Sweden’s banking and finance sector has been considered one of the most stable and well-regulated in the world. Historically, Sweden has faced several financial crises, such as the banking crisis in the early 1990s, which led to a series of policy responses aimed at strengthening the sector’s resilience. These measures have included the establishment of a regulatory framework, the implementation of macroprudential policies, and the adoption of the European Union’s (EU) banking directives.
The Swedish banking system is guided by several principles, including transparency, stability, and financial integration. These principles are aimed at promoting a safe and efficient financial system that can withstand shocks and crises. Despite these efforts, some risks are inherent in the system, such as credit risk, market risk, operational risk, and liquidity risk. Additionally, given Sweden’s integration with the global financial system, the country’s banks may also be exposed to external risks, such as contagion from international crises.
Banking regulation in Sweden is crucial for maintaining the stability of the financial system, protecting consumers, and ensuring the sector’s competitiveness. The regulatory framework provides a comprehensive set of rules and guidelines aimed at addressing the various risks associated with banking operations. This framework is also designed to ensure that banks maintain adequate capital and liquidity levels, adhere to risk management best practices, and comply with anti-money laundering and counter-terrorism financing regulations.
Despite its strengths, the Swedish banking sector has some weaknesses, such as the high concentration of a few large banks, the significant exposure to the domestic housing market, and a reliance on short-term wholesale funding. These weaknesses could potentially lead to systemic risks, which may have a negative impact on account holders and other creditors. In the event of a bank failure, creditors may face losses and the erosion of their investments’ value.
Swedish Banking Law
The Banking and Financing Business Act: This Act governs the licensing, organization, and supervision of banks and other credit institutions in Sweden. It sets out requirements for capital adequacy, risk management, and governance.
The Financial Supervisory Authority Act: This Act establishes the Swedish Financial Supervisory Authority (SFSA) as the primary regulator responsible for overseeing the financial sector, including banks, insurance companies, and securities firms.
The Deposit Guarantee Scheme Act: This Act provides for the protection of depositors by establishing a deposit guarantee scheme, which compensates depositors up to a certain limit in the event of a bank failure.
The Bank Recovery and Resolution Directive (BRRD): As an EU member state, Sweden has implemented the BRRD, which provides a framework for the recovery and resolution of failing banks, aiming to minimize the impact on the financial system and protect taxpayers.
The SFSA has the authority to impose administrative sanctions on banks that fail to comply with laws and regulations, including fines, license revocations, and restrictions on business operations. The SFSA also has the power to appoint a special investigator to manage the bank’s operations in severe cases. Internationally, Swedish banks are subject to the supervision of the European Central Bank (ECB) and the European Banking Authority (EBA). These institutions may impose sanctions in cases of non-compliance with EU regulations or when a Swedish bank poses a risk to the financial stability of the European banking system. The ECB and EBA work in close collaboration with the SFSA to ensure consistent enforcement of regulations and swift action against any potential threats to financial stability.
Bank resolution procedures in Sweden
In line with the BRRD, Sweden has established a framework for bank resolution, aimed at managing the orderly failure of banks and minimizing the impact on the financial system. The resolution process is initiated when the SFSA determines that a bank is failing or likely to fail and that no other supervisory action would restore its viability. Resolution tools at the disposal of the SFSA include the sale of business, the establishment of a bridge institution, asset separation, and bail-in, which involves the write-down or conversion of debt into equity to recapitalize the bank.
The insolvency procedures for banks in Sweden are governed by the Bankruptcy Act and the Act on Bank Support and Restructuring. When a bank is declared insolvent, it is subject to the general bankruptcy rules. The SFSA appoints a liquidator, who is responsible for administering the bank’s assets and settling its debts.
Priority of claims and creditor hierarchy
In a bank insolvency, the priority of claims and creditor hierarchy is as follows:
- Secured claims, such as collateralized loans and mortgages
- Unsecured claims, including deposits covered by the deposit guarantee scheme
- Subordinated debt, including hybrid capital instruments and Tier 2 capital
- Shareholders’ equity
Case studies from failed Swedish financial institutions
The most notable example of a Swedish bank failure is the collapse of Nordbanken and Götabanken in the early 1990s. The government intervened to resolve the crisis by establishing a new state-owned bank, Nordea, which acquired the assets and liabilities of the failed banks. Depositors were protected, and the government eventually recouped its investment by privatizing Nordea.
In the event of a bank failure, creditors can utilize the legal framework provided by the Deposit Guarantee Scheme Act and the BRRD to recover their funds. Depositors with insured deposits will be compensated up to the limit specified by the deposit guarantee scheme, currently 100,000 EUR per depositor, per institution. Other creditors, including those holding debt instruments, can recover their investments through the bank’s insolvency proceedings, subject to the priority of claims and creditor hierarchy. The bail-in tool may also be used to recapitalize the bank and allow creditors to recover their investments through equity conversion.