sou · H7B352 · 2019-12-09 00:00:00 — It is difficult to see any particular obstacles to well-functioning co- operation between and the Swedish Na- tional Debt Office if participates in the banking union. applies a special procedure for approval of a ‘resolution scheme’. The procedure is designed to take account of two facts. First, a decision on how to implement resolution must be made quickly, preferably within 48 hours. Second, the decision must be adopted by an EU institution. This is because resolution decisions both include an assessment of whether resolution is in the public interest and potentially can involve a need to make use of the . In the latter case it is the that makes the final decision. The procedure for adopting the resolution scheme within the Single Resolution Mechanism has not been tested to any great extent. For that reason, it is, as yet, next to impossible to evaluate the efficiency of this decision-making, especially in a It can, however, be noted that there is a high number of actors involved in decision-making at EU level, with the as one example. Choice of resolution tools Participation of in the banking union is not expected to re- sult in any significant changes in terms of which resolution tools will be applied. Both the Debt Office and have indicated that bail-in will be their main reso- lution tool. cannot apply the ‘govern- ment stabilisation tools’ since the decision to use the tools must be adopted by the government or a government ministry and since it is the itself that is responsible for funding. It should be stressed that these tools are to be seen as a last resort in a highly exceptional crisis. The starting point is that they will, in principle, not be used. ‘Resolution colleges’ are set up for banking groups with cross-bor- der banking activity. The role of these colleges includes exchanging information and agreeing how to carry out the resolution of such a bank. Debt Office leads the work of the res- olution colleges for the three largest Swedish banking groups. and the are also members of these colleges. No resolution colleges are set up for cross-border groups that solely have activities in the banking union. In the case of participation, the colleges for Swedish banking groups with activities outside the banking union will be led by and the Debt Office will be an . In other words, the Debt Office’s direct influence on and control of the decisions about how to handle Swedish banking groups with cross-border activities outside the banking union in res- olution will decrease with participation compared with if stays outside. However, the Debt Office will par- ticipate in the work done in the ’internal resolution teams’ within the Single Resolution Mechanism. These teams are responsible for resolution preparations if a resolution college is not required. Implementing resolution of a cross-border banking group It is likely that the resolution of a Swedish cross-border banking group will be implemented with the same starting points in the Sin- gle Resolution Mechanism as if the Debt Office had implemented the resolution. The for the efficient res- olution of a cross-border group may be better in some respects within the Single Resolution Mechanism. For instance, the financial burden sharing arrangements between Member States will have been addressed in advance when the is fully mu- tualised as of 2024. This provides better for taking deci- sions rapidly. There are, however, certain other aspects that make the procedure more complex in the Single Resolution Mechanism. When decisions are made about resolution of a cross-border group, situations can arise in which the Commission and the Single Reso- lution Board reach different conclusions, e.g. as to whether resolu- tion is in the public interest. is it possible to rule out the exist- ence of different interests in the regarding how to finance resolution. This may lead to the decision-making procedure not being followed as intended and that the resolution decision (and therefore also its implementation) takes longer. This can be prob- lematic if there is instability on financial markets. The big difference, under current regulations, between how the Swe- dish National Debt Office and have de- signed the requirements for bail-inable liabilities (the ‘MREL re- quirements’) is that the Debt Office applies higher requirements for subordination. All else equal, this facilitates write-down and conver- sion of debt in purely practical terms in Swedish banks and makes Swedish banks more resolvable in this respect than corresponding banks in the banking union. The consequences of participation of depend on how the revised capital adequacy and bank recov- ery and resolution rules (the banking package), which are currently being implemented in Member States, are designed. The new rules are to be implemented in national law no later than . It remains to be seen what impact the regulation will have but the design and application of the MREL-requirements will most likely differ less between Member States going forward. In terms solely of the number of mechanisms, the banking union provides for more possibilities for political accountability regarding supervision and resolution decisions than there are in . How- ever, the accountability mechanisms in the banking union consist mainly of access to information and possibilities for politicians (also in national parliaments) to ask questions to representatives from the banking union bodies. The legal framework of the banking union provides banks and private individuals with good means of access to . The possibility to institute proceedings directly to the Court of of Union in certain cases and obtaining ac- cess to the ECB’s ought to increase the predictability of decision-making and save time compared to corresponding possibilities in outside the banking union. Participation of would most likely mean that individuals who take part in the meetings of or (director-general or corresponding senior man- ager from and the Debt Of- fice), need to meet stricter requirements when moving to a new post compared with their assignment at the Swedish authority. Participa- tion does not necessitate amendments of the Swedish legislation concerning conflicts of interest. The of the banking union means that part of the fi- nancial safety net – financing in the event of resolution – is common to the participating Member States. The third part of the banking union – a jointly financed guarantee scheme – is still not in place, and its political future is at present unclear. The banking union also includes the application of the parts of the regulatory framework for bank recovery and resolution that deal with liquidity assistance. However, the possibilities for central banks to provide