Swedish Bank’s Risk Management and Senior Management Regulations
In an effort to maintain stability in the financial sector, Swedish banks are required to have robust risk management frameworks and senior management structures in place.
Risk Management Framework
According to regulatory guidelines issued by the Swedish Financial Supervisory Authority (SFSA), banks must establish strategies, processes, procedures, internal rules, limits, controls, and reporting procedures to identify, measure, govern, report, and control risks that could impact their operations. This framework should be comprehensive enough to cover all aspects of risk management, including:
- Credit risks
- Market risks
- Operational risks
- Liquidity risks
Control Functions
To ensure effective risk management, banks are also required to have separate control functions, including:
- Risk control function
- Compliance function
- Internal audit function
While smaller companies with simpler operations may combine these functions, larger institutions must maintain them as distinct entities to prevent conflicts of interest.
Senior Management Appointments
The SFSA has introduced regulations governing senior management appointments. Before appointing new members to their board of directors or managing director roles, banks must assess whether they possess sufficient insight and experience to participate in the management of a bank. The SFSA also conducts suitability assessments for senior management candidates, reviewing information from various sources, including:
- Credit agencies
- Tax authorities
- Law enforcement agencies
Remuneration Policies
The SFSA’s guidelines on remuneration policies require banks to establish documented policies that promote sound risk management and counteract excessive risk-taking behavior. Banks must ensure that their remuneration structures are:
- Transparent
- Proportionate
- Aligned with the company’s overall strategy
The board of directors is responsible for deciding on remuneration packages for senior management and employees in control functions, ensuring that they are:
- Fair
- Reasonable
- Do not compromise the bank’s ability to maintain a sufficient capital base
Remuneration Structures for Specially Regulated Staff
Banks must establish separate remuneration structures for “specially regulated staff,” including:
- Risk takers
- Strategic managers
- Employees responsible for control functions
These individuals’ variable compensation should be based on both individual performance and overall company performance, with a cap of 100% of their fixed compensation.
Conclusion
Overall, these regulations aim to promote sound risk management practices and ensure that Swedish banks operate in a stable and transparent manner, protecting the interests of:
- Shareholders
- Customers
- The broader financial system