisory tools to bring about timely corrective actions, including ability to revoke the banking license or recommend its revocation. - EC1: FI normally communicates findings to the Executive Director representing the supervised entity; where supervisory concerns exist FI communicates outcomes to the chairman of the Board and requires timely remediation. FI may place orders on the credit institution and require written progress reports depending on severity. - EC2: - Sweden lacks specific bank insolvency rules other than the Support Act to Credit Institutions (2008:814) for systemically important credit institutions. - For non-systemic institutions, under the BFBA FI has the right to petition for liquidation and determine the manner of winding up if license is revoked (BFBA 2004:297, Chapter 10, Section 31). - When petitioning the court, FI may propose a liquidator; the court has accepted such proposals to date. - Revocation of the license is an automatic trigger to liquidation in all but very few exceptions (BFBA 2004:297, Chapter 10, Section 31). - Regulatory decisions by FI (including revocation) can be appealed within a three week window following FI’s decision; appeals can seek inhibition (stay of execution). FI notes threshold requirements to obtain an inhibition are set very high. - Since 2006 to present day, 40 percent of FI’s intervention decisions (issuance of remark, warning or revocation) have been appealed against. No appeal was successful. - EC3: FI required to intervene when a credit institution violates the Banking and Financing and Business Act; powers include restricting activities, limiting operations, requiring risk reduction, capital injection; warnings or revocation are possible. - EC4: FI can withhold approval of new activities if institution does not meet criteria; can replace managing director/CEO or any Board member if they do not meet requirements in the Banking and Financing Act; FI may order restrictions on qualified shareholders or order divestment; no explicit rules on interim management but FI can replace board member or managing director on an interim basis; FI can revoke license. - FI cannot replace or restrict powers of any manager other than the managing director/CEO due to Swedish law not recognizing the concept of “senior management.” - FI cannot restrict payout of dividends (expected to be amended with Basel III capital conservation requirements). - Swedish legislation does not provide for FI to facilitate a takeover by or a merger with a healthier institution. - EC5: - If a credit institution does not meet capital requirements, FI has powers to limit operations, reduce risks, strengthen governance, apply specific reservation politics, impose a remark or warning, or revoke license. - A remark and a warning may be combined with a penalty fee of between SEK 5, 000 (€ 500) and SEK 50 million (€ 5 million). A fine can only be issued in conjunction with a remark or a warning. - FI is considering how to make more extensive use of powers to restrict activities (BFBA, Chapter 15, Section 1). - EC6: - If a Board member or the Managing Director/CEO no longer meets fit-and-proper criteria FI may revoke the license or remove the Board member or managing director—but not other members of management. - FI may only intervene and impose sanctions on the credit institution as such; personal responsibility for individuals is a matter for courts or specific Company Act provisions. - AC1: - No direct prohibition against supervisory forbearance, but legislation and structures mitigate against it. FI has a duty under the BFBA to intervene where obligations are violated and is governed by the Administrative Procedure Act (Section 7). - Parliamentary Ombudsmen (PO) and the chancellor of justice provide oversight and deterrence. - AC2: FI’s remedial powers include ring-fencing and measures to prevent shareholders obstructing sound operations (e.g., limits on representation at general meetings, orders to divest, requirements for prior approval of transactions). - AC3: As consolidated supervisor of all domestic financial entities, FI coordinates remedial action with those responsible for nonbank entities and has permissive powers to inform authorities outside Sweden (BFBA, 2004:297, Chapter 13, Section 6 a). - Assessment: Largely Compliant - Comments: - Gaps and limitations exist, particularly powers over individuals (FI cannot remove senior management except managing director) and the cap on fines (SEK 50 million) may be nugatory for larger institutions. - Legal uncertainty from appeal and inhibition mechanisms can interrupt supervisory processes; liquidation is triggered by revocation but revocation can be overturned and liquidation suspended pending appeal. - No formal triggers for early intervention or prompt corrective action; resource limitations have delayed intense supervisory action in some cases. Recommendation to develop a robust and flexible early-intervention framework and consider formal triggers. ### Consolidated supervision - Principle: Supervise banking group on a consolidated basis, monitoring and applying prudential norms to business worldwide. - EC1: FI applies consolidated, risk based supervision; drills down from consolidated data into legal entities and jurisdictions as indicators suggest; risk reviews and reporting normally performed on consolidated level. - A mapping of each group’s entities and business areas of the major four banking groups is carried out yearly to inform college membership and structure. - EC2: FI has power to require all relevant information to assess capital adequacy and risks of credit institutions in Sweden, including subsidiaries or branches; information gathering powers extend to financial and mixed activity financial holding companies. - Off-site supervision of foreign activities is normally through the Swedish parent or host supervisor; on-site supervision of subsidiaries can only be carried out together with the host supervisory authority. - FI has substantial experience and has performed joint inspections with Nordic and Baltic supervisors; when performing on-site supervision of branches FI informs the host supervisor before the visit. - EC3: SREP/Pillar 2 supervision reviews exposure to all material risks irrespective of banking or nonbanking origin; assessment documented in yearly SREP and incorporates information from FI’s insurance and securities supervision. - Nonbanking activities evaluated include special purpose vehicles used to manage real estate collateral taken over