Key Laws and Regulations
As Sweden is an EU Member State, Swedish banks are subject to laws and regulations on an EU level and a national level. Consequently, Swedish banks are subject to national laws implementing the Capital Requirements Directive (2013/36/EU) (the CRD) and directly subject to the Capital Requirements Regulation (EU No 575/2013/EU) (the CRR), which are the two key European legislative acts that govern the Swedish banking sector.
On a national level, Sweden has implemented the CRD through the Banking and Financing Business Act (2004:297) (the BFA). The CRR is directly applicable in Sweden but has been complemented with certain Swedish rules, including the Credit Institutions’ and Investment Firms’ (Special Supervision) Act (2014:968) (the Special Supervision Act) and the Capital Buffers Act (2014:966) (the CBA). The relevant acts set out general prudential and organisational requirements with which Swedish credit institutions (including banks) must comply. For banks that are limited liability companies, the general Swedish Companies Act (2005:551) (the Companies Act) is also an important piece of legislation that has an implication on the corporate governance of Swedish banks.
Banks that provide investment services are subject to the Securities Market Act (2007:528) (the SMA), implementing MiFID 2 (2014/65/EU). Other key legislation containing requirements in relation to specific financial services includes the Payment Services Act (2010:751) implementing PSD2 (EU) 2015/2366, and the Consumer Credit Act (2010:1846), regulating consumers' rights in relation to credits offered to consumers.
Swedish banks are subject to the Anti-Money Laundering and Terrorist Financing Act (2017:630) (the AMLA), implementing the AML Directive (EU) 2015/849, which stipulates requirements in relation to the prevention of money laundering and terrorist financing.
In relation to depositor protection and the crisis management of banks, the Deposit Guarantee Act (1995:1571) (the DGA) (providing for the Swedish deposit guarantee scheme) and the Resolution Act (2015:1016) implementing the Banking Recovery and Resolution Directive 2014/59/EU are key pieces of legislation.
Swedish laws are supplemented by regulations (mandatory rules) and guidelines (comply or explain principle) issued by the Swedish regulator and financial supervisory authority, the Swedish Financial Supervisory Authority (Finansinspektionen) (the SFSA). Furthermore, the guidelines of the European Banking Authority (EBA) generally apply to Swedish banks, either directly through confirmation by the SFSA or as further implemented by SFSA regulations or guidelines. Upon confirmation by the SFSA, EBA guidelines have the same legal status as the SFSA guidelines.
The SFSA is the primary regulator in the financial sector and is responsible for the authorisation and supervision of Swedish banks. The SFSA’s objective is to ensure stable financial systems, by promoting confidence, well-functioning markets and a high level of consumer protection.
The Swedish National Debt Office (Riksgälden) is responsible for the resolution of banks and the national deposit guarantee scheme. The central bank of Sweden (Riksbanken) acts as a lender of last resort but does not have any supervisory function in relation to banks.
Other relevant regulatory authorities include the Data Protection Authority (Datainspektionen), which supervises compliance with the General Data Protection Regulation (EU) 2016/679 (GDPR), and the Consumer Agency (Konsumentverket), which has certain supervisory powers regarding the marketing of and disclosure requirements in relation to consumer credits.
Although a member of the EU, Sweden does not participate in the European banking union and the institutional frameworks referred to as the “Single Supervisory Mechanism” and the “Single Resolution Mechanism” (the SRM). Therefore, the European Central Bank (the ECB) does not have any direct authority in relation to the licensing and supervision of Swedish banks.
Types of Licences and Activities Covered
The BFA regulates Swedish licence requirements that apply to activities carried out by credit institutions. There are two regulated activities in this regard.
The first activity is “banking business” (bankrörelse), which captures undertakings that participate in the processing of payments through general payment systems and receive money from the public on their own account, which after termination is available to the creditor within a maximum of 30 days. The second activity is “financing business” (finansieringsrörelse), which refers to undertakings that take up deposits and other repayable funds from the public and grant credits for their own account. Companies that are licensed to carry out financing business are referred to in the BFA as credit market institutions.
Conceptually, Swedish banks and credit market institutions are both “credit institutions” within the meaning of the CRD. Accordingly, Swedish banks as well as credit market institutions may provide all sorts of financial services listed in Annex 1 of the CRD. However, institutions that carry out financing business are traditionally less complex than banks, but are in essence subject to the same regulatory requirements as banks. For the purposes of the descriptions below and unless specifically set out below, we will use the word “bank” when describing regulatory requirements applicable to credit institutions in Sweden.
Other Financial Services
Business that includes only limited financial services, such as residential credits, consumer credits and payment services, but not deposit-taking, is also regulated and subject to licence requirements under separate legal frameworks.
Banks authorised in other European Economic Area (the EEA) Member States (including the EU) may provide banking services in Sweden without obtaining a separate licence from the SFSA. These banks may start to operate in Sweden on a cross-border basis or by establishing a branch office by notifying their home state authority, which will in turn notify the SFSA. Third country banks will need to apply for authorisation in Sweden through establishment in Sweden, and may not provide cross-border services into Sweden.
Conditions for Authorisation
In order to obtain a banking licence, an applicant must file a comprehensive application to evidence that they will meet the conditions for authorisation, including that:
Furthermore, a bank must have a starting capital corresponding to at least EUR5 million at the time of commencing business once the application has been approved.
The Application Process
Applications are submitted to the SFSA, which will decide whether the conditions for authorisation are fulfilled. Applicants pay a fee to the SFSA in conjunction with the application, currently SEK420,000.
The application must include information on how the undertaking will fulfil and comply with legal, organisational and prudential requirements. This includes comprehensive and detailed descriptions of the undertaking’s internal rules, procedures and methods with respect to internal governance and risk management.
Documents that must be provided in the application include a detailed business plan, annual reports, capital and liquidity assessments and a wide range of required internal policies, as further described under 4.1 Corporate Governance Requirements. The applicant must also submit information about the owners, management and senior executives for the purpose of the SFSA’s assessment with respect to the criteria described under 3.1 Requirements for Acquiring or Increasing Control over a Bank and 4.2 Registration and Oversight of Senior Management.
The SFSA’s Assessment
As a formal rule, the SFSA should make its decision to grant or refuse a licence within six months of receiving a formally complete application. As the SFSA usually requests complementary information during the evaluation period, a timeline of 12-18 months from the date an application is filed can be expected. The undertaking must then commence its business operations within a year of the application being granted.
