October 05, 2017

IMF published seven technical notes under the Financial Sector Assessment Program (FSAP) with Sweden. This assessment comprises technical notes on the wide spectrum of areas in the financial sector, including banking, insurance, and securities.

Technical Note on Banking Regulation and Supervision. The note reveals that the banking system in Sweden dominates its financial system, with one bank being designated as a global systemically important bank (G-SIB). Concerns raised in the 2011 FSAP regarding the insufficient granularity and frequency of reporting by supervised institutions have been addressed, starting in the third quarter of 2014. The Financial Services Authority Finansinspektionen (FI) has made considerable progress in developing supervisory approaches and techniques, particularly structured risk assessments for the four large banking groups. FI has implemented a new system for management of banking and insurance supervisory data. One concrete measure taken was a legal amendment to permit the liquidation of a bank to begin immediately on the revocation of its license. This same policy should be extended to cover non-bank credit institutions that are also authorized to take deposits from the public.

Technical Note on Insurance Sector Regulation and Supervision. This technical note assesses the development of regulation and supervision in the insurance sector in Sweden since the FSAP in 2011. The note reveals that, overall, the regulatory and supervisory framework has been enhanced since the 2011 FSAP. Solvency II has brought higher standards of regulation, but is not being applied in full, on a mandatory basis, to all occupational pensions insurance. Some measures are recommended to strengthen the Solvency regulation further. For Solvency II business, early follow-up on likely non-compliance with reporting requirements will be important. FI is encouraged to focus supervisory effort on areas of significant change, including the more principles-based approach to investments. FI should use its continuing review of companies’ Own Risk and Solvency Assessments as an input into capital requirements to be applied, as appropriate, to individual companies, using the tools it has to impose such requirements. Strengthening of the supervisory approach is also recommended, along with a review of the approach to development and use of macro-prudential tools and financial stability work.

Technical Note on Stress Testing. In this note, stress tests cover three major segments of the domestic financial sector—namely banks, insurance companies, and investment funds. Liquidity analysis of investment funds suggests that corporate bonds markets may face stress in the event of large redemption shocks. The overall stress testing exercise suggests that there is room for improvement in the individual components of authorities’ stress testing framework. These include improving the liquidity and solvency stress testing framework; addressing data gaps by collecting all interbank exposures and conducting a network analysis on a regular basis including by using market-price based approaches; and designing and performing regular liquidity stress tests for investment funds.

Technical Note on Crisis Readiness, Management, and Resolution. The note explains that, since the 2011 FSAP, Sweden’s financial safety net and crisis management frameworks, including bank resolution and contingency planning, have improved. In response to the FSAP and the overhaul of pertinent EU rules, Sweden has enacted a host of new legislation, introduced a resolution regime for credit institutions and certain investment firms, established a national resolution authority and a Financial Stability Council (FSC), held financial crisis simulation exercises, and revised its deposit insurance system (DIS), allowing it to fund resolution measures.

Technical Note on Systemic Risk Oversight Framework and Management. The note highlights that a rising share of highly indebted households and high housing prices pose serious macro-financial risks and that higher bank capital is not sufficient to mitigate risks in the system. To promote accountability, the law should clarify the allocation of macro-prudential powers between government and FI, and grant FI a clear legal mandate for macro-prudential policy, with full operational independence, including the ability to adopt and change instruments and their calibration.

Technical Note on Regulation and Supervision of Cross-Border Securities Activities. The note highlights that Sweden has large and diverse securities markets, where services can be easily provided on a cross-border basis. Both domestic and foreign firms actively seek to benefit from the passports provided under the EU legislation. This emphasizes the importance of a robust home-country regulation and supervision and requires authorities to be vigilant about potential cross-border spillovers. The complex operating environment poses challenges for FI, particularly for the two areas—Consumer Protection and Markets—that have the primary responsibility for the regulation and supervision of securities markets. Furthermore, enhancements to cross-border supervisory cooperation and active participation in the work of ESMA were found to be the necessary complements to FI’s current active domestic supervisory program.

Technical Note on Supervision and Oversight of Financial Market Infrastructures. The note explains that the financial market infrastructures (FMI) in Sweden are well-developed and subject to minimum regulatory requirements established in relevant international standards, the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMI). Domestic critical FMIs include two payment systems (RIX, the Swedish RTGS payments system, and Bankgirot, a retail payments system); one CCP (Nasdaq Clearing); and one CSD and SSS (Euroclear Sweden). Several overseas-based FMIs are also important to financial stability in Sweden, including two CCPs (EuroCCP and LCH.Clearnet Ltd), CLS, a settlement system for foreign exchange transactions, and SWIFT, which provides network and message standards for financial transactions. There is effective cooperation between FI and Riksbank in the supervision and oversight of FMIs. Overall, the risk management at Nasdaq Clearing appears to be sound. However, Nasdaq Clearing should significantly enhance its recovery plan and should continue to enhance its management of risks in certain other areas, including enhancements to its approach to credit and liquidity stress testing.

 

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Keywords: Europe, Sweden, Banking, Insurance, Securities, PMI, Basel III, Solvency II, Stress Testing, FSAP, IMF

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