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Sweden’s Banking Sector: Strengthening Risk Management and Governance
In an effort to strengthen risk management and governance in Sweden’s banking sector, regulatory bodies have introduced new guidelines and regulations. The goal is to ensure that banks are better equipped to identify, measure, govern, and control risks, thereby maintaining stability and confidence in the financial system.
Risk Management Framework
Under the new framework, banks must establish a comprehensive risk management framework that includes:
- Strategies
- Processes
- Procedures
- Internal rules
- Limits
- Controls
- Reporting procedures
This will enable them to identify, measure, and govern risks on an ongoing basis, ensuring they are better equipped to respond to changing market conditions.
Control Functions
Banks must also have separate control functions, including:
- Risk control function: responsible for monitoring and reporting on the bank’s risk exposure.
- Compliance function: responsible for identifying and addressing potential risks or irregularities.
- Internal audit function: responsible for evaluating the effectiveness of internal controls and risk management processes.
Outsourcing Arrangements
To ensure effective risk management, banks must establish clear rules for managing outsourcing agreements. This includes:
- Exercising due skill, care, and diligence when entering into, managing, and terminating such agreements.
- Particular attention to agreements relating to work or functions of material significance to the bank’s operations.
Senior Management Oversight
Regulatory bodies have also introduced new requirements for senior management oversight. Under the Banking and Financing Business Act (SFS 2004:297), banks must ensure that their board members and managing directors possess:
- Sufficient insight, experience, and expertise to participate in the management of a bank.
- Suitability assessments, which involve collecting information from various sources.
Accountability
In terms of accountability, the board of directors is responsible for ensuring that the bank complies with regulatory requirements. The Swedish Financial Supervisory Authority (SFSA) may intervene in cases where a bank has violated obligations under the Banking and Financing Business Act or other relevant regulations.
Remuneration Requirements
Banks must establish remuneration policies and practices that promote sound risk management and do not encourage excessive risk-taking behavior. This includes:
- Setting fixed and variable components of employee remuneration.
- Aligning variable components with the bank’s overall performance and risk profile.
Specially Regulated Staff
Senior management and employees in certain categories of staff, including those responsible for control functions, risk takers, and employees whose total remuneration exceeds that of senior managers, are considered specially regulated staff. Their variable remuneration must be based on:
- Both their individual performance and the overall performance of the business unit or company.
Conclusion
The new regulations and guidelines introduced by Swedish regulatory bodies aim to strengthen risk management and governance in the banking sector. By implementing these measures, banks will be better equipped to manage risks, maintain stability, and ensure confidence in the financial system. As a result, the Swedish economy is expected to benefit from a more robust and resilient banking sector.