During the evaluation period, the SFSA will communicate with the applicant on an ongoing basis – for example, in order to request complementary information. In general, it is advisable to have regular informal contact with the SFSA’s case handler in order to check on the status of the application.
As a rule, the application must show that the undertaking will be able to fulfil all of the criteria described in the previous sections as soon as the business operations commence. In recent years, the SFSA has increasingly focused not only on whether the conditions for authorisation are formally fulfilled but also on whether the applicant has a credible and viable strategy and business model, which will allow the applicant to generate returns on a long-term basis.
In the past four to five years, the SFSA has only granted licences to a handful of applicants, and many others have either been subject to non-approval or have withdrawn their application following the SFA’s indication that it would not be approved.
For the reasons above and due to the sheer amount of information that must be provided, an application has become a lengthy and costly procedure, which usually requires the involvement of external consultants, such as lawyers with regulatory expertise and capital adequacy experts.
Any individual or entity acquiring a qualifying holding in a bank must be subject to prior approval and ownership assessment by the SFSA. A qualifying holding is defined as a direct or indirect holding of at least 10% of the capital or the voting rights, or which otherwise makes it possible to exercise significant influence over the bank – eg, through veto rights or representation on the board. An approval must also be obtained if a qualifying holding is increased and reaches or exceeds 20%, 30% or 50% of the capital or the voting rights.
Furthermore, an application should be made if several acquirers act in concert and their aggregate holdings amount to a qualifying holding. When determining whether the acquirers act in concert, consideration should be taken inter alia of shareholder agreements and other close ties between the acquirers.
Requirements in Relation to Owners
There are no formal restrictions regarding the categories of persons that may acquire a qualifying holding – eg, in relation to foreign ownership. However, the SFSA will assess whether the acquirer is suitable to own a qualified holding.
An acquisition will be approved only if it does not impede the sound and prudent management of the bank and its ability to conduct business in accordance with applicable legal requirements. In its assessment, the SFSA will consider the following, among other things:
If the acquisition results in a “close link” between the bank and the owner or an affiliate of the owner, which is assessed based on certain ownership thresholds, it will only be approved if it does not prevent the effective supervision of the bank.
The application for approval is made using standard forms provided by the SFSA. The magnitude of the information that must be provided in the application varies depending on the size of the holding that is acquired, but includes information about the organisational structure of the acquirer (including an ownership chain), the acquirer’s financial situation and the acquirer’s management, as well as business and financing plans.
The SFSA has a handling time of up to 60 working days from the date a formally complete application is filed. During the assessment period, the SFSA may request additional information, in which case the assessment period is suspended.
In order to obtain relevant information about the acquirer, the SFSA will also gather information from other Swedish authorities and, where applicable, foreign authorities.
If the SFSA decides to oppose the proposed transaction, it must inform the proposed acquirer of the decision in writing. The decision may be appealed to the administrative courts of Sweden.
Relevant Legislation and Codes
Key legislation with respect to corporate governance includes the BFA, SFSA regulations and EBA guidelines. For banks that are limited companies, the Companies Act is essential. Furthermore, the Swedish Bankers’ Association publishes recommendations, which banks generally follow. Banks that are listed on stock exchanges must comply with the relevant stock exchange rules and with the "Swedish Code of Corporate Governance", an industry code for listed companies.
General Corporate Governance
From a general perspective, the Companies Act stipulates that Swedish companies must have three decision-making bodies: the shareholders’ meeting, the board and the managing director (in hierarchical order). Companies are also required to have an external auditor, which is appointed by the shareholders’ meeting.
The board has the ultimate responsibility for the organisation of a company and the management of its affairs. The managing director is responsible for the day-to-day management. The board is required to define and distinguish the duties of the board and the managing director.
In a banking regulatory context, the board is ultimately responsible for the bank’s internal governance, its financial situation and its legal compliance. The managing director of a bank is responsible for managing the bank in accordance with the board’s instructions.
Control Functions in Banks
Banks are required to have independent control functions for risk control, compliance and internal audit. These functions monitor and control the bank’s operations to ensure that risks are properly managed and legal requirements are met. As a general rule, the functions must be organisationally separated from the business operations and each other.
Banks must adopt internal rules for the control functions, stipulating their responsibilities, duties and reporting procedures. As a rule, the functions for risk control and compliance will report regularly to the managing director and the board, while the internal audit function reports directly to the board.
Banks are required to provide the control functions with enough resources, and staff in the control functions must have sufficient experience and knowledge to monitor the bank’s operations.
The control functions may be outsourced to external service providers, subject to certain regulatory requirements for outsourcing.
Internal Governance and Control
Banks must adopt an adequate and effective written framework for internal governance and control, which should include clearly defined decision-making processes and allocations of responsibilities as well as specified reporting lines.
The governance and control frameworks should take into account the nature and scope of the bank’s business, but are in general very comprehensive. Areas where written policies, rules and procedures are a statutory requirement include risk management, anti-money laundering and terrorist financing, compliance, IT systems, business continuity, conflicts of interests, remuneration and outsourcing.
Outsourcing arrangements have become increasingly common in Sweden, especially in relation to IT systems and cloud services. In order to ensure that banks maintain control when critical functions or part of the business are outsourced, they must regularly monitor and evaluate the service provider. Critical outsourcing arrangements must be reported to the SFSA.
Continuity management is of the essence in outsourcing arrangements. Banks must ensure that disruptions can be avoided if the external partners fail to provide the services or if the arrangement is terminated. In this regard, it must be possible to transfer the outsourced activities to another service provider or to the bank within a reasonable period upon termination.
Board members in Swedish companies are appointed by the shareholders’ meeting, and the managing director is in turn appointed by the board.
Banks are required to adopt a suitability policy with respect to board members and senior management. The policy should set out rules on the appointment procedure and which requirements the relevant persons must meet.
Banks must ensure that the board as a whole, as well as the individual members, has sufficient experience and knowledge in relevant areas – eg, financial markets, legal requirements, risk management and the managing of financial businesses. The diversity of the board as regards age, gender and background must also be considered.
Registration with the SFSA
Board members, alternate board members, the managing director and deputy managing directors are subject to suitability assessments by the SFSA. An application for a suitability assessment must be filed when an undertaking applies for authorisation and when there is a change in these positions.
