## Executive Summary ## Source details **Canonical URL:** [Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11287.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11287.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11287.pdf.json) --- ### Introduction and scope - The note elaborates on recommendations made in the Financial Sector Assessment Program (FSAP) Update for Sweden in the areas of contingency planning, crisis management and bank resolution. - The FSAP Update mission was undertaken during March 9–22, 2011. - The note is based upon analysis of relevant legal and policy documents and intensive discussions with the authorities and private sector representatives. Where appropriate, new government proposals for reforms elaborated in the aftermath of the crisis are taken into account. - The report is organized to cover: crisis preparedness and interagency cooperation; Emergency Liquidity Assistance (ELA); framework for official financial support to SIFIs, bank resolution and deposit insurance (DI); Appendix I compares the Swedish DI system with the Core Principles for Effective Deposit Insurance. ### Overall assessment - Sweden’s safety net and crisis management arrangements fared well during the global financial crisis. Authorities’ response was timely and forceful with a wide range of extraordinary measures that helped contain the impact of the crisis and restore market stability and confidence. - The crisis revealed weaknesses in the toolkit for dealing with failing deposit-taking institutions. Some weaknesses were addressed by new crisis legislation in 2008, but options for dealing with non-systemic institutions remain insufficient. - A Committee for review of the crisis management framework has been set up to analyze lessons learned and propose legislative and institutional measures; it is tasked to present its report no later than August 2012. ### Key findings and recommendations (summary) - Domestic institutional framework for contingency planning and crisis management - The institutional setup for contingency planning is broadly appropriate, including ongoing information exchange and dialogue via the Domestic Standing Group (DSG) chaired by the state secretary of the Ministry of Finance (MOF), and bilateral contacts among key agencies. - Suggested complements: - Develop the macroprudential policy framework. - Clarify the Riksbank’s (RB’s) mandate in the area of financial stability. - Set up a high-level systemic council with an explicit mandate and accountability. - Improve routines for information and data sharing and test them in a domestic crisis simulation exercise involving all parties to the domestic Memorandum of Understanding (MOU). - Cross-border cooperation - Strong foundations exist via bilateral and multilateral MOUs and supervisory colleges in the Nordic-Baltic region. - Suggested actions: - Elaborate the burden-sharing principles of the 2010 Nordic-Baltic MOU into a more structured assessment framework. - Develop a confidential platform for data exchange. - Test the framework through a joint crisis simulation exercise. - Emergency liquidity assistance (ELA) - RB’s mandate for ELA to an individual institution is robust for dealing with domestic liquidity problems and provides RB with a high degree of flexibility to react to an evolving crisis. - RB’s ELA policy has been publicly communicated and tested in the recent crisis. - Further work may be needed on: - Modalities for addressing cross-border liquidity problems. - The interplay between RB’s ELA and support by the Swedish National Debt Office (SNDO) in different stages of financial crisis management. - State support to financial institutions - Framework for official financial support to systemically important financial institutions (SIFIs) and for temporary public ownership is pragmatic for handling systemic crisis. - Complementary approaches that would enable resolution authorities to write down claims of some or all unsecured creditors and convert debt into equity could be useful once design modalities are agreed at the international level. - Deposit guarantee scheme (DGS) and bank resolution - A robust and flexible early-intervention framework is needed to give supervisory and resolution authorities tools and mandate to intervene and resolve ailing institutions at an earlier stage. - Introducing a resolution regime for credit institutions and legislative changes to DGS in a single legislative package is preferable to ensure legal consistency. - Meanwhile, authorities are encouraged to reform the DGS to: - Shorten the payout. - Redefine a DGS trigger. - Improve information available to the Deposit Guarantee Fund (DGF) administrator as proposed recently by the government. ### Detailed policy recommendations (Table 1) - Domestic coordination arrangements and systemic oversight - Refine the regular exchange of information between the FI and RB and develop appropriate routines — Short-term - Introduce a legal requirement for FI to inform SNDO as the manager of DGF about circumstances that could eventually trigger a DGS payout sufficiently in advance — Short-term - Test the functionality of the 2009 domestic MOU in a crisis simulation exercise involving all its parties — Medium-term - Cross-border coordination arrangements - Develop burden-sharing assessment framework and confidential data warehouse implied by the 2010 Nordic-Baltic MOU (in cooperation with other national authorities) — Medium-term - Test the new tools in a cross-border crisis simulation — Medium-term - Strengthen FI’s staff and resources for running supervisory colleges it chairs — Short term - Enhance the common platform for information exchange among supervisory authorities implied by the bank-specific MOUs — Medium-term - Emergency liquidity assistance - Formalize RB and FI cooperation in assessing solvency and viability in the context of ELA — Short-term - Clarify the RB’s scope for granting ELA relative to SNDO’s powers under the terms of the Government Support Act in different stages of the crisis — Medium-term - Bank resolution - Give FI the right to petition for insolvency of credit institutions — Medium-term - Give FI powers to initiate special bank resolution on an administrative basis with a pre-insolvency regulatory threshold, including enabling P&A — Medium-term - Specify the role and powers of the liquidator — Medium-term - Authorize the DGF to support bank resolution operations — Medium-term - Establish a clear priority of claims in the insolvency regime for credit institutions — Medium-term - Consider giving (insured) depositors a preference in creditor ranking — Medium-term - Remove a possibility that a court appeal stays supervisory action (license revocation). The shareholders should be entitled to monetary damages, rather than a reversal of a supervisory decision — Medium-term - Deposit insurance - Change in the DGS trigger to make DGS funds available upon the revocation of the license by FI — Short-term - Shorten the maximum legal period for payout and remove the option to prolong this period — Short-term - Explore technical ways to accelerate the payout to below the statutory limits — Short-term - Require banks to keep an up-to-date database of depositors’ identification data and deposit balances on a “single customer” basis — Medium-term ### Institutional roles and coordination architecture - Key entities in crisis preparedness and coordination: - Finansinspektionen (FI) — authorization, prudential supervision, remedial actions; objectives include contributing to a stable and sound financial system and promoting consumer protection. - Sveriges Riksbank (RB) — monetary policy, promote safe and efficient payments, provide ELA, oversee systemically important payments, clearing and settlement systems. - Ministry of Finance (MOF) — fiscal authority bearing ultimate political responsibility for financial stability and responsible for financial sector legislation; decisions on public funds to support failing institutions may be required and responsibility is shared between the Minister for Finance and the Minister for Financial Markets. - Swedish National Debt Office (SNDO) — manages DI and investor protection systems and is the support authority when public funds are conferred on a credit institution. - Coordination mechanisms and practices: - A mix of explicit and implicit arrangements is used, including the Domestic Standing Group (DSG), cross-representation, MOUs, crisis management operational procedures, and crisis exercises. - Cross-border contingency planning is important given large cross-border exposures of the banking sector; supervisory colleges and the 2010 Nordic-Baltic MOU play a central role. ### Observations on scope and terminology - The terms “credit institution” and “bank” are used interchangeably to denote institutions accepting deposits from the public that are covered by DI. - In Sweden, the substantial majority of all deposits (98 percent) are held by banks. - Deposits with other categories of institutions (credit market undertakings, securities firms where relevant) 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 are not covered by the Deposit Guarantee Scheme. *Source: Executive Summary of the FSAP Update technical note (FSAP Update mission March 9–22, 2011).