Sweden’s Central Bank Tightens Regulatory Requirements for Banking Institutions

In a move to ensure the stability of Sweden’s financial system, the country’s Debt Office has introduced new regulatory requirements for banking institutions. At the heart of this framework is the Minimum Requirement for own funds and eligible liabilities (MREL), which is crucial in maintaining the stability of the financial system.

What is MREL?

The MREL policy requires banking institutions to maintain sufficient resources, including own funds and eligible liabilities, to absorb potential losses in case of a crisis. This ensures that the central government can intervene quickly without using taxpayer money. The requirement also helps clarify which lenders will bear the costs of the crisis management process.

Calculating MREL

The Debt Office calculates the MREL based on an institution’s capital requirements, which are set by Finansinspektionen (the Swedish Financial Supervisory Authority). This means that institutions operating in multiple markets will have their capital requirements applied consistently across those markets. The reference date for these requirements is normally 31 December of the preceding year.

Meeting MREL Requirements

To meet the MREL requirement, banking institutions can use capital and certain types of liabilities known as eligible liabilities. The Debt Office decides on the level of MREL and how much of it should be met with subordinated eligible liabilities. Institutions have been subject to MREL since 2018, and there have been some changes to the application process due to amendments to the Swedish Resolution Act.

Reducing or Repurchasing Eligible Liabilities

Institutions must obtain prior permission from the Debt Office before reducing or repurchasing eligible liabilities instruments before their contractual maturity date. This requirement applies to credit institutions and investment firms that are subject to MREL. The application process is outlined in Commission Delegated Regulation (EU) No. 241/2014, which sets forth what kinds of liabilities are subject to the requirement.

Application Process

The processing time for an application to reduce or repurchase eligible liabilities instruments is up to four months for a new application and three months for an extension of a general prior permission. The application fee is SEK 35,700, and institutions must deduct corresponding amounts from the sum of their eligible liabilities after obtaining permission.

Reporting Requirements

Institutions that have obtained a general prior permission must also include information in the issuance documentation stating that eligible liabilities may only be reduced with permission from the Debt Office. This is in line with the European Banking Authority’s (EBA) guidelines on how to make deductions from eligible liabilities.

Monitoring and Compliance

The Debt Office publishes quarterly reports on its monitoring of systemically important banks and institutions’ compliance with MREL requirements. These reports are available on the Debt Office’s website, along with information on the ranking of items in Swedish insolvency proceedings.

Conclusion

Sweden’s central bank is taking a proactive approach to ensuring the stability of the country’s financial system by introducing new regulatory requirements for banking institutions. By maintaining sufficient resources and obtaining prior permission for reducing or repurchasing eligible liabilities instruments, institutions can ensure compliance with MREL and contribute to the overall stability of the financial system.