Applications are made by using standard form questionnaires. The application must include a curriculum vitae and information about the person’s employment and ownership in other undertakings and potential conflicts of interest. When new board members are appointed, the application should include an assessment of the new board member and of the board as a whole.
The SFSA has a handling period of up to 60 working days to assess whether the person is suitable based on their knowledge, experience and reputation.
Please see 4.1 Corporate Governance Requirements regarding the roles and duties of the board and the managing director. Failure to perform these duties properly may lead to civil liability under the Companies Act if the bank has suffered damages or losses. It may also lead to disciplinary action from the SFSA in the form of administrative fines or a banning order that prevents the person from acting as a board member or managing director in a bank for three to ten years.
The remuneration practices in banks are mainly regulated by the BFA and SFSA regulations. Banks must also comply with EBA’s guidelines on remuneration. The legal requirements apply to both monetary and non-monetary benefits.
Banks are required to have a written, gender-neutral remuneration policy that must promote sound and effective risk management, may not encourage excessive risk-taking and should include measures to avoid conflicts of interest. Furthermore, the policy should align with the bank’s strategy, risk appetite, values and long-term interests.
Banks are required to carry out an annual analysis in order to identify categories of staff whose professional activities have a material impact on the risk profile of bank (“risk-takers”). Risk-takers will include senior executives, staff in control functions and staff whose remuneration exceeds certain thresholds, among others. Special rules will apply to the remuneration paid to such staff.
A distinction is made between fixed and variable remuneration, and the levels of fixed and variable remuneration must be appropriately balanced. Variable remuneration is subject to special restrictions, including that it must be based on both financial and non-financial as well as risk-adjusted performance criteria. As a rule, guaranteed variable remuneration is not permitted other than during the first year of employment.
For risk-takers, the total variable remuneration must not exceed the total fixed remuneration they receive. Furthermore, at least 40% of their variable remuneration above SEK100,000 should be deferred for at least three to five years; if the remuneration is particularly high, at least 60% should be deferred. In larger banks, at least 50% of the variable remuneration of risk-takers should consist of shares or other instruments.
The board is responsible for ensuring that the total variable remuneration paid to staff does not limit its ability to maintain or strengthen its capital base. Variable compensation should be able to be withheld or reduced, if the pay-out could jeopardise the bank’s financial situation, for example.
Review of Remuneration Practices
The board is required to review the remuneration policy and the risk analysis annually, in order to ensure that actual remuneration practices comply with the policy and the legal requirements. Such a review must also be carried out independently by the control functions.
Banks are required to disclose information to the public about their remuneration policy and practices on an annual basis, including information about variable remuneration paid to risk-takers. The SFSA also collects information from all Swedish banks on their remuneration practices on an annual basis.
Consequences of Breaches
If a bank is in breach of the remuneration requirements, the SFSA may order it to amend its remuneration practices. If the breach is serious, a warning may be given or, in a worst case scenario, the bank’s authorisation may be withdrawn. The SFSA may also issue an administrative fine. The board members and the managing director could be subject to the sanctions described under 4.2 Registration and Oversight of Senior Management.
Future Changes through CRD V
During 2021, new remuneration requirements will enter into force as part of the changes to the CRD made through Directive 2019/878/EU (CRD V). The changes will, inter alia, increase the minimum deferral period to four years for general risk-takers and five years for senior management. Smaller banks and staff with annual salaries below EUR50,000 will be exempted from the requirement to defer compensation and pay parts of it in shares.
Sweden has implemented the Anti-Money Laundering Directive (EU) 2015/849 through the AMLA, which prescribes requirements for the prevention of money laundering and terrorist financing that correspond to the requirements set out in the Directive. The requirements can roughly be divided into three main focus areas:
General Risk Assessment
The general risk assessment shall identify how the products and services provided by the bank can be used for money laundering or terrorist financing, and assess the risks associated with money laundering and terrorist financing. In conjunction with the general risk assessment, special consideration shall be given to the types of products and services that are provided, the existing customers and distribution channels, and the existing geographical risk factors. Banks shall conduct a risk assessment of the customers and determine a risk profile for each customer. The customer’s risk profile shall be based on the general risk assessment and the knowledge of the customer.
Customer Due Diligence
A bank may not establish or maintain a business relationship nor carry out an individual transaction where it lacks sufficient knowledge of the customer. Such knowledge is essential in order to be able to handle the risk associated with the customer and to supervise and assess the customer’s activities and transactions to identify suspicious activities and potential money laundering or terrorist financing.
Necessary customer due diligence measures include:
Simplified or Enhanced Measures
Depending on the customer’s risk profile, simplified or enhanced measures can be allowed or required. If the risk associated with the customer relationship is determined as being high, the business operator shall carry out particularly comprehensive verifications, assessments and investigations. Such measures include obtaining additional information regarding the purpose and nature of the business relationship or transaction information regarding the origins of the financial resources of the customer and the beneficial owner.
Ongoing Monitoring and Reporting
A business operator shall monitor ongoing business relationships and evaluate individual transactions for the purpose of discovering suspicious activities and transactions. The focus and scope of the monitoring shall be determined based on the general risk assessment and the customer’s risk profile. If there is reasonable cause to suspect money laundering or terrorist financing, information regarding all indicative circumstances shall be reported promptly to the Swedish Police.
The Swedish deposit guarantee scheme (the Scheme) is administered by the Swedish National Debt Office (the NDO). Relevant legislation includes the DGA, the Deposit Guarantee Ordinance (2011:834) and NDO regulations.
The Scheme protects deposits in cases where a due and payable deposit is not repaid by a bank under the applicable legal or contractual deposits, and where the SFSA has determined there are no current prospects of the bank being able to do so, or where the bank has entered into bankruptcy. The Scheme continues to apply if the NDO takes control of a bank in cases of resolution. As of 2020, compensation has been paid out from the Scheme on three separate occasions, for a total amount corresponding to approximately EUR20 million.
"Deposit" in this regard means a credit balance in any kind of bank accounts, such as current accounts and savings accounts, and regardless of whether the deposit is fixed-term or subject to other restrictions.
The Scheme covers deposits with Swedish banks as well as branch offices of Swedish banks in other EEA Member States. Upon a bank's application to the NDO, the Scheme may also cover deposits with branch offices outside the EEA. Swedish branch offices of banks authorised in other EEA Member States may also participate in the Scheme upon application to the NDO. In such cases, the Scheme will supplement the cover provided by the depositor guarantee scheme in the home state.