* --- ### Legal mandates, institutional responsibilities, and domestic coordination ### Legal mandates and institutional responsibilities - The FI is the sole agency tasked with an explicit broad financial stability objective. - The RB does not have an explicit financial stability mandate enshrined in the law; a provision on promoting a safe and efficient payments system is often interpreted as a more general responsibility for the stability of the financial system. - Part of the macroprudential toolkit falls under the remit of SNDO or RB. - RB Act requires RB to consult FI on matters of major importance within their mandates. - FI Instructions Ordinance imposes an obligation on FI to: - notify government on risks that instability in the financial sector could adversely affect the functioning of the Swedish financial system; - cooperate with and notify the RB on issues relating to crisis management, stability of the payment system or to the RB’s responsibility for currency and credit policy and for the payment system overall; and - notify the SNDO on issues of significance to deposit insurance investor protection. - SNDO Instructions Ordinance tasks SNDO with the obligation to consult and exchange information with RB, FI, and other competent authorities in matters related to deposit insurance or government support to credit institutions. ### Domestic coordination, MOUs, and decision structures - Gateway provisions in respective legislation provide for the exchange of information between principal domestic authorities with responsibilities with respect to financial stability. - The MOU signed in 2009 by the MOF, the RB, FI and the SNDO establishes guidelines for consultation and the exchange of information between the parties in the areas of financial stability and crisis management. - The RB deputy governor is represented on the Board of the FI. - The DSG set up for consultation and information sharing is led by the MOF State Secretary with responsibility for financial market matters, and comprises: - a member of the Executive Board of the RB, - the Director General of the FI, and - the Director General of the SNDO. - The consultative group (DSG) has no decision making powers; it is tasked with: - assessing financial stability and systemic risks, - developing coordination routines, - organizing crisis exercises, and - cross-border communication. - The DSG should meet at least quarterly, but may be convened at short notice any time. - A dedicated section of the MOU further elaborates cooperation between FI and RB. ### Information exchange: legal basis and operational gaps - The legal framework provides a sound basis for information exchange and a high degree of transparency inherent to the Swedish public administration. - In principle, all information that is collected by or communicated from a public Swedish authority is open for public to see unless an explicit justification has been provided. - The 2009 MOU sets only a very-high-level set of principles for data exchange between RB and FI and has not been supplemented by standardized routines; this could hinder a more thorough and frequent exchange of information between RB and FI. - Specific operational improvements noted: - RB would benefit from a more efficient use of supervisory data in RB’s financial stability analysis. - FI could supplement its supervisory returns with higher frequency data compiled by RB on a more systematic basis. - Legal underpinnings for information exchange between FI and SNDO need to be strengthened because there is currently no formal requirement for advance communication about an ailing financial institution which could trigger a DGS payout. ### Crisis framework, exercises, and testing - National authorities organized eight financial crisis management exercises since 2003; these exercises uncovered lessons on coordination of information sharing and communication, coordination of decision-making, and interaction of different legislation. - The new 2009 MOU and new DGS and state support arrangements need to be tested for functionality. - The new arrangements involving the SNDO remain to be tested in domestic crisis simulation exercises. ### Recommendations to strengthen domestic cooperation (excerpt) - Refine the regular exchange of information pertaining to financial stability between FI and RB: - encompass data, supervisory information and analyses of aggregate developments and the financial situation of major banking groups; - develop routines for a more automatic information sharing while respecting necessary confidentiality arrangements. - Strengthen requirements for the information exchange between FI and SNDO: - FI should be required to inform SNDO once it becomes aware of circumstances that could trigger a DGS payout to give SNDO sufficient lead time (as envisaged in the government proposal for the DGS amendments). - Undertake a domestic crisis simulation exercise involving all parties of the 2009 MOU: - scenario based on a medium-sized bank illiquidity to test coordination between RB, SNDO, and FI on ELA or depositor payout decisions and the effectiveness of technical means, templates and data for speedy exchange of meaningful data. --- ### Cross-border coordination, supervisory colleges, and outstanding elements - Important foundations for cross-border cooperation have been laid down in the Nordic-Baltic MOUs and the EU-wide arrangements. - Sweden played a leading role in the establishment of the cooperation agreement on cross-border financial stability, crisis management and resolution among Baltic and Nordic authorities in 2010. - FI was an early adopter of supervisory colleges and uses them actively; FI chairs supervisory colleges for four major Swedish banks and these colleges are fully operational. - Quarterly meetings are held for the core colleges while extended colleges meet on an annual basis. - Bank-specific MOUs on supervisory cooperation have been signed for all four SIFIs; core college activities include joint supervisory priorities, joint inspections, and joint Pillar 2 capital allocation discussions. - Outstanding elements to complete the cross-border framework: - develop and test the toolkit implied by the 2010 Nordic-Baltic MOU including a structured burden-sharing assessment framework and templates for a confidential data warehouse; - strengthen FI’s staff and resources for running supervisory colleges it chairs to ensure core supervisory functions are not undermined by administrative duties; - speed up work on a common platform for information exchange implied by the bank-specific MOUs (FI’s ability to lead this is hampered by resource constraints). --- ### Emergency Liquidity Assistance (ELA): principles, RB policy, and required clarifications ### ELA fundamentals and recommended practice - ELA is defined as the discretionary provision of liquidity by the central bank to a financial institution that could not otherwise access liquidity. - ELA characteristics and policy guidance: - ELA is a standard—albeit rarely used—central bank tool. - The primary responsibility for reducing the incidence of liquidity problems rests with market participants themselves. - ELA should never be seen as an obligation of the central bank. - ELA can be needed to: (i) prevent illiquidity at an individual bank from unnecessarily leading to its insolvency and systemic implications; and (ii) avoid runs that spill over from bank to bank. - Moral hazard is best avoided by providing ELA only in exceptional circumstances. - The central bank can manage its own credit, market and liquidity risk by requiring collateral with sufficiently prudent haircuts and other terms. ### Riksbank-specific notes - RB’s mandate for ELA to an individual institution is robust for dealing with domestic liquidity problems; RB is authorized by law in exceptional circumstances to support liquidity to provide credit or guarantees to banks and Swedish companies subject to FI supervision. - RB’s ELA policy has been publicly communicated and tested in the recent crisis. - Internal RB guidelines cover decision-making process, collateral acceptance and valuation, and other terms and conditions. - Consideration might be given to specifying a consultation between FI and RB on ELA in the bilateral cooperation agreement, particularly regarding types of solvency and viability assessments to be carried out. - Any institution that has benefitted from ELA should be subject to intensified supervision and measures designed to restore its access to market liquidity. ### Clarification needed between RB and SNDO roles - RB is expected to deal only with solvent institutions while insolvent systemic institutions would be supported by SNDO under the State Support Act. - When SNDO became a support authority under the Support Act in 2008, questions emerged on how RB’s scope for granting ELA works in relation to SNDO’s scope for providing liquidity assistance under the Support Act. - If RB were to act as a payment agent for liquidity assistance by SNDO to an insolvent institution, it should do so only after an agreement with SNDO on the subsequent course of events. - Authorities need to be mindful of the need to comply with the prohibition of monetary financing. --- ### Box 2 — The Riksbank’s Public Policy Statement on ELA ### ELA policy principles (as stated by the Riksbank) - Primary objective: To promote a safe and efficient payment system. - Eligible institutions: Banks (including branches of foreign banks) and Swedish companies subject to FI supervision. ELA to institutions that are not members of RIX will be paid out through a member bank. - Liquidity support only: The RB will support an illiquid but solvent financial institution, while the government is expected to deal with an insolvent one. Solvency assessment is aimed at assessing long term survival capacity of an institution, including its balance-sheet solvency, business model, profit generation capacity, and capacity to resolve capital problems without further public interventions, even if the bank momentarily does not meet the capital adequacy requirements. RB recognizes that the assessment of systemic risk and financial condition under a time pressure will be based on imperfect information. - Collateral requirements: In a crisis situation, the RB can consider accepting as collateral other assets than those normally accepted in interbank trading and in the RIX system, for example equity or loan claims. A haircut will take into account uncertainties in valuation. - Interest rate: The interest rate on ELA is determined case by case. The RB will normally charge higher rates than the normal lending rate in order to counter moral hazard and to take account of higher risks, while recognizing that too high an interest rate could jeopardize the purpose of the assistance by creating solvency problems. - Transparency: ELA provided by the RB will be public information, even in the unlikely event that the markets had no knowledge of it. The precise terms and conditions of credit will not be disclosed, however, to market participants. - Foreign currency lending: If spot or swap markets were not functioning due to the perceived counterparty risk, the RB could provide credit in foreign currency or offer an outright swap. The RB may also mediate between lenders and a problem institution and if necessary issue a guarantee. - Other conditions: The RB may provide ELA to a financial institution that has an intention to rescue other problem institutions, require that the institution receiving ELA takes measures to increase its liquidity for instance by reducing the size of its loan portfolio or impose special requirements for access to information and reporting, as applied during the recent crisis. The RB may issue a guarantee as an alternative to granting credit, if this would be a more appropriate response to exceptional circumstances. ### Operational implications and constraints highlighted - Solvency vs liquidity: ELA is explicitly for illiquid but solvent institutions; the government is expected to address insolvency. - Imperfect information: The RB acknowledges that solvency and systemic risk assessments under time pressure will rely on imperfect information. - Collateral flexibility: In crises, collateral accepted can extend beyond usual RIX/interbank collateral to include equity or loan claims, with haircuts reflecting valuation uncertainty. - Rate-setting trade-off: Charging materially higher rates is intended to counter moral hazard and reflect risk, but excessively high rates could induce solvency problems and undermine the assistance objective. - Disclosure stance: Provision of ELA is public, but precise credit terms and conditions are withheld from market participants. ### Policy recommendations and suggested improvements (summary) - Formalize RB and FI cooperation in assessing solvency and viability in the context of ELA in a bilateral cooperation agreement and reach a common understanding on necessary supporting data and analytical tools. It would be beneficial for SNDO to participate in developing mutual understanding of key elements of such assessment. - Clarify the RB’s scope for granting ELA relative to SNDO’s scope for providing liquidity under the terms of the Government Support Act in different stages of the crisis. *Source: Box 2. The Riksbank’s Public Policy Statement on ELA, as provided in the source content.* --- ### Bank insolvency, special resolution toolkit, and Deposit Insurance observations ### Rationale for a special bank resolution toolkit - Financial assets can be dissipated quickly and banks are vulnerable to the loss of confidence with potentially damaging repercussions. - Foremost objective of a failed bank receiver: minimize the impact of bank’s failure on the rest of the financial system. - Concern for creditor rights in a general bankruptcy process must be seen in the bank context; this can justify departure from equal treatment of all creditors ("pari passu") in certain circumstances. - Examples of justified departures and tools: - Preference to insured depositors up to the amount of insured deposits (experience from the United States). - Sale of business or parts into an unfavorable market to avoid market disruptions. - Ability to impose full or partial suspension of payments and stay of enforcement (moratorium) to protect depositors. ### Observations on the Swedish Deposit Guarantee Scheme (DGS) - Mandate and scope: - The DGF can only be used to pay depositors that incur losses as a result of a financial institution’s bankruptcy. It has no role in bank restructuring. - Payout to insured depositors is currently triggered only after the institution has been placed into bankruptcy. - Bankruptcy trigger both distorts the purpose of limited DGS and increases the cost to deposit insurer; delays in reimbursement can lead to contagion and runs on other banks and cause financial hardship for depositors. - Activation history and operational readiness: - Since 1996 (when the DGS was introduced), there have been only three failures leading to a payout. - Two failures occurred in 2006 and some 1,500 depositors received approximately SEK 175 million. - During the financial crisis in 2008–2009 there were no failures where the DI had to be involved. - In early 2010, a Danish bank with a branch in Sweden went bankrupt that had a topping-up arrangement with the Swedish DGS; in total SEK 11 million was paid from the Swedish scheme to 825 depositors. The Danish deposit guarantee scheme handled the administration of the case. - The DGS has been rarely activated and on these occasions has only been used for very small institutions, making contingency planning important. ### Key problems identified - Trigger for payout tied to bankruptcy delays payouts and undermines DGS effectiveness. - DGF cannot support bank restructuring or resolution operations under current narrow pay-box design. - Lack of early, reliable depositor data and limited operational contingency planning risk slow reimbursements. - Absence of effective and speedy resolution tools for non-systemic institutions could encourage moral hazard. ### Recommendations: special bank resolution framework - Introduce a special bank resolution framework for all institutions accepting insured deposits; special resolution tools (including through orderly liquidation) should apply for all troubled institutions, whether or not ex ante considered systemic. - Objectives of framework: ensure continuity of critical functions, minimize public financial support, reduce legal uncertainty, enable prompt resolution to mitigate depositor contagion and reduce systemic risk. - Legislative approach and specific powers to consider: - FI should be given the right to petition for insolvency of deposit taking institutions. Options: - FI could be given exclusive right to petition for insolvency. - Alternatively, specify that no insolvency proceedings may be opened against a deposit taking institution without the explicit consent by FI, while other stakeholders could be allowed to petition as well; in this case FI should be entitled to participate in all stages of the proceedings. - FI should be given powers to initiate special bank resolution on an administrative basis with a pre-insolvency regulatory threshold and the role of the liquidator should be clearly specified. - FI powers to initiate special bank resolution administratively based upon regulatory criteria and at a sufficiently early stage (i.e., before insolvency is triggered). - The liquidator should be overseen by FI. - Transfer (sale) of assets, including subsidiaries, with assumption of liabilities to third-party acquirers (purchase and assumption or P&A) should be enabled. - To facilitate transactions, authorities might subject certain liabilities to a selective stay with exclusions to preserve stability of payments system and protect central bank transactions. - The DGF should be authorized to support bank resolution operations, in particular via: - Transfer of insured deposits to another bank through a P&A transaction (i.e., with corresponding amount of assets). - Transfer to a bridge bank managed by the government until an assuming bank is found. - DGF funds supporting a bank resolution should not exceed the amount that would have been expended in the course of a normal liquidation. - The insolvency regime for depository institutions should establish a clear priority of claims. - Authorities could consider giving (insured) depositors a preference in creditor ranking to provide a mechanism to recover DGS pay-outs from the bank estate and reduce need for official support while justifying transfer of insured depositors to a healthy bank (P&A). - Note: An alternative two-tiered approach could be considered, wherein a smaller (insured) portion enjoys a higher priority, followed by all other deposits (that are not excluded from DGS coverage), followed by general creditors. - Remove the possibility that a court appeal stays supervisory action (license revocation), while preserving rights of appeal. - Shareholder entitled to compensation only if FI acted improperly; economic interest protected via monetary damages rather than reversal of supervisory decision. - Limitations should be considered as regards other resolution powers, e.g., possibility to stay transfer transactions. ### Interim improvements to the DI framework (while comprehensive reform proceeds) - Implement improvements aligned with recent government proposal presented to Parliament in April 2011 with intention to enact on July 1, 2011; proposals aimed at ensuring Sweden’s compliance with revised EU Deposit Insurance Directive and include shortening payout deadline to 20 days, stricter information requirements, and new trigger for payout dependent on FI’s decision. - Suggested interim measures: - Change in the DGS trigger: DI funds should become available to depositors upon the revocation of the license by FI. - Shorter maximum legal period for payout of deposits at failing banks (a maximum of 20 days implied by the current EU directive). Remove option to prolong this period and explore possibility to mandate an even shorter payout limit. - Explore ways to accelerate payouts. SNDO encouraged to explore technical ways to accelerate the payout to below statutory limits. Standard means include use of a bank with a wide branch network as a payment agent or SNDO itself serving as payment agent once data on individual accounts are available. - Set up a legal obligation for FI to communicate with the SNDO sufficiently in advance prior to the triggering of DGS once it concludes that payment might be triggered in the future. - Ensure SNDO has access at an early stage to reliable information about depositors and their deposits so as to make payments automatic: - Deposit taking institutions should be legally required to keep an up-to-date database of depositors’ identification data and deposit balances on a “single customer” basis consolidating the deposits of an individual in different accounts in the bank. - These data would be transmitted to the SNDO when the payout has been triggered. The DGF would then hold a claim against the liquidated bank and could ascertain the legality of all claims. - Early involvement and advance preparation of DGF/SNDO in the