liquidity as- sistance to (solvent) banks are not part of the regulatory framework of the banking union. Since the areas of use, financing and other conditions of the and the Swedish Resolution Reserve are governed by the same rules, there are no decisive differences regarding the fi- nancing of resolution. The starting point is that money from resolu- tion funds will only be used in exceptional cases and for a limited period. Nonetheless, there are a number of differences regarding the design of resolution financing in and in the Single Resolu- tion Mechanism. Participation in the banking union significantly increases the poten- tial capacity for financing loss absorption or recapitalisation of large Swedish banks. Provided that the is not placed under great strain, this provides better conditions for effi- cient bank recovery and resolution in . However, the starting point is that loss absorption and recapitalisation should be handled using the banks’ internal buffers, i.e. drawings from the are financed by all banks, irrespective of which they are established in. If the nevertheless needs to be used, Swedish banks will share the cost of restoring the to its target level with all the banks in the banking union, i.e. with a much larger number of banks than they do if the Swedish Resolution Reserve needs to be replenished. In times of financial instability, it can be of importance that banks are not charged excessive fees, as their repayment capac- ity may be under strain. Estimates indicate that, in combination with the backstop, the will be sufficient even in a very serious sys- temic crisis. Nevertheless, a very exceptional situation may arise in which not even full use of the backstop is sufficient to deal with re- capitalisation needs. In such a situation, access to the Single Resolu- tion Fund may be rationed and a greater financial burden may fall on Member States. In that case, efficient crisis management is likely to be predicated on the Swedish state still having good borrowing ca- pacity. Account or fund? One advantage of the being an actual fund is that it may create greater certainty that money is immediately available. In this respect, a fund can be seen as a way of reducing the harmful co-dependence between government finances and the bank- ing system in a crisis. The Resolution Reserve is instead an account at the Debt Office, and this means that if with- drawals need to be made from the Resolution Reserve, the Swedish state has to borrow money. The question is however whether the design of the financing arrangement is the best way to reduce this co-dependence; the size and degree of mutuality of the financing ar- rangements are likely to be of greater importance. Moreover, Swe- den’s government debt level is currently low, which decreases the risk of negative co-dependence between banks and government fi- nances in a banking crisis. The fact that participation in the banking union means that the ex-ante contributions paid in by Swedish banks are managed in a fund instead of in an account ought, in an overall assessment, not to be of great importance for the possibilities of ef- ficient crisis management Swedish banks. Flexibility in the application of certain rules Some of the rules of the Directive have been implemented in Swedish law with a view to provide flexi- bility in the Debt Office’s managing of Swedish banks in resolution. In some respects, this flexibility will decrease in the event of Swedish participation in the banking union. Participation would probably mean restrictions on the possibility of using the deposit guarantee scheme in resolution. It is, however, difficult to assess the im- portance of this. In addition, the alternative basis for calculating write-downs necessary to access the resolution fund will not be ap- plied by . The practical importance this will have is expected to be limited. The of the banking union does not affect the Riks- bank’s possibilities of providing liquidity assistance for monetary policy reasons. However, if a central bank in the banking union wishes to provide general liquidity assistance, with the express pur- pose of promoting financial stability, this is likely to be a matter that the ECB can have views on, in its role as a supervisory authority. Even if participation in the banking union does not change the Riksbank’s responsibility in relation to Swedish banks when it comes to provid- ing liquidity, greater coordination will probably be required with the ECB, and . Participation of in the banking union does not affect the legal possibilities of providing liquidity assistance to solvent banks within the framework of precautionary government support. How- ever, if participates, it is the ECB, and not Finansinspektio- nen, that assesses whether it is possible to provide this support. The financing is however provided at the national level via the . is probably not sufficient for liquid- ity assistance for large banks undergoing resolution. Discussions are under way at the EU level with a view to find an acceptable solution. For ’s part it is important that a solution enables access to liquidity assistance on equivalent terms, as in the case of the back- stop linked to the . The Swedish Resolution Reserve has access to a backstop (sv. garantiram), which provides relatively good possibilities of providing liquidity assistance to a bank undergoing resolution if remains outside the banking union. Ultimately the borrowing capacity of the Swedish state de- termines the size of the liquidity assistance that can be provided by the Resolution Reserve. Deposit guarantees are a national responsibility in the EU, although there are common rules. The Commission has presented a proposal for a common deposit insurance scheme for the banking union. Po- litical discussions are under way about whether or not to introduce a scheme. From a Swedish perspective, the value of a jointly financed deposit guarantee is assessed as limited. The large Swedish banks will have high levels of bail-inable debt of good quality, which improves the possibilities of implementing resolution in an orderly way and thereby reducing the risk that the deposit guarantee will have to be activated in conjunction with resolution. In addition, ’s bor- rowing capacity is currently high, which should imply a high credi- bility of the Swedish deposit guarantee scheme. Consequences for Swedish banks, the credit supply and as a financial centre Participation of in the banking union would impact on the costs and competitive situation of Swedish banks in various ways. They concern, first, changes in supervision and the requirements set for banks and, second, the contributions the banks pay to the and banking union bodies. Effects of the design of supervision From the