The Scheme covers deposits, including interest, up to the date on which the SFSA makes a determination that there are no prospects of the bank being able to repay, or up to the date bankruptcy is declared.
Deposits from both individuals and legal persons (including the estates of deceased persons) are protected through the Scheme. However, deposits by financial institutions such as banks, investment firms and insurance companies and public and local authorities made on their own behalf are not covered by the Scheme. Funds found to be connected to money laundering or terrorist financing are not protected.
The maximum amount covered by the Scheme is an amount in SEK corresponding to EUR100,000. The amount nominated in SEK is reviewed and decided by the NDO every fifth year. As of 1 January 2021, the amount covered will increase from SEK950,000 to SEK1,050,000.
Under certain circumstances, the maximum guaranteed amount covered may be raised to SEK5 million. This is the case with respect to deposits resulting from private residential property transactions and deposits related to divorce, dismissals, pensions, redundancy, invalidity or death, as well as insurance payments and compensation from criminal injuries. However, such higher amounts are only protected for a period of 12 months from the date the deposit was made.
The maximum amount applies per person and bank, which means that a person holding deposits with several banks may receive the maximum amount for each of the banks with which they have made deposits. With respect to joint accounts and client accounts, every individual owner is, as a main rule, entitled to the maximum amount covered.
The protection enjoyed by depositors under the Scheme is not affected if the depositor also has debts with the bank (eg, a mortgage). Debts will therefore not be subtracted from the compensation but are more likely taken over by another bank.
Banks are required to inform depositors of the Scheme and whether deposits are covered, the maximum amount covered, and how the guarantee will be paid out.
Banks are also required to submit regular information to the NDO on depositors and their deposits. Information about the total amount of guaranteed deposits at the end of each quarter of a year must be reported no later than 24 January the following year.
Funding of the Scheme
Each bank that is covered by the Scheme must pay an annual fee to the NDP, which is based on the total amount of deposits received by the bank during the preceding year. The basic annual fee is 0.1% of the total deposits made during the preceding year, but the individual fee per bank is set by the NDO, with consideration given to risk-adjusting factors.
The fees are placed by the NDO in a designated account administered by the NDO itself, from which compensation to depositors is paid when required. This account is generally considered to be well funded but in the hypothetical case that the funds are insufficient to compensate all depositors, the NDO will borrow money from the government.
The bank secrecy requirements follow from the BFA, although similar requirements are set out in other related legal areas. In the BFA, the bank secrecy requirements are expressed in a way that an individual’s relationship to a bank may not be disclosed to a third party. There are some exceptions to this rule; however, they are not explicitly expressed in law, but rather as instances when a disclosure may be permissible.
The requirements are directed towards the bank as a legal person, but apply to management and all employees. If the bank violates the bank secrecy requirements, the bank may face administrative penalties and fees. Such a violation is not classified as a criminal offence.
Information Covered by Bank Secrecy
Bank secrecy protects all information, documented or not, that a bank holds on a customer, regardless of how the bank has obtained said information. The “individual’s relationship with the bank” that is covered by bank secrecy also includes relationships where an individual has negotiated with the bank regarding a potential customer relationship but for some reason never entered into one.
It should be noted that bank secrecy also covers a guarantor’s relationship to a bank and any other relationship that results in the bank having information regarding the person in question and where there is a legitimate interest in keeping the information secret. Furthermore, bank secrecy does not cease if a customer relationship with the bank in question ends.
Exceptions Permitting Disclosure
Bank secrecy is not absolute and there are situations where information may be disclosed. In some situations, the secrecy constitutes a duty not to spread information regarding the customer. On the other hand, there may be situations that oblige the bank to disclose the information. In addition, there may be situations where the bank is not obliged to, but instead has a right to derogate from the bank secrecy.
One example of where disclosure is permitted is when it is necessary in order to fulfil the customer’s instructions. This may include disclosure internally, within the bank and where the bank has a legitimate interest to disclose the information. Such information can only be disclosed to the extent it is deemed necessary – ie, to the departments or to the group of persons where the information is needed in order to fulfil the customer’s instructions.
To conclude, information regarding the bank’s customers is not considered to be general or widely accessible within a bank. If the bank’s employees gain access to customer information when such information is not required by the employee’s duties and tasks, this would constitute a breach of bank secrecy.
A bank can be legally obliged to disclose customer information to authorities, such as the Swedish Tax Authority or the SFSA. Disclosure due to legal obligations is accordingly permissible.
Within a group of companies that includes a bank, there is often interest in having the information transferred within the group for marketing purposes. It can be argued that marketing constitutes a legitimate interest that would authorise the disclosure of customer information within the group, especially when the information is limited to the name and address of the customer and when the customer gets some kind of benefit in return, such as a discount on other services provided by the group.
To conclude, information regarding the customer can be used within the bank and under certain circumstances within a group of companies, but in no case can the information be used for interests that are in conflict with the customer’s interests.
Other Relevant Legislation
When processing information regarding the consumer, consideration must be given to other relevant legislation. For example, the processing of personal data must be compliant with the GDPR, which requires a legal basis and an explicit purpose for the processing.
By the end of 2010, the Basel Committee published the first parts of the global regulatory framework called Basel III. The framework was finalised in late 2017, but parts of it were transposed in the EU through the CRR, which is directly applicable across the EU. Together with the CRD, these legal acts constitute the main legislative framework for banks in the EU and thus Sweden.
Sweden has implemented the CRD mainly through the Special Supervision Act, the CBA and the SFSA’s regulations regarding prudential requirements and capital buffers (FFFS 2014:12) and regulations regarding the management of liquidity risks in credit institutions and investment firms (FFFS 2010:7). The regulations contain rules on consolidated situations, own funds, own fund requirements, large exposures, liquidity, reporting, disclosure of information, capital buffers and documentation of the undertakings' capital and liquidity assessment procedures. Sweden has made an exemption from the requirements set out in Article 129(1)(c) of the CRR to avoid the concentration problems on the Swedish market that could arise if issuers of covered bonds were referred to only a few derivative counterparties.