problem bank resolution process is key for ensuring prompt reimbursement of insured depositors. ### Context: EU and international initiatives referenced - Government proposal for Deposit Insurance Act amendments presented to Parliament in April 2011 with intention to enact on July 1, 2011; proposal includes shortening payout deadline to 20 days, stricter information requirements, new trigger for payout dependent on FI’s decision, and improved information exchange between FI and SNDO. - In July 2010, the European Commission adopted a legislative proposal for a thorough revision of the EU Directive on Deposit Guarantee Schemes; recent urgent legislative changes in early 2009 raised minimum coverage to € 50 000 by end-June 2009 and € 100 000 by end 2010, reduced deadline to decide if a bank has failed, reduced the payout delay, and abandoned coinsurance. - BCBS and IADI issued the Core Principles for Effective Deposit Insurance Systems in June 2009; Swedish DI design analyzed against these principles (observations summarized in Appendix I). *Source: _cr11287 - 35. In bank insolvency, prompt action is of essence justifying the special toolkit._* --- ### Compulsory membership, coverage, funding and operational features of the Swedish DI ### Compulsory membership and coverage - Membership is compulsory for institutions licensed to hold customers’ funds on account (Section 2 of the DI Act), including for branches of non-EU banks and branches of Swedish banks operating in other EU member states. - Branches of banks from other EU states can “top up” their coverage. - Institutions accepting deposits from those most in need for protection are included. - Coverage is clearly defined in the law and limited. It covers all types of deposits. - Compensation includes accrued interest and is limited to € 100 000 for the deposits in any currency combined with any distribution from the institution’s bankruptcy. - At this level eligible deposits amount to around 25 percent of total deposits by amount but close to 100 percent by number of depositors. - Excludes: financial institutions licensed to accept customer funds on account, including foreign companies, those subject to criminal legal proceedings for money laundering (Sections 4–5 of the Act). - The law does not explicitly mention insider deposits. - No blanket guarantee is in place. ### Funding mechanisms, premia and fund size - Every institution covered by a guarantee pays an annual fee. - Charges are imposed ex ante and are set at 0.1 percent of total insured deposits (on previous December 31). - In 2008, the stability fund has been set up by the State Support Act with an aim to ensure that in the long run, credit institutions themselves will bear the costs of dealing with financial crises. Authorities are considering options for coordination of the two systems. - The system has an unlimited loan backup facility from the SNDO set in the law (Section 15) should the fund’s resources not cover the required payout. - The fees are invested after the SNDO’s administrative costs for running the syst5em have been deducted. - SNDO may order the institution that failed to fulfill its obligations to take corrective measures (Section 21 of the Act). - If measures are not implemented within a year of the order, the SNDO may decide that the deposit guarantee no longer applies to institution’s deposits (with consent of home country supervisory authorities for the European Economic Area (EEA) banks and after notifying home supervisors of non-EEA banks). - There is no target level for the fund. - The accumulated value at the end of 2010 at just over SEK 22 billion or around 2 percent of insured deposits, which is at a lower end in international comparison. - Empirical surveys show that most countries have established Funds in the range of 1.25 to 5 percent of insured deposits. - The Swedish DGF was relatively larger before the limit was doubled to 100,000 euro at end-2010 in line with the EU directive. ### Risk-adjusted premia, investment rules and public awareness - The criteria for setting risk-adjusted fees are set in the law (Sections 12–14 of the Deposit Insurance Act). - Fees can vary between 0.06 percent and 0.14 percent depending on the institution’s capital adequacy ratio relative to capital adequacy of other institutions in the system (Section 13 of the Deposit Insurance Act). - Decisions on banks fees can be appealed at the general administrative court. - Investment rules are prescribed by the law (Section 15 of the Deposit Insurance act). Bank fees are invested in interest-bearing account in the SNDO or government debt instruments. - Members shall provide depositors with all information relevant to the guarantee before a contract is established and during the contract period (Section 11 of the Deposit Insurance Act). - SNDO maintains a website with detailed information in Swedish and English. - There is high degree of transparency about past bank interventions and a manner in which the ailing banks have been resolved. ### Legal protection, early intervention and reimbursement timing - Specific provisions concerning employee liability are not mentioned in the Deposit Insurance Act. - General provisions on the liability of public administrative authorities and their employees are set out in the Damages Act (1972:207). Public administrative authorities are liable for damages resulting from negligence in carrying out their duties (Chapter 3, Section 2). - Case law has set the threshold for what constitutes negligence in the discharge of administrative duties very high; an authority’s incorrect assessments are not enough to incur liability unless the incorrect assessment was manifestly wrong. - Legal redress against those at fault in a bank failure to deposit insurer or other bodies is not addressed in the Deposit Insurance Act. - Early detection, timely intervention and resolution are the responsibility of the FI. - The SNDO is the bank support agency under the State Support Act in systemic cases; in this capacity it can become involved in restructuring a bank that receives a support. - The DGF has no role in bank resolution being only a narrow pay-box and does not have responsibility for restructuring banks or for covering the cost of doing so. - The SNDO is responsible for payment to depositors after a bank has been declared bankrupt by the court. - The bankruptcy, including liquidation of the failed institution’s assets, proceeds according to the regular bankruptcy rules and is handled by a court-appointed lawyer. The SNDO acts as a regular claimholder and has no powers to intervene in bankruptcy proceedings. - The FI may determine the manner in which business shall be wound up (Banking and Financing Business Act (2004:297)). - Facilitating the acquisition by an appropriate body of the assets and the assumption of the liabilities of a failed bank (to provide depositors with continuous access to their funds and maintaining clearing and settlement activities) is not explicitly dealt with in the law. - Compensation shall be disbursed no later than within three months of the date bankruptcy of the financial institution is determined by the court, or unavailability of deposits is determined by the home country authority for a branch of foreign institution (Section 9 of the Deposit Insirance Act). - General administrative court may extend the limit by not more than three months. Additional extensions of not more than three months at a time may be granted twice. (Section 9 of the Deposit Insurance Act). - SNDO aims to repay depositors faster and the new government proposal entails a 20 days limit. This may fall short of the currently discusses EU Directive amendments. - Depositor loses his/her right to compensation if (s)he fails to assert claim before losing the right to distribution from the institution’s bankruptcy. - There is no legal obligation for institutions to maintain up-to-date database of insured deposits. This would change if the amendments proposed by the government became effective. - The state is subrogated and intervenes in the depositor’s right vis-à-vis the failed institution with a right of precedence over the depositor up to the amount disbursed (Section 19 of the Deposit Insurance Act). - The SNDO is responsible for protecting the state interest. - Recovered money is paid to the DGF. - The same priority holds for a foreign guarantee system that has paid compensation when Swedish institution has been declared bankrupt. *Source: _cr11287 - 8. Compulsory membership for all_* ### Executive Summary ...................................................................................................... ### Executive Summary ### Introduction and scope - The note elaborates on recommendations made in the Financial Sector Assessment Program (FSAP) Update for Sweden in the areas of contingency planning, crisis management and bank resolution. - The FSAP Update mission was undertaken during March 9–22, 2011. - The note is based upon analysis of relevant legal and policy documents and intensive discussions with the authorities and private sector representatives. Where appropriate, new government proposals for reforms elaborated in the aftermath of the crisis are taken into account. - The report is organized to cover: crisis preparedness and interagency cooperation; Emergency Liquidity Assistance (ELA); framework for official financial support to SIFIs, bank resolution and deposit insurance (DI); Appendix I compares the Swedish DI system with the Core Principles for Effective Deposit Insurance. ### Overall assessment - Sweden’s safety net and crisis management arrangements fared well during the global financial crisis. Authorities’ response was timely and forceful with a wide range of extraordinary measures that helped contain the impact of the crisis and restore market stability and confidence. - The crisis revealed weaknesses in the toolkit for dealing with failing deposit-taking institutions. Some weaknesses were addressed by new crisis legislation in 2008, but options for dealing with non-systemic institutions remain insufficient. - A Committee for review of the crisis management framework has been set up to analyze