during the crisis. - EC4: The CALE Act gives FI power to establish prudential standards on a consolidated level regarding CALE; FI works towards joint decisions in colleges for group capital adequacy within EU CRD framework. - Exposures to related parties are subject to disclosure and closely monitored, but FI has no power to impose limits on related party lending. - EC5: Supervisory colleges established for credit institution groups with cross-border activities; colleges operate under MoUs based on CEBS (now EBA) templates. Colleges exist for the four largest Swedish banking groups; one college has been in operation for over ten years; three new colleges are being established. - EC6: A credit institution intending to establish a branch abroad must receive FI’s authorization; FI has power to require on a consolidated basis that an institution reduce or eliminate risks wherever located, though in practice it has not acted on these powers. - FI does not have power to prevent an institution from making an acquisition of up to 25 percent of the institution’s capital base. - EC7–EC8: FI determines oversight of foreign activities via supervisory processes including quarterly risk meetings with overseas supervisors; FI regularly reviews group policies and evaluates quality of governance and internal control of overseas operations. FI has had no experience of host countries impeding access to information. - EC9: FI can require closing of foreign offices or exiting markets through power to require risk reduction or elimination. - EC10: Supervision is risk-based and documented three times per year; FI increased attention to Baltic and Ukrainian operations in past two years relative to Nordic operations. - AC1: Sweden permits corporate ownership of credit institutions; owners exceeding 10, 20, 30, or 50 percent of share capital or votes need FI approval before acquisition. FI can review activities of parent company if a financial conglomerate is assessed to exist. - FI can enforce fit-and-proper standards for future owners at ownership change; ongoing enforcement limited unless owner is financial/mixed financial holding company or impedes sound management, commits serious crimes, or increases money laundering likelihood. - AC2: Quality of supervision in other countries assessed through college work, joint inspections, and information exchange; no formal evaluation of other authorities’ supervision is conducted. - AC3: FI conducts risk based supervision and regularly visits foreign operations; host supervisors are informed and typically invited. - Assessment: Compliant - Comments: - FI does not have direct powers to impose prudential standards on non-financial (non mixed activity) parent companies of credit institutions; advisable to consider going beyond EU banking directives if needed. - Challenges relate to scale and complexity as consolidated supervisor of four systemic banking groups with significant cross-border activity; maintaining open cooperative relationships with host supervisors is essential. - One major systemic firm is a conglomerate, with the coordinating supervisor for the wider conglomerate group being Finland. ### Home-host relationships - Principle: Cross-border consolidated supervision requires cooperation and information exchange between home supervisors and host banking supervisors; local operations of foreign banks must be conducted to same standards as domestic institutions. - EC1–EC2: - Supervisory colleges established for the four largest banks, based on MoUs in line with CEBS/EBA standards; banks are informed and meet regularly with college representatives. MoUs established with supervisory authorities in nine major financial centers outside the EEA. - EC3–EC4: - EU legislation (CRD) sets legal basis for FI to share information as home and host authority; FI operates an open policy on exchange of information focused on systemic institutions. - Within colleges information exchange is extensive and bilateral, including findings from investigations and plans for future investigations. A joint yearly risk assessment is carried out in each college and group SREP is conducted jointly with relevant host authorities participating in decision making. Joint work includes model approvals and specific investigations. - FI experienced friction in information exchange only at the peak of the recent financial crisis. - EC5: Under transposed EU legislation FI must treat cross-border operations of foreign banks on an equivalent basis to domestic institutions. - EC6: - A non-EEA credit institution may be granted a license provided home supervision is satisfactory and the home authority consents to establishment in Sweden (Chapter 4, Section 4 of the BFBA). - FI does not explicitly establish that an incoming credit institution is subject to global consolidated supervision. - EC7: Conditional on a MoU, FI gives home country supervisors access to local offices and subsidiaries; limited practical experience but example given of U.S. authorities performing an on-site examination in a Swedish subsidiary of a U.S. bank. - EC8: Shell banks are not permitted under Swedish law. - EC9: Within colleges frequent exchange of supervisory information and consultation before taking any action; for non-college institutions FI would consult or inform other relevant supervisors before taking action. - AC1: Communication strategy within supervisory colleges follows CEBS guidelines. - Assessment: Compliant - Comments: - Sweden is home to four systemically significant banking groups and host to 45 foreign branches; Sweden’s role as home supervisor is more significant. - FI may wish to institute explicit practice that an incoming credit institution is subject to global consolidated supervision. - Colleges in the Nordic region are among the oldest; information exchange within key colleges is unimpeded and FI has actively used EU directive powers. - Home-host arrangements have progressed beyond information sharing toward joint supervisory activity and decision making; FI aims to leverage colleges for broader supervisory perspective and mobilize cross-border resources. - Progress needs continued development and would benefit from increased on-site visits to host/home jurisdictions, limited by resource constraints. - Industry meetings indicated firms recognize differences in views among college members and appreciate FI’s efforts to achieve consistency. *Assessment and comments extracted from the source.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11281.pdf_