Pillar 1 Requirements
According to capital adequacy requirements, Tier 1 and Tier 2 capital must exceed 8% of risk-weighted assets (Pillar 1 core requirements). The Tier 1 capital requirements include common equity and other qualifying financial instruments (so-called additional Tier 1 capital), the loss absorption capacity of which is considered equal to equity. The minimum requirement for common equity is 4.5% of risk-weighted assets, while the additional Tier 1 capital is 1.5%. On the other hand, Tier 2 capital is subordinated to unsecured senior debt of the bank and is set at 2%. Moreover, the CRR restricts accelerated repayments, redemptions and other cancellations of equity or debt made available to bank investors for Tier 1 and Tier 2. The CRR further restricts the granting of guarantees or security interests by subsidiaries of the bank in order to protect the quality of the bank’s regulatory capital from dilution.
The 8% minimum capital requirement is fully binding for all banks; breach thereof could lead to a withdrawal of the bank’s licence. However, capital buffer requirements result in much higher levels of capital for banks and especially for the global systemically banks (G-SII). A capital conservation buffer of 2.5% of risk-weighted assets is added to this. The total minimum common equity held as part of a bank’s capital is therefore 7% of risk-weighted assets.
Combined Buffer Requirements
Sweden prescribes the following capital buffer requirements:
As mentioned above, the conservation buffer amounts to 2.5% and is designed to ensure that banks build up capital buffers outside periods of stress which can be drawn down as losses are incurred. The countercyclical buffer has a range between 0% and 2.5% of risk-weighted assets compromising common equity or other fully loss absorbing capital. The countercyclical buffer is utilised to address systemic risk concerns.
The SFSA has issued regulations regarding the calculation of the countercyclical buffer and the credit exposures’ geographic composition. In accordance with the CBA, the SFSA shall set a countercyclical buffer guide and a countercyclical buffer rate each quarter. As of 9 September 2020, the buffer rate is set to 0% and the countercyclical buffer guide is set at 1.3%.
The purpose of the systemic risk buffer is to prevent systemic risks of a long-term, non-cyclical nature that are not covered by the CRR. The SFSA has imposed a systemic risk buffer of 3% on the larger banks in Sweden.
CBA provides for a surcharge for any G-SII between 1% and 3.5% of each bank’s total risk-weighted assets. However, the limitation of 3.5% will be removed on 29 December 2020.
The SFSA is also responsible for identifying other systemically important institutions (O-SII) and deciding on additional capital buffer requirements for such institutions. As of 29 December 2020, the additional capital buffer for O-SII can amount to 3%. This capital buffer, however, is in addition to the systemic risk buffer.
Pillar 2 Requirements
Banks must identify, measure, govern, report internally and control their risks on a regular basis in order to ensure that the aggregated risk does not endanger their ability to meet their obligations. The banks must provide the SFSA with a documented internal capital adequacy assessment (ICAAP) for the SFSA to review and evaluate. Based on this evaluation, the SFSA can impose an additional individual requirement, which should cover risks that are not fully captured by the Pillar 1 requirements. This additional capital requirement is referred to as the "additional own funds requirement". The capital assessment further includes an assessment of the bank’s need for a capital planning buffer, which should constitute a margin to the minimum requirement.
The CRR together with the delegated regulation and the SFSA’s regulation FFFS 2010:7 prescribe the liquidity requirements for banks in Sweden. On a broad level, the focus areas for liquidity requirements are the liquidity coverage ratio (LCR) and – as of June 2021 – the net stable funding ratio (NSFR).
The LCR can be said to have two components:
Banks shall hold an adequate level of unencumbered, high-quality liquid assets that can be easily converted into cash at little or no loss of value to be able to cover the total net cash outflows over a 30 calendar day time horizon. When banks use the liquidity stock, they need to provide for a plan to restore their holdings of liquid assets, and the SFSA will need to ensure that such plan is adequate and sufficiently implemented.
The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. This requirement is meant to ensure that the banks have stable funding to cover long-term obligations under a one-year horizon under conditions of extended stress.
The FFFS 2010:7 prescribes requirements regarding internal governance, the identification and measurement of liquidity risks, the managing of liquidity risk and the disclosure of information. Banks shall have a documented risk tolerance that is based on a quantitative and qualitative view of appropriate liquidity risk and is adapted to the bank’s operational objective, strategic direction and general risk preference. Furthermore, the bank shall have strategies in place to manage the liquidity risk in accordance with the risk tolerance in order to ensure sufficient liquidity.
In order for the SFSA to control compliance with these requirements, the banks are obliged to report the high-quality liquid assets at least every month to the SFSA and the stable funding at least quarterly to the SFSA.
Sweden has implemented the Bank Recovery and Resolution Directive (2014/59/EU – the BRRD) through the Swedish Resolution Act. The BRRD in turn incorporates principles from the international standard "Key Attributes of Effective Resolution Regimes", issued by the Financial Stability Board (the FSB). Although it is an EU Member State, Sweden does not participate in the EU’s SRM.
The purpose of the Resolution Act is to ensure that the government can take over a failing bank and restructure it or wind down its operations in an orderly manner to maintain the critical functions of the bank and stability in the financial system.
As of 2020, the resolution mechanism has never been put into practice in Sweden.
The basic principle in the resolution procedure is that the costs should be borne by the banks’ shareholders and creditors (excluding protected depositors), and not the taxpayers. As a protection, another key principle is the “no-creditor-worse-off” principle, which means that no owner or creditor should be compensated to a lesser extent than he or she would have been under normal insolvency proceedings.
Recovery and Crisis Planning
The NDO is the appointed Swedish resolution authority and, as such, is responsible for preparing for crises in banks and for managing banks in crises.
The NDO must prepare a crisis plan for all Swedish banks but the approach that the NDO will take varies depending on which bank is in crisis and what sort of crisis. In practice, only systematically important banks will be placed into resolution. Most banks are not considered systematically important, and the NDO has simplified plans for these banks. In general, these banks will be placed under ordinary insolvency proceedings if necessary.
Banks are required to prepare and maintain recovery plans, setting out the preventative measures and actions they will undertake if under financial distress in order to prevent failure. As the supervisory authority, the SFSA is responsible for assessing the recovery plans of banks, and may order a bank to improve the plan if necessary. The SFSA also has early intervention powers and may order banks to make organisational and strategical changes, to take recapitalisation measures or to activate the recovery plan.