lessons learned and propose legislative and institutional measures; it is tasked to present its report no later than August 2012. ### Key findings and recommendations (summary) - Domestic institutional framework for contingency planning and crisis management - The institutional setup for contingency planning is broadly appropriate, including ongoing information exchange and dialogue via the Domestic Standing Group (DSG) chaired by the state secretary of the Ministry of Finance (MOF), and bilateral contacts among key agencies. - Suggested complements: - Develop the macroprudential policy framework. - Clarify the Riksbank’s (RB’s) mandate in the area of financial stability. - Set up a high-level systemic council with an explicit mandate and accountability. - Improve routines for information and data sharing and test them in a domestic crisis simulation exercise involving all parties to the domestic Memorandum of Understanding (MOU). - Cross-border cooperation - Strong foundations exist via bilateral and multilateral MOUs and supervisory colleges in the Nordic-Baltic region. - Suggested actions: - Elaborate the burden-sharing principles of the 2010 Nordic-Baltic MOU into a more structured assessment framework. - Develop a confidential platform for data exchange. - Test the framework through a joint crisis simulation exercise. - Emergency liquidity assistance (ELA) - RB’s mandate for ELA to an individual institution is robust for dealing with domestic liquidity problems and provides RB with a high degree of flexibility to react to an evolving crisis. - RB’s ELA policy has been publicly communicated and tested in the recent crisis. - Further work may be needed on: - Modalities for addressing cross-border liquidity problems. - The interplay between RB’s ELA and support by the Swedish National Debt Office (SNDO) in different stages of financial crisis management. - State support to financial institutions - Framework for official financial support to systemically important financial institutions (SIFIs) and for temporary public ownership is pragmatic for handling systemic crisis. - Complementary approaches that would enable resolution authorities to write down claims of some or all unsecured creditors and convert debt into equity could be useful once design modalities are agreed at the international level. - Deposit guarantee scheme (DGS) and bank resolution - A robust and flexible early-intervention framework is needed to give supervisory and resolution authorities tools and mandate to intervene and resolve ailing institutions at an earlier stage. - Introducing a resolution regime for credit institutions and legislative changes to DGS in a single legislative package is preferable to ensure legal consistency. - Meanwhile, authorities are encouraged to reform the DGS to: - Shorten the payout. - Redefine a DGS trigger. - Improve information available to the Deposit Guarantee Fund (DGF) administrator as proposed recently by the government. ### Detailed policy recommendations (Table 1) - Domestic coordination arrangements and systemic oversight - Refine the regular exchange of information between the FI and RB and develop appropriate routines — Short-term - Introduce a legal requirement for FI to inform SNDO as the manager of DGF about circumstances that could eventually trigger a DGS payout sufficiently in advance — Short-term - Test the functionality of the 2009 domestic MOU in a crisis simulation exercise involving all its parties — Medium-term - Cross-border coordination arrangements - Develop burden-sharing assessment framework and confidential data warehouse implied by the 2010 Nordic-Baltic MOU (in cooperation with other national authorities) — Medium-term - Test the new tools in a cross-border crisis simulation — Medium-term - Strengthen FI’s staff and resources for running supervisory colleges it chairs — Short term - Enhance the common platform for information exchange among supervisory authorities implied by the bank-specific MOUs — Medium-term - Emergency liquidity assistance - Formalize RB and FI cooperation in assessing solvency and viability in the context of ELA — Short-term - Clarify the RB’s scope for granting ELA relative to SNDO’s powers under the terms of the Government Support Act in different stages of the crisis — Medium-term - Bank resolution - Give FI the right to petition for insolvency of credit institutions — Medium-term - Give FI powers to initiate special bank resolution on an administrative basis with a pre-insolvency regulatory threshold, including enabling P&A — Medium-term - Specify the role and powers of the liquidator — Medium-term - Authorize the DGF to support bank resolution operations — Medium-term - Establish a clear priority of claims in the insolvency regime for credit institutions — Medium-term - Consider giving (insured) depositors a preference in creditor ranking — Medium-term - Remove a possibility that a court appeal stays supervisory action (license revocation). The shareholders should be entitled to monetary damages, rather than a reversal of a supervisory decision — Medium-term - Deposit insurance - Change in the DGS trigger to make DGS funds available upon the revocation of the license by FI — Short-term - Shorten the maximum legal period for payout and remove the option to prolong this period — Short-term - Explore technical ways to accelerate the payout to below the statutory limits — Short-term - Require banks to keep an up-to-date database of depositors’ identification data and deposit balances on a “single customer” basis — Medium-term ### Institutional roles and coordination architecture - Key entities in crisis preparedness and coordination: - Finansinspektionen (FI) — authorization, prudential supervision, remedial actions; objectives include contributing to a stable and sound financial system and promoting consumer protection. - Sveriges Riksbank (RB) — monetary policy, promote safe and efficient payments, provide ELA, oversee systemically important payments, clearing and settlement systems. - Ministry of Finance (MOF) — fiscal authority bearing ultimate political responsibility for financial stability and responsible for financial sector legislation; decisions on public funds to support failing institutions may be required and responsibility is shared between the Minister for Finance and the Minister for Financial Markets. - Swedish National Debt Office (SNDO) — manages DI and investor protection systems and is the support authority when public funds are conferred on a credit institution. - Coordination mechanisms and practices: - A mix of explicit and implicit arrangements is used, including the Domestic Standing Group (DSG), cross-representation, MOUs, crisis management operational procedures, and crisis exercises. - Cross-border contingency planning is important given large cross-border exposures of the banking sector; supervisory colleges and the 2010 Nordic-Baltic MOU play a central role. ### Observations on scope and terminology - The terms “credit institution” and “bank” are used interchangeably to denote institutions accepting deposits from the public that are covered by DI. - In Sweden, the substantial majority of all deposits (98 percent) are held by banks. - Deposits with other categories of institutions (credit market undertakings, securities firms where relevant) 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 are not covered by the Deposit Guarantee Scheme. *Source: Executive Summary of the FSAP Update technical note (FSAP Update mission March 9–22, 2011).* ### 9. The FI has explicit legal responsibility for promoting financial stability, while ### 9. The FI has explicit legal responsibility for promoting financial stability, while ### Legal mandates and institutional responsibilities - The FI is the sole agency tasked with an explicit broad financial stability objective. - The RB does not have an explicit financial stability mandate enshrined in the law; a provision on promoting a safe and efficient payments system is often interpreted as a more general responsibility for the stability of the financial system. - Part of the macroprudential toolkit falls under the remit of SNDO or RB. - RB Act requires RB to consult FI on matters of major importance within their mandates. - FI Instructions Ordinance imposes an obligation on FI to: - notify government on risks that instability in the financial sector could adversely affect the functioning of the Swedish financial system; - cooperate with and notify the RB on issues relating to crisis management, stability of the payment system or to the RB’s responsibility for currency and credit policy and for the payment system overall; and - notify the SNDO on issues of significance to deposit insurance investor protection. - SNDO Instructions Ordinance tasks SNDO with the obligation to consult and exchange information with RB, FI, and other competent authorities in matters related to deposit insurance or government support to credit institutions. ### Domestic coordination, MOUs, and decision structures - Gateway provisions in respective legislation provide for the exchange of information between principal domestic authorities with responsibilities with respect to financial stability. - The MOU signed in 2009 by the MOF, the RB, FI and the SNDO establishes guidelines for consultation and the exchange of information between the parties in the areas of financial stability and crisis management. - The RB deputy governor is represented on the Board of the FI. - The DSG set up for consultation and information sharing is led by the MOF State Secretary with responsibility for financial market matters, and comprises: - a member of the Executive Board of the RB, - the Director General of the FI, and - the Director General of the SNDO. - The consultative group (DSG) has no decision making powers; it is tasked with: - assessing financial stability and systemic risks, - developing coordination routines, - organizing crisis exercises, and - cross-border communication. - The DSG should meet at least quarterly, but may be convened at short notice any time. - A dedicated section of the MOU further elaborates cooperation between FI and RB. ### Information exchange: legal basis and operational gaps - The legal framework provides a sound basis for information exchange and a high degree of transparency inherent to the Swedish public administration. - In principle, all information that is collected by or communicated from a public Swedish authority is open for public to see unless an explicit justification has been provided. - The 2009 MOU sets only a very-high-level set of principles for data exchange between RB and FI and has not been supplemented by standardized routines; this could hinder a more thorough and frequent exchange of information between RB and FI. - Specific operational improvements noted: - RB would benefit from a more efficient use of supervisory data in RB’s financial stability analysis. - FI could supplement its supervisory returns with higher frequency data compiled by RB on a more systematic basis. - Legal underpinnings for information exchange between FI and SNDO need to be strengthened because there is currently no formal requirement for advance communication about an ailing financial institution which could trigger a DGS payout. ### Crisis framework, exercises, and testing - National authorities organized eight financial crisis management exercises since 2003; these exercises uncovered lessons on coordination of information sharing and communication, coordination of decision-making, and interaction of different legislation. - The new 2009 MOU and new DGS and state support arrangements need to be tested for functionality. - The new arrangements involving the SNDO remain to be tested in domestic crisis simulation exercises. ### Findings on mandates, policy interactions, and recommended institutional changes - A clear mandate and common understanding of crisis resolution and financial stability responsibilities would support the contingency framework and better outline options for financial stability arrangements. - Macroprudential policy should have primary responsibility for ensuring the stability of the financial system, while other policies (microprudential and monetary) complement it. - Macroprudential policy cannot substitute for sound policies more broadly, including strong prudential regulation and supervision, and sound macroeconomic policies. - Consideration could be given to: - specifying RB’s financial stability mandate to be broader than in relation to the payments system; and - augmenting the existing institutional arrangements by establishing an overarching macroprudential framework. - Examples from national central bank laws and EU Treaty foundations are described in Box 1 (excerpted examples include Austria, Hungary, Luxembourg, Finland, Poland, Canada, and Japan). ### Recommendations to strengthen domestic cooperation (excerpt) - Refine the regular exchange of information pertaining to financial stability between FI and RB: - encompass data, supervisory information and analyses of aggregate developments and the financial situation of major banking groups; - develop routines for a more automatic information sharing while respecting necessary confidentiality arrangements. - Strengthen requirements for the information exchange between FI and SNDO: - FI should be required to inform SNDO once it becomes aware of circumstances that could trigger a DGS payout to give SNDO sufficient lead time (as envisaged in the government proposal for the DGS amendments). - Undertake a domestic crisis simulation exercise involving all parties of the 2009 MOU: - scenario based on a medium-sized bank illiquidity to test coordination between RB, SNDO, and FI on ELA or depositor payout decisions and the effectiveness of technical means, templates and data for speedy exchange of meaningful data. ### Cross-border coordination - Important foundations for cross-border cooperation have been laid down in the Nordic-Baltic MOUs and the EU-wide arrangements. - Sweden played a leading role in the establishment of the cooperation agreement on cross-border financial stability, crisis management and resolution among Baltic and Nordic authorities in 2010. - FI was an early adopter of supervisory colleges and uses them actively; FI chairs supervisory colleges for four major Swedish banks and these colleges are fully operational. - Quarterly meetings are held for the core colleges while extended colleges meet on an annual basis. - Bank-specific MOUs on supervisory cooperation have been signed for all four SIFIs; core college activities include joint supervisory priorities, joint inspections, and joint Pillar 2 capital allocation discussions. - Outstanding elements to complete the cross-border framework: - develop and test the toolkit implied by the 2010 Nordic-Baltic MOU including a structured burden-sharing assessment framework and templates for a confidential data warehouse; - strengthen FI’s staff and resources for running supervisory colleges it chairs to ensure core supervisory functions are not undermined by administrative duties; - speed up work on a common platform for information exchange implied by the bank-specific MOUs (FI’s ability to lead this is hampered by resource constraints). ### Emergency Liquidity Assistance (ELA) - ELA is defined as the discretionary provision of liquidity by the central bank to a financial institution that could not otherwise access liquidity. - ELA characteristics and policy guidance: - ELA is a standard—albeit rarely used—central bank tool. - The primary responsibility for reducing the incidence of liquidity problems rests with market participants themselves. - ELA should never be seen as an obligation of the central bank. - ELA can be needed to: (i) prevent illiquidity at an individual bank from unnecessarily leading to its insolvency and systemic implications; and (ii) avoid runs that spill over from bank to bank. - Moral hazard is best avoided by providing ELA only in exceptional circumstances. - The central bank can manage its own credit, market and liquidity risk by requiring collateral with sufficiently prudent haircuts and other terms. - RB-specific notes: - RB’s mandate for ELA to an individual institution is robust for dealing with domestic liquidity problems; RB is authorized by law in exceptional circumstances to support liquidity to provide credit or guarantees to banks and Swedish companies subject to FI supervision. - RB’s ELA policy has been publicly communicated and tested in the recent crisis. - Internal RB guidelines cover decision-making process, collateral acceptance and valuation, and other terms and conditions. - Consideration might be given to specifying a consultation between FI and RB on ELA in the bilateral cooperation agreement, particularly regarding types of solvency and viability assessments to be carried out. - Any institution that has benefitted from ELA should be subject to intensified supervision and measures designed to restore its access to market liquidity. - Clarification needed between RB and SNDO roles: - RB is expected to deal only with solvent institutions while insolvent systemic institutions would be supported by SNDO under the State Support Act. - When SNDO became a support authority under the Support Act in 2008, questions emerged on how RB’s scope for granting ELA works in relation to SNDO’s scope for providing liquidity assistance under the Support Act. - If RB were to act as a payment agent for liquidity assistance by SNDO to an insolvent institution, it should do so only after an agreement with SNDO on the subsequent course of events. - Authorities need to be mindful of the need to comply with the prohibition of monetary financing (prohibition of monetary financing is referenced in the legislative context). *Source: IMF staff analysis excerpted from the provided document.* ### Box 2. The Riksbank’s Public Policy Statement on ELA ### Box 2. The Riksbank’s Public Policy Statement on ELA ### ELA policy principles (as stated by the Riksbank) - Primary objective: To promote a safe and efficient payment system. - Eligible institutions: Banks (including branches of foreign banks) and Swedish companies subject to FI supervision. ELA to institutions that are not members of RIX will be paid out through a member bank. - Liquidity support only: The RB will support an illiquid but solvent financial institution, while the government is expected to deal with an insolvent one. Solvency assessment is aimed at assessing long term survival capacity of an institution, including its balance-sheet solvency, business model, profit generation capacity, and capacity to resolve capital problems without further public interventions, even if the bank momentarily does not meet the capital adequacy requirements. RB recognizes that the assessment of systemic risk and financial condition under a time pressure will be based on imperfect information. - Collateral requirements: In a crisis situation, the RB can consider accepting as collateral other assets than those normally accepted in interbank trading and in the RIX system, for example equity or loan claims. A haircut will take into account uncertainties in valuation. - Interest rate: The interest rate on ELA is determined case by case. The RB will normally charge higher rates than the normal lending rate in order to counter moral hazard and to take account of higher risks, while recognizing that too high an interest rate could jeopardize the purpose of the assistance by creating solvency problems. - Transparency: ELA provided by the RB will be public information, even in the unlikely event that the markets had no knowledge of it. The precise terms and conditions of credit will not be disclosed, however, to market participants. - Foreign currency lending: If spot or swap markets were not functioning due to the perceived counterparty risk, the RB could provide credit in foreign currency or offer an outright swap. The RB may also mediate between lenders and a problem institution and if necessary issue a guarantee. - Other conditions: The RB may provide ELA to a financial institution that has an intention to rescue other problem institutions, require that the institution receiving ELA takes measures to increase its liquidity for instance by reducing the size of its loan portfolio or impose special requirements