Financial Crime World

Sweden’s Banking Regulation: A History of Evolution

Introduction

Sweden has a long history of evolving its banking regulation to ensure financial stability. From the capital adequacy rule implemented after World War I to the implementation of Basel III Accord in 2019, Sweden’s regulatory framework has undergone significant changes.

Early Years (1918-1923)

In the aftermath of World War I, Sweden implemented a capital adequacy rule, requiring banks to maintain a certain level of capital relative to their assets. However, this regulation was ineffective in preventing banking crises. A comparison between selected banks for the period 1918-1923 reveals that there were significant differences in bank risk-taking behavior.

The Statist Regime (Post-WWII)

Following World War II, Sweden adopted a more interventionist approach to banking regulation. The so-called “Riksbank Regulation” imposed strict controls on lending and deposit rates, as well as liquidity quotas and moral suasion to guide credit allocation towards preferred sectors such as mortgage bonds and government bonds.

  • Little attention was paid to risks in lending during this period.
  • The need for collateral was deemphasized, leading to an increase in unsecured debts.
  • These debts were not considered high-risk due to the tacit support of the Riksbank.

Risk-Based Regulation (1968-1975)

In 1968, risk-based capital adequacy relating to assets rather than liabilities was introduced. The Banking Law was revised in 1975 to allow banks to grant larger loans without collateral. This move towards risk-based regulation was a precursor to the Basel I Accord.

International Convergence (1974-1988)

The international convergence of banking regulation and supervision began in earnest with the formation of the Basel Committee on Banking Supervision in 1974. Sweden, as a member of the Group of Ten (G10) countries, participated in these efforts and ultimately adopted the Basel II Accord.

  • 1988: The Basel I Accord was implemented.
  • This marked a significant shift towards international cooperation in banking regulation.

Recent Developments (2008-2019)

The Financial Crisis of 2008 led to a renewed focus on risk-based regulation, with the implementation of the Basel III Accord in 2019. Today, Sweden’s banking regulatory framework is characterized by a combination of prudential supervision and macroprudential policies aimed at ensuring financial stability.

Timeline

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  • 1918-1923: Capital adequacy rule implemented
  • Post-WWII: Riksbank Regulation imposed strict controls on lending and deposit rates
  • 1968: Risk-based capital adequacy introduced
  • 1975: Banking Law revised to allow larger loans without collateral
  • 1974: Basel Committee on Banking Supervision formed
  • 1988: Basel I Accord implemented
  • 2008: Financial Crisis prompts renewed focus on risk-based regulation
  • 2019: Basel III Accord implemented

Key Figures and Institutions

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  • Riksbank (Sweden’s central bank)
  • Bank for International Settlements (BIS)
  • Group of Ten (G10) countries
  • Basel Committee on Banking Supervision
  • Swedish government agencies, such as the Ministry of Finance and the Ministry of Industry and Trade