Requirements for Resolution
If actions taken under the bank’s recovery plan or the intervention measures taken by the SFSA do not improve the bank’s financial situation, the first step is to determine whether the bank is failing or is likely to fail. The SFSA will hand over the responsibility to the NDO if the following criteria are fulfilled:
In order to initiate a resolution procedure, the NDO will also need to establish that there are no alternative measures available to prevent the failure of the bank, and that resolution is necessary with regard to the public interest. The public interest requirement is why non-systematically important banks in general will be placed in ordinary insolvency proceedings.
Once a bank has been placed under resolution, the NDO will take over the control and management of the bank, but not any ownership. The NDO will have a number of "resolution tools" at its disposal, which are aligned with the BRRD and can be used separately or in combination.
These tools include the "bail-in tool", where shares and liabilities are written down or converted to equity. The writing down of shares will occur before debts are converted. The NDO might also sell all or parts of the shares issued by the bank, or its assets, rights or liabilities, to one or more buyers (the "sale of assets tool").
The "bridge institution tool" allows the NDO to transfer all or part of the bank’s business to a separate legal entity controlled by the NDO, which will uphold critical functions until the business is sold or wound down. Under the "asset separation tool", assets that are non-critical for the functioning of the financial system can be separated from the bank and managed via an asset management vehicle.
Resolution Reserve and Government Intervention
While the main principle is that shareholders and creditors should bear the bank’s losses and the costs for resolution, there may sometimes be a need for external financing. For that purpose, a resolution reserve has been set up with the NDO.
The resolution reserve may be used as a complement to the bail-in tool, but only where the shareholders and creditors have already absorbed losses corresponding to 8% of the total assets or 20% of risk-weighted assets, and certain other criteria are fulfilled.
The resolution reserve is financed through annual fees, which banks must pay if their reserve is below 3% of their total covered deposits.
Finally, as a last resort, the government stabilisation tool may be used to recapitalise the bank or take temporary public ownership over it. This tool is separate from the use of the resolution reserve and may only be used after all other tools have been assessed and exploited to the maximum extent possible. This tool is subject to EU state aid rules and requires, inter alia, that a government makes the decision on whether the tool shall be used.
Insolvency Preference Rules for Deposits
The depositor guarantee scheme (see 6.1 Depositor Protection Regime) will apply regardless of whether resolution or ordinary bankruptcy proceedings are used. In bankruptcy, guaranteed deposits enjoy preference above unsecured and subordinated liabilities but below a number of secured liabilities, such as covered bonds.
Precautionary Support to Sound Banks
It should be noted that the NDO may in some cases provide precautionary government support to systematically important banks that have temporary problems (eg, due to serious systematic disturbances in the economy) but that have sustainable finances on a long-term basis and a fundamentally sound business model. This is not an alternative to resolution under the Resolution Act and will not be provided to failing banks (as defined in the Resolution Act).
After the financial crisis of 2008, Sweden set up a "stability fund", to which the banks paid fees up to the establishment of the resolution reserve. Part of the stability fund was transferred to the resolution reserve but the remainder will finance such precautionary support measures.
On an EU level, amendments to the CRR, CRD and BRRD, among others, were adopted in 2019. These amendments are commonly referred to as the “package”. With the package, certain parts of the final version of the Basel III agreement will be implemented – ie, requirements regarding more stable financing and a non-risk-weighted leverage ratio. The package further includes provisions that implement TLAC (Total Loss Absorbing Capacity) within the EU.
However, the COVID-19 pandemic is having a significant impact on the financial market. From a regulatory perspective, there has been a temporary easing of regulatory capital requirements and other prudential regulations, due to the current situation. For example, a "quick fix package" of the CRR, (EU) 2020/873 (CRR II), was adopted that, inter alia, extended the transitional arrangements for expected credit loss accounting under IFRS 9 and the treatment of publicly guaranteed loans under the prudential backstop for non-performing loans, offsetting the impact of excluding certain exposures from the calculation of the leverage ratio and deferring the application date for the leverage ratio buffer to 1 January 2023.
At a national level, banks in Sweden were given the possibility to offer all new and existing mortgagors an exemption from the amortisation requirements due to COVID-19. The exemption will be in force until the end of June 2021. Furthermore, the SFSA decided to lower the countercyclical buffer and communicated to the banks that they could use their liquidity buffers.
CRD V/CRR II
The updated EU regulations entail several significant changes, with the key changes being outlined below.
One of the major changes is the binding leverage ratio that requires banks to maintain Tier 1 capital of at least 3% of their non-risk-weighted assets. An additional leverage ratio buffer will apply to G-SIIs. The CRR II also allows an initial margin to reduce the exposure measures when applying the leverage ratio to derivatives.
Net stable funding ratio
The CRR II introduces a net stable funding ratio (NSFR) that aligns with Basel III. The NSFR focuses on the liabilities side of the balance sheet as opposed to the liquidity coverage ratio, which focuses on the quality and liquidity of a bank's assets. The NSFR is designed to ensure that exposures are broadly matched with stable funding.
Intermediate parent undertaking
The CRD V contains a requirement to the effect that certain third country banks with subsidiaries within the EEA will have to establish an intermediate parent undertaking within the EEA. The requirement applies to groups that have at least two institutions within the EEA if the group’s total assets within the EEA amount to EUR40 billion.
Standardised approach for counterparty credit risk
The CRR II introduces a new approach to counterparty credit risk (SA-CCR) which is more risk sensitive, providing better recognition of hedging, netting diversification and collateral.
As described under 4.3 Remuneration Requirements, changes to remuneration rules under the CRD V as well as remuneration disclosure requirements under the CRR II will apply during the course of 2021.
The CRR II and the CRD V take steps towards a more sustainable future by prescribing some measures that focus on sustainable finance. EBA investigates how to incorporate Environmental, Social and Governance (ESG) risks into the supervision and treatment of assets associated with environmental and social objectives. Large banks are required to disclose their ESG-related risks.
Bank crisis management framework
The provisions regarding the subordination of minimum required eligible liabilities (MREL) instruments are tightened and a new category of large banks is introduced – the so-called “top-tier banks” with a balance sheet greater than EUR100 billion.
Group level requirements
Certain requirements regarding core capital, large exposures, liquidity and reporting obligations prescribed in the CRR II will apply to holding companies.
In relation to non-performing loans, the CRR II adjusts credit risk provisions to mitigate the capital impact of massive disposals of such loans.