for access to information and reporting, as applied during the recent crisis. The RB may issue a guarantee as an alternative to granting credit, if this would be a more appropriate response to exceptional circumstances. ### Operational implications and constraints highlighted - Solvency vs liquidity: ELA is explicitly for illiquid but solvent institutions; the government is expected to address insolvency. - Imperfect information: The RB acknowledges that solvency and systemic risk assessments under time pressure will rely on imperfect information. - Collateral flexibility: In crises, collateral accepted can extend beyond usual RIX/interbank collateral to include equity or loan claims, with haircuts reflecting valuation uncertainty. - Rate-setting trade-off: Charging materially higher rates is intended to counter moral hazard and reflect risk, but excessively high rates could induce solvency problems and undermine the assistance objective. - Disclosure stance: Provision of ELA is public, but precise credit terms and conditions are withheld from market participants. ### Policy recommendations and suggested improvements (summary from following discussion) - Formalize cooperation: Formalize RB and FI cooperation in assessing solvency and viability in the context of ELA in a bilateral cooperation agreement and reach a common understanding on necessary supporting data and analytical tools. It would be beneficial for SNDO to participate in developing mutual understanding of key elements of such assessment. - Clarify scope vs SNDO: Clarify the RB’s scope for granting ELA relative to SNDO’s scope for providing liquidity under the terms of the Government Support Act in different stages of the crisis. *Source: Box 2. The Riksbank’s Public Policy Statement on ELA, as provided in the source content.* ### 35. In bank insolvency, prompt action is of essence justifying the special toolkit. ### 35. In bank insolvency, prompt action is of essence justifying the special toolkit. ### Rationale for a special bank resolution toolkit - Financial assets can be dissipated quickly and banks are vulnerable to the loss of confidence with potentially damaging repercussions. - Foremost objective of a failed bank receiver: minimize the impact of bank’s failure on the rest of the financial system. - Concern for creditor rights in a general bankruptcy process must be seen in the bank context; this can justify departure from equal treatment of all creditors ("pari passu") in certain circumstances. - Examples of justified departures and tools: - Preference to insured depositors up to the amount of insured deposits (experience from the United States). - Sale of business or parts into an unfavorable market to avoid market disruptions. - Ability to impose full or partial suspension of payments and stay of enforcement (moratorium) to protect depositors. ### Observations on the Swedish Deposit Guarantee Scheme (DGS) - Mandate and scope: - The DGF can only be used to pay depositors that incur losses as a result of a financial institution’s bankruptcy. It has no role in bank restructuring. - Payout to insured depositors is currently triggered only after the institution has been placed into bankruptcy. - Bankruptcy trigger both distorts the purpose of limited DGS and increases the cost to deposit insurer; delays in reimbursement can lead to contagion and runs on other banks and cause financial hardship for depositors. - Activation history and operational readiness: - Since 1996 (when the DGS was introduced), there have been only three failures leading to a payout. - Two failures occurred in 2006 and some 1,500 depositors received approximately SEK 175 million. - During the financial crisis in 2008–2009 there were no failures where the DI had to be involved. - In early 2010, a Danish bank with a branch in Sweden went bankrupt that had a topping-up arrangement with the Swedish DGS; in total SEK 11 million was paid from the Swedish scheme to 825 depositors. The Danish deposit guarantee scheme handled the administration of the case. - The DGS has been rarely activated and on these occasions has only been used for very small institutions, making contingency planning important. - Legal and institutional features (summary from Appendix I / table): - Deposit Insurance Act does not state the objective of the system; objective is stated in SNDO public communication as “to protect savers and investors and help to maintain the stability of the financial system.” - Mandate specified as a narrow pay-box. - SNDO powers are not formally specified in the Deposit Insurance Act; DGF has no role in bank restructuring. - SNDO decides fees in line with law (Section 13); financial institutions must provide SNDO all information necessary for its operations (Section 16); banks report guaranteed deposits each year at previous December 31 and this information must be audited. - Governance: DGF is endowed with appropriate autonomy within SNDO; day-to-day operations managed by guarantee department; fund managed by Kammarkollegiet on behalf of SNDO; SNDO is a state agency under MOF jurisdiction. - Relationships and information exchange: legal basis for information exchange is set out; MOU exists but does not cover routine information exchange in detail; latest government proposal would improve and codify information exchange between FI and SNDO. - Cross-border arrangements are ad hoc and follow EU practice; reimbursement of Danish bank branch in early 2010 illustrated functionality of arrangements. ### Key problems identified - Trigger for payout tied to bankruptcy delays payouts and undermines DGS effectiveness. - DGF cannot support bank restructuring or resolution operations under current narrow pay-box design. - Lack of early, reliable depositor data and limited operational contingency planning risk slow reimbursements. - Absence of effective and speedy resolution tools for non-systemic institutions could encourage moral hazard. ### Recommendations: special bank resolution framework - Introduce a special bank resolution framework for all institutions accepting insured deposits; special resolution tools (including through orderly liquidation) should apply for all troubled institutions, whether or not ex ante considered systemic. - Objectives of framework: ensure continuity of critical functions, minimize public financial support, reduce legal uncertainty, enable prompt resolution to mitigate depositor contagion and reduce systemic risk. - Legislative approach: - Introduce special bank resolution framework and legislative changes to DGS in a single legislative package to ensure legal consistency. - Principles for such a framework could include: - FI should be given the right to petition for insolvency of deposit taking institutions. Options: - FI could be given exclusive right to petition for insolvency. - Alternatively, specify that no insolvency proceedings may be opened against a deposit taking institution without the explicit consent by FI, while other stakeholders (e.g., management and/or creditors) could be allowed to petition as well; in this case FI should be entitled to participate in all stages of the proceedings. - FI should be given powers to initiate special bank resolution on an administrative basis with a pre-insolvency regulatory threshold and the role of the liquidator should be clearly specified. - FI powers to initiate special bank resolution administratively based upon regulatory criteria and at a sufficiently early stage (i.e., before insolvency is triggered). - The liquidator should be overseen by FI. - Transfer (sale) of assets, including subsidiaries, with assumption of liabilities to third-party acquirers (purchase and assumption or P&A) should be enabled. - To facilitate transactions, authorities might subject certain liabilities to a selective stay with exclusions to preserve stability of payments system and protect central bank transactions. - The DGF should be authorized to support bank resolution operations, in particular via: - Transfer of insured deposits to another bank through a P&A transaction (i.e., with corresponding amount of assets). - Transfer to a bridge bank managed by the government until an assuming bank is found. - DGF funds supporting a bank resolution should not exceed the amount that would have been expended in the course of a normal liquidation. - The insolvency regime for depository institutions should establish a clear priority of claims. - Authorities could consider giving (insured) depositors a preference in creditor ranking to provide a mechanism to recover DGS pay-outs from the bank estate and reduce need for official support while justifying transfer of insured depositors to a healthy bank (P&A). - Note: An alternative two-tiered approach could be considered, wherein a smaller (insured) portion enjoys a higher priority, followed by all other deposits (that are not excluded from DGS coverage), followed by general creditors. - Remove the possibility that a court appeal stays supervisory action (license revocation), while preserving rights of appeal. - Shareholder entitled to compensation only if FI acted improperly; economic interest protected via monetary damages rather than reversal of supervisory decision. - Limitations should be considered as regards other resolution powers, e.g., possibility to stay transfer transactions. ### Interim improvements to the DI framework (while comprehensive reform proceeds) - Implement improvements aligned with recent government proposal presented to Parliament in April 2011 with intention to enact on July 1, 2011; proposals aimed at ensuring Sweden’s compliance with revised EU Deposit Insurance Directive and include shortening payout deadline to 20 days, stricter information requirements, and new trigger for payout dependent on FI’s decision. - Suggested interim measures: - Change in the DGS trigger: DI funds should become available to depositors upon the revocation of the license by FI. - Shorter maximum legal period for payout of deposits at failing banks (a maximum of 20 days implied by the current EU directive). Remove option to prolong this period and explore possibility to mandate an even shorter payout limit. - Explore ways