Financial Crime World

BREAKING: Tier 2 Instruments to Rank Ahead of Tier 1, Subordinated to Unsecured Senior Debt

In a significant development in the financial regulatory landscape, Sweden’s Financial Supervisory Authority (SFSA) has announced that Tier 2 instruments will now rank ahead of Tier 1 instruments in terms of capital adequacy. However, these Tier 2 instruments will be subordinated to unsecured senior debt of the bank.

Background and Rationale

The move is a result of changes to the Capital Requirements Directive (CRD IV) and the Capital Requirements Regulation (CRR), which aim to strengthen financial stability and reduce the risk of bank failures. The CRD IV introduces an 8% minimum capital requirement, which is fully binding and can lead to license withdrawal if breached.

Key Changes

  • Tier 2 instruments will now rank ahead of Tier 1 instruments in terms of capital adequacy.
  • Tier 2 instruments will be subordinated to unsecured senior debt of the bank.
  • The CRD IV introduces an 8% minimum capital requirement, which is fully binding and can lead to license withdrawal if breached.
  • Four capital buffers have been introduced: the capital conservation buffer, institution-specific countercyclical capital buffer, systemic risk buffer, and buffers for systemically important institutions.

Enforcement and Undercapitalization

The SFSA is responsible for overseeing and enforcing compliance with the capital adequacy framework. This includes:

  • Periodic reports from banks
  • Ad hoc investigations
  • Restrictions on distributions, divestments, or other measures to remedy a bank’s financial position if it becomes undercapitalized

If a bank’s financial situation deteriorates further, contractual write-downs and conversions of capital instruments may be triggered, followed by resolution actions or license revocation and mandatory liquidation or bankruptcy procedures.

Insolvency and Resolution

Systemically important banks would generally be subject to resolution procedures, while non-systemically important banks would be wound down through ordinary bankruptcy procedures.

Recent and Future Changes

The CRD IV and CRR were revised following the financial crisis. Further revisions are proposed, aiming to introduce more risk-sensitive capital requirements, a binding leverage ratio, and measures to address excessive reliance on short-term wholesale funding and reduce long-term funding risks.

Timeline

  • Revised CRD IV and CRR in [year]
  • Proposed revisions in November 2016
  • Expected implementation of binding leverage ratio in the near future

Ownership Restrictions

There are no restrictions on foreign ownership of banks in Sweden. However, entities holding a controlling interest must be approved by the SFSA, which assesses their reputation, financial strength, and potential impact on the bank’s business activities.

Key Takeaways

  • No restrictions on foreign ownership of banks
  • Entities holding a controlling interest must be approved by the SFSA
  • Changes to management must be reported to the authorities
  • Holding companies engaged in financial activities may be subject to consolidated supervision by the SFSA
  • Shareholders may be liable for losses incurred by the company if they acted with intent or gross negligence
  • The SFSA has the power to reduce the share capital of a bank in a deteriorating financial situation, which could result in losses for direct shareholders