A brief timeframe for the CRR II and CRD V is as follows:
The BRRD2 should be implemented on 28 December 2020. The BRRD2 includes updated minimum requirements for MREL, to align these with the FSB's TLAC standard. The CRR II contains important provisions implementing TLAC for G-SIIs. The BRRD2 further entails mandatory subordination as well as additional measures to address breaches of the MREL. The maximum distributable amount restrictions entail that capital buffer requirements are added on top of the MREL.
Other Regulatory Changes and Updates
SRMR2, (EU) 2019/877, amends the SRM Regulation to reflect the BRRD2 amendments. Since Sweden is not participating in the banking union, this regulation is not applicable in Sweden. However, Sweden has just recently considered a potential participation but there are no decisions regarding participation as yet.
Sweden: Increased Household Indebtedness, Supervisory Challenges and New Business Opportunities
Household indebtedness in Sweden has risen continuously over the past few decades and is among the highest in the European Union. The growth rate in household debt has slowed down somewhat during the past few years but continues to be high, and the overall household debt stood at 176% of disposable income or 88% of GDP in 2019.
While the overall household debt consists primarily of mortgages, unsecured borrowing in the form of consumption loans and other forms of consumer credit have also accelerated over the past ten years. As a response, the Swedish legislator and the Swedish Financial Supervisory Authority (SFSA) have implemented a number of regulatory measures to halt this development.
This article will discuss the key drivers behind the development, the regulatory response and the challenges and opportunities faced by market participants. The regulatory development might have created some hurdles for market participants, but the Swedish credit market continues to expand. Sweden will likely continue to be an attractive market for domestic and foreign investors seeking to invest in Swedish loans.
Household debt in Sweden
The increase in the Swedish household debt has been driven mainly by high mortgage lending linked to a steep increase in housing prices, primarily in urban areas. This continued increase in household debt has been identified by the Swedish Central Bank (Riksbanken) as the greatest risk to financial stability in Sweden. Several measures have been taken to address the issue, including strengthened amortisation requirements and increased capital buffer requirements for credit institutions. Changes to housing and tax policies have also been discussed on a political level to tackle structural problems in the housing market.
Consumer loans are currently considered to have limited implications in terms of financial stability risks. However, such loans constitute a risk for individual households, as they are often subject to high interest rates and fees. While they account for only a limited portion of the total indebtedness of Swedish households, the interest and amortisation payments for consumer loans stood for more than half of household debt payments in 2019. Therefore, the level of consumer loans could have an impact on the financial stability in the longer term, if the individuals are not paying off their loans and the debt level instead builds up over time. This may result in increased costs for the individual and decreased consumption. Because of this, consumer loans have been a key focus area for Swedish authorities in recent years.
Most of the loans in the Swedish market originate from credit institutions. In recent years, however, the traditional banks in Sweden have faced increasing competition from both niche banks and new types of market participants.
New technological solutions and regulatory developments have allowed fintech companies such as mortgage credit institutions and consumer credit institutions, which offer their services online, applying instant credit assessments and using digital tools for the quick processing of credit applications, to compete with traditional banks.
In connection with the Swedish implementation of the EU Mortgage Credit Directive 2014/17/EU, a new type of licence for mortgage credit institutions was introduced, resulting in specialised mortgage credit providers entering the market. The new licence enables financial undertakings to provide mortgage loans as their core business, with the increased use of alternative financing. While the loan volumes originated from mortgage credit institutions are still relatively small compared to those of the credit institutions, they continue to gain market shares and offer increasing competition through low interest rates and quick, digital credit application processes.
Consumer credit institutions are undertakings that provide or intermediate mainly unsecured consumer loans. Up until 2014, such businesses did not need to obtain a licence for their operations, but only needed to register with the SFSA. In order to address particular problems with so-called high-cost credits and to ensure sufficient supervision of these undertakings, consumer credit institutions are now required to obtain a licence from the SFSA.
Many consumer credit institutions and mortgage credit institutions do not originate their own loans but rather act as intermediaries that provide loan comparison platforms. These platforms have spurred the competition between credit providers and made Swedish consumers extremely prone to regularly transferring their existing loans and mortgages to the creditor that offers the lowest interest rates.
These new market participants are not allowed to take deposits from the public. Therefore, they must find alternative means to finance their loan origination – for example by attracting capital from pension trusts, insurance undertakings and other institutional investors.
Consumer credit institutions and mortgage credit institutions that wish to finance their business through deposits must apply for a licence as a credit institution. In recent years, however, it has become increasingly hard to obtain such a licence. The SFSA has only granted a few new licences and many have either been subject to non-approval or been voluntarily withdrawn by the applicant following the SFSA indicating that the application is unlikely to be approved. This could probably be explained, inter alia, by the development of a more comprehensive financial regulation and legislation and the enhanced supervisory measures taken by the SFSA over recent years. Nevertheless, this development has resulted in impressive hurdles for consumer credit institutions and mortgage credit institutions wishing to expand their business, making alternative financing solutions more and more relevant.
Sweden has implemented the EU Consumer Credit Directive (EU) 2008/48/EG (the CCD) through the Swedish Consumer Credit Act (the CCA), which sets out rules that must be complied with when credits are offered to consumers. While the CCD is a full-harmonisation directive, meaning that EU Member States may not impose stricter rules on matters within the scope of the directive, Sweden has implemented strict rules in areas outside the scope of the CCD. In contrast to the CCD, which excludes credit agreements involving a total amount of credit less than EUR200 from its scope, there are no monetary thresholds in the CCA for when the rules apply.
Consumer loans include unsecured loans, asset financing (eg, where a car serves as collateral), revolving credits and credit purchases. The increase in consumer loans has raised concerns with Swedish authorities, who are worried that more and more borrowers could face financial problems, particularly in the event of a general decline in the economy and increased unemployment.
As mentioned above, a significant part of the increase in consumer loans originates from undertakings that are not subject to the same prudential requirements as credit institutions. It has also become evident that the borrowers of these consumer credit institutions tend to fall into financial difficulties more often.
So far, regulatory actions to address problems associated with consumer loans have been focused on consumer protection, mainly to ensure that loans are provided on fair terms and that loans are not granted to individuals who lack the ability to service their loans.
So-called high-cost credits have caused particular concern in recent years. They are defined as credits with an effective interest rate equal to at least the reference rate plus 30 percentage points, and that are not connected to a credit purchase or mortgage loan.
In 2018, an interest rate ceiling and an absolute cost ceiling in relation to consumer credits were introduced to address the problems associated with high-cost credits. The maximum interest rate allowed is now the Central Bank of Sweden’s reference rate plus 40%, and the maximum cost for a credit (including interest rates, late fees and other costs) may not exceed an amount equal to the original credit amount.