to accelerate payouts. SNDO encouraged to explore technical ways to accelerate the payout to below statutory limits. Standard means include use of a bank with a wide branch network as a payment agent or SNDO itself serving as payment agent once data on individual accounts are available. - Set up a legal obligation for FI to communicate with the SNDO sufficiently in advance prior to the triggering of DGS once it concludes that payment might be triggered in the future. - Ensure SNDO has access at an early stage to reliable information about depositors and their deposits so as to make payments automatic: - Deposit taking institutions should be legally required to keep an up-to-date database of depositors’ identification data and deposit balances on a “single customer” basis consolidating the deposits of an individual in different accounts in the bank. - These data would be transmitted to the SNDO when the payout has been triggered. The DGF would then hold a claim against the liquidated bank and could ascertain the legality of all claims. - Early involvement and advance preparation of DGF/SNDO in the problem bank resolution process is key for ensuring prompt reimbursement of insured depositors. ### Context: EU and international initiatives referenced - EU developments: - Government proposal for Deposit Insurance Act amendments presented to Parliament in April 2011 with intention to enact on July 1, 2011; proposal includes shortening payout deadline to 20 days, stricter information requirements, new trigger for payout dependent on FI’s decision, and improved information exchange between FI and SNDO. - In July 2010, the European Commission adopted a legislative proposal for a thorough revision of the EU Directive on Deposit Guarantee Schemes; recent urgent legislative changes in early 2009 raised minimum coverage to € 50 000 by end-June 2009 and € 100 000 by end 2010, reduced deadline to decide if a bank has failed, reduced the payout delay, and abandoned coinsurance. - International standards: - BCBS and IADI issued the Core Principles for Effective Deposit Insurance Systems in June 2009; Swedish DI design analyzed against these principles (observations summarized in Appendix I). *Source: _cr11287 - 35. In bank insolvency, prompt action is of essence justifying the special toolkit.* ### 8. Compulsory membership for all ### 8. Compulsory membership for all ### Compulsory membership - Membership is compulsory for institutions licensed to hold customers’ funds on account (Section 2 of the DI Act), including for branches of non-EU banks and branches of Swedish banks operating in other EU member states. - Branches of banks from other EU states can “top up” their coverage. - Institutions accepting deposits from those most in need for protection are included. ### Coverage: definition and scope - Coverage is clearly defined in the law and limited. It covers all types of deposits. - Compensation includes accrued interest and is limited to € 100 000 for the deposits in any currency combined with any distribution from the institution’s bankruptcy. - At this level eligible deposits amount to around 25 percent of total deposits by amount but close to 100 percent by number of depositors. - Excludes: financial institutions licensed to accept customer funds on account, including foreign companies, those subject to criminal legal proceedings for money laundering (Sections 4–5 of the Act). - The law does not explicitly mention insider deposits. ### Transitioning from a blanket guarantee - No blanket guarantee is in place. ### Funding mechanisms, premia and fund size - Every institution covered by a guarantee pays an annual fee. - Charges are imposed ex ante and are set at 0.1 percent of total insured deposits (on previous December 31). - In 2008, the stability fund has been set up by the State Support Act with an aim to ensure that in the long run, credit institutions themselves will bear the costs of dealing with financial crises. Authorities are considering options for coordination of the two systems. - The system has an unlimited loan backup facility from the SNDO set in the law (Section 15) should the fund’s resources not cover the required payout. - The fees are invested after the SNDO’s administrative costs for running the syst5em have been deducted. - SNDO may order the institution that failed to fulfill its obligations to take corrective measures (Section 21 of the Act). - If measures are not implemented within a year of the order, the SNDO may decide that the deposit guarantee no longer applies to institution’s deposits (with consent of home country supervisory authorities for the European Economic Area (EEA) banks and after notifying home supervisors of non-EEA banks). - There is no target level for the fund. - The accumulated value at the end of 2010 at just over SEK 22 billion or around 2 percent of insured deposits, which is at a lower end in international comparison. - Empirical surveys show that most countries have established Funds in the range of 1.25 to 5 percent of insured deposits. - The Swedish DGF was relatively larger before the limit was doubled to 100,000 euro at end-2010 in line with the EU directive. ### Risk-adjusted premia and investment rules - The criteria for setting risk-adjusted fees are set in the law (Sections 12–14 of the Deposit Insurance Act). - Fees can vary between 0.06 percent and 0.14 percent depending on the institution’s capital adequacy ratio relative to capital adequacy of other institutions in the system (Section 13 of the Deposit Insurance Act). - Decisions on banks fees can be appealed at the general administrative court. - Investment rules are prescribed by the law (Section 15 of the Deposit Insurance act). Bank fees are invested in interest-bearing account in the SNDO or government debt instruments. ### Public awareness - Members shall provide depositors with all information relevant to the guarantee before a contract is established and during the contract period (Section 11 of the Deposit Insurance Act). - SNDO maintains a website with detailed information in Swedish and English. - There is high degree of transparency about past bank interventions and a manner in which the ailing banks have been resolved. ### Legal protection for staff and legal redress - Specific provisions concerning employee liability are not mentioned in the Deposit Insurance Act. - General provisions on the liability of public administrative authorities and their employees are set out in the Damages Act (1972:207). Public administrative authorities are liable for damages resulting from negligence in carrying out their duties (Chapter 3, Section 2). - Case law has set the threshold for what constitutes negligence in the discharge of administrative duties very high; an authority’s incorrect assessments are not enough to incur liability unless the incorrect assessment was manifestly wrong. - Legal redress against those at fault in a bank failure to deposit insurer or other bodies is not addressed in the Deposit Insurance Act. - The IOSCO assessment noted that the legal and judicial framework apparently does not provide for effective deterrence against a range of crimes in financial markets. ### Early detection, intervention and resolution - Early detection, timely intervention and resolution are the responsibility of the FI. - The SNDO is the bank support agency under the State Support Act in systemic cases; in this capacity it can become involved in restructuring a bank that receives a support. - See Basel Core Principles detailed assessment and comments on operational independence and intervention powers under CP 1 and CP 23. - The DGF has no role in bank resolution being only a narrow pay-box and does not have responsibility for restructuring banks or for covering the cost of doing so. - The SNDO is responsible for payment to depositors after a bank has been declared bankrupt by the court. - The bankruptcy, including liquidation of the failed institution’s assets, proceeds according to the regular bankruptcy rules and is handled by a court-appointed lawyer. The SNDO acts as a regular claimholder and has no powers to intervene in bankruptcy proceedings. - The FI may determine the manner in which business shall be wound up (Banking and Financing Business Act (2004:297)). - Facilitating the acquisition by an appropriate body of the assets and the assumption of the liabilities of a failed bank (to provide depositors with continuous access to their funds and maintaining clearing and settlement activities) is not explicitly dealt with in the law. ### Reimbursement timing, depositor information and recoveries - Compensation shall be disbursed no later than within three months of the date bankruptcy of the financial institution is determined by the court, or unavailability of deposits is determined by the home country authority for a branch of foreign institution (Section 9 of the Deposit Insirance Act). - General administrative court may extend the limit by not more than three months. Additional extensions of not more than three months at a time may be granted twice. (Section 9 of the Deposit Insurance Act). - SNDO aims to repay depositors faster and the new government proposal entails a 20 days limit. This may fall short of the currently discusses EU Directive amendments. - Depositor loses his/her right to compensation if (s)he fails to assert claim before losing the right to distribution from the institution’s bankruptcy. - There is no legal obligation for institutions to maintain up-to-date database of insured deposits. This would change if the amendments proposed by the government became effective. - The state is subrogated and intervenes in the depositor’s right vis-à-vis the failed institution with a right of precedence over the depositor up to the amount disbursed (Section 19 of the Deposit Insurance Act). - The SNDO is responsible for protecting the state interest. - Recovered money is paid to the DGF. - The same priority holds for a foreign guarantee system that has paid compensation when Swedish institution has been declared bankrupt. *Source: _cr11287 - 8. Compulsory membership for all* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11287.pdf_