According to a report from the SFSA in October 2020, the total number of high-cost credits has been reduced and many of the institutions that previously provided such credits have now ceased to do so. Interestingly, the SFSA also reported that consumers now borrowed nearly 7% more after the legislation entered into force. This indicates that the regulatory intervention to reduce high interest rate levels also resulted in increased borrowing.
Credit assessments and an increasing number of small loans
As a general rule, all credit agreements must be preceded by a credit assessment in order to determine the customer’s ability to repay the credit. According to the CCA, a credit assessment must be based on sufficient information regarding the customer’s financial situation. The credit may be granted only where the consumer’s financial situation is such that he or she will be able to repay the loan. Furthermore, a credit assessment does not always need to be conducted. According to the CCA, the institutions are not obligated to conduct a credit assessment under certain circumstances – ie, if the credit is interest-free, concerns a credit purchase that has to be repaid within three months and only entails an insignificant fee.
However, poor credit assessments are becoming a focus area of the authorities. A 2020 report from the SFSA showed that a fifth of consumer loan borrowers received payment reminders and 4.5% received collection notices, rising to 8% among borrowers under the age of 25.
The report also showed that larger loans are more often preceded by a more comprehensive credit assessment than smaller loans. Smaller loans (ie, loan amounts under SEK10,000) have increased from SEK4 billion in 2008 to nearly SEK50 billion 2019. Therefore, a significant amount of credit granted to consumers is based on a more simplified credit assessment.
Against this background, the SFSA has stressed the importance of performing proper credit assessments on each customer, and announced its intention to issue new guidelines on the information that credit institutions should use in credit assessments during 2021. The Swedish Consumer Agency (Konsumentverket), which supervises the credit assessments of consumer credit institutions (but not those of the credit institutions), has also recently issued updated guidelines in relation to credit assessments, which state that information regarding the customer’s monthly salary, expenditure, credits and instalments should be obtained in order to assess the customer’s financial situation. The information should further be verified by, for example, external sources.
The large increase in smaller loans, where only a limited credit assessment is carried out, can to a large extent be explained by the fact that “buy-now, pay-later” alternatives have largely increased the number of credit purchases made online. A growing number of consumers have ended up in debt when they have become unable to repay such credits.
Presentation of credit as a payment option
In order to tackle the increasing number of consumers ending up in debt in connection to their online purchases, an amendment to the Swedish Payment Services Act (2010:751) entered into force in July 2020. The amendment means that payment options including a credit element may no longer be automatically displayed over other available payment options or as a default option in connection with online purchases. However, the effectiveness of the new legislation has been called into question, as credit providers have already found ways around the rules – eg, by arguing that it is not technically possible to distinguish between debit cards and credit cards.
Marketing of consumer loans
The marketing of credits to consumers is governed by the CCA. In 2018, a new provision was introduced in the CCA, which explicitly states that the marketing of consumer credits must be moderate. The purpose was to further emphasise that marketing must be made with consideration of the general risks associated with consumer credits, such as over-indebtedness, and to prevent consumers from making unconsidered decisions. The requirement that marketing must be moderate entails, inter alia, that it must not depict consumer credits as a carefree solution to economic problems. In a recent court case, a credit provider was prohibited under the risk of a penalty fine from continuing to depict its services as a carefree solution to economic problems by stating that consumers can obtain a happier lifestyle by using loans.
The Consumer Agency, which is the authority responsible for supervising marketing practices in Sweden, has increased its scrutiny of credit providers in recent years. The Consumer Agency has the authority to file a cease and desist order under a penalty if a breach is considered to be of minor importance, or to file a lawsuit before the Patent and Market Court (Patent- och Marknadsdomstolen).
As mentioned above, the Swedish legislator and the SFSA have also adopted measures aimed at slowing down the increase in mortgage-to-income ratios.
In order to prevent over-indebtedness and overvalued house prices, the Swedish Government introduced an amortisation requirement for mortgage loans in 2016. The amortisation requirement is supplemented by SFSA regulations, which provide further detailed rules and requirements in relation to amortisation and the maximum amount of mortgage loan a consumer may be granted.
Depending on the loan to valuation ratio and the borrower’s debt ratio, the borrower must amortise up to 3% of the mortgage loan per year. Furthermore, according to the SFSA’s regulations, a mortgage loan may not be granted if the loan to valuation ratio exceeds 85%. The requirement applies to credit institutions as well as mortgage credit institutions. However, the new amortisation requirement has been subject to criticism – eg, since entry into the mortgage market for younger people with lower incomes is now even more difficult.
Due to the COVID-19 pandemic, credit institutions in Sweden were given the possibility to offer all new and existing mortgagors an exemption from the amortisation requirements. The exemption will be in force until the end of June 2021.
Sweden stands out among several of the EU countries when it comes to the high levels of household debt. Although the household debt in Sweden consists primarily of mortgages, unsecured consumer loans have also increased over the last decade. The low interest rate environment will most probably cater for further expansion of the credit market in the short and medium term.
Even though parts of the Swedish regulations are based on EU directives, Sweden has taken regulatory measures on a national level to address certain identified issues related to consumer loans and mortgage loans. The regulatory measures taken include the introduction of maximum interest rates and absolute cost ceilings for high-cost credits, authorisation for consumer credit providers, enhanced supervision regarding the marketing of credit products, the focus on sufficient credit assessments, and the amortisation requirements for mortgage loans. The SFSA has also adopted a stricter approach when assessing and approving credit institution licence applications, making it difficult for consumer credit institutions and mortgage credit institutions to expand their business.
For credit providers, the challenge will be to find ways to grow their business, as margins are low in a market where they are subject to fierce competition. In their quest to find ways to finance their expansion this may lead to a development when faced with difficulties obtaining authorisation as a credit institution, where new financing models are actively sought. This may create business opportunities for service providers and intermediaries that can enable innovative structured financing solutions. Such solutions could offer a level of yield that may be attractive as an investment for institutional investors, including alternative investment funds, insurance undertakings and pension trusts. There are several developments in this area, where new financing solutions are made available to credit providers.
However, it is important for market participants to be aware of the regulatory developments, particularly regarding consumer and mortgage loans that will continue to be an area of focus for the Swedish Government and the SFSA.