perspective of Swedish banks there are both advantages and disadvantages in how the ECB conducts supervision. One ad- vantage that can be noted is greater awareness among external asses- sors of Swedish banks that they will be examined and compared more with corresponding banks in the banking union. At the same time, ECB supervision results in greater requirements for detailed reporting in combination with a larger number of on-site inspections and meetings with supervisory teams. This is likely to result in higher administrative costs for banks. A possible countervailing ef- fect is that costs of regulatory compliance for banking groups that already have activities in the banking union may decrease due to uni- form reporting requirements and since the banks will not need to interact with as many supervisory authorities (and resolution au- thorities). The decision-making process in has been slow, which, if it is a lasting problem, may create uncer- tainty about how to apply rules. The ECB is also working to harmonise supervisory methods for less significant banks. For that reason, it is probable that the super- visory methods for smaller banks will be more like those applied to significant banks. For smaller banks an adaptation of their supervi- sion may increase costs and risk being disproportionately onerous. Higher level of fees Provided that the financing of the takes place with existing means in the Resolution Reserve, Swedish partic- ipation will not result in additional expenditure for the banks in the short term. If the falls below its target level in the future, the banks will have to make new contributions. This is also the case if the Resolution Reserve falls below its target level. In the event of participation in the banking union, Swedish banks will have to pay supervisory fees to the ECB. A rough estimate is that Swedish banks would have to pay a sum of the order of 200 mil- lion kronor per year in total to the ECB in addition to the fees they pay to . The higher level of fees may be palpable for smaller banks. The experience of participating Member States is that, even though the ECB has taken over the direct supervisory re- sponsibility for significant banks, national supervisory authorities have needed to significantly increase their staffing to match up to the increased requirements of the ECB. This probably means that additional resources will need to be provided for the bank supervi- sion of in the event of participation. However, may need increased resources for banking su- pervision even if remains outside the banking union, if adapts its supervision to the ECB’s more intru- sive and resource-heavy supervision. In the banking union all banks and other credit institutions pay administrative fees to . In that case, this will be a new form of fee for Swedish banks, since the activities of the Debt Office are financed by appropriations. rough estimate is that Swedish banks and credit institutions would have to pay a sum of the order of per year in total to if participates in the banking union. Effects on the credit provision to companies and households There is considerable uncertainty in any quantification of the effects of participation in the banking union on the financing costs of Swe- dish banks. In the short term and given the existing regulatory framework, the assessment is that, with participation, will have slightly lower financing costs. In the longer term, the assess- ment is that financing costs – and therefore the provision of credit to companies and households – will not be affected to any great ex- tent by participation. One contributing factor is the ongoing har- monisation of regulatory frameworks in the EU, which means that differences in regulatory requirements between and the banking union will decrease. The long-term effects of participation on the supply of credit are very much bound up with the quality of supervision, how the com- petitive situation of Swedish banks develops and whether it will be easier or to maintain financial stability. Previous financial cri- ses have shown that banks try to ensure their survival by reducing their supply of credit, especially to riskier with a poorer ability to repay (e.g. small businesses and low-income households). Effects on banks’ business models Banks may make some changes in their business models and the di- rection of their activities in order to better match up to the require- ments set by and . The ECB places great weight on supervision of banks’ govern- ance and management. essentially has a similar approach, but the ECB goes further in some respects, e.g. by having representatives of the ECB participate in board meetings. Irrespec- tive of the importance of well-functioning forms of governance and management in a bank, the ECB’s supervision in this area appears to be very detailed and intrusive. It is still too early to assess what impact the banking union may have on the cross-border activities of banks in the future. Since the bank- ing union was established, there has not been any distinct re-integra- tion of banking markets in the euro area. The same applies to cross- border mergers and acquisitions. If anything, a renationalisation has occurred; the consolidation of euro area banks is mainly taking place within national borders. time, more uniform supervision and application of the sin- gle rulebook may make it less attractive for banks to locate their ac- tivities on the basis of how supervision is carried out and what re- quirements are set. intrusive supervision can also contribute to closer scrutiny of banks, which reduces uncertainty for an acquir- ing bank. Finally, more uniformity in supervision and common fi- nancing of resolution (and thereafter a possible deposit guarantee) may lead to supervisory and resolution authorities in host countries being less liable to safeguard (‘ring-fence’) subsidiaries of interna- tional groups. This may enable banking groups to allocate capital and liquidity more efficiently, which will then increase the return on es- tablishment in other countries. The management of capital and li- quidity in cross-border banking groups is also influenced by these aspects of the design of the single rulebook. It should also be pointed out that banks’ decisions on the location of their activities are influ- enced by factors other than banking regulation and supervision. Sev- eral of these areas (e.g. taxes and insolvency law) are not, as of now, harmonised within the EU. To the extent that the banking union provides better conditions for cross-border banking activities, Swedish banks can see business opportunities in the consolidation of banks in the euro area Member States. uniform supervision and application of requirements in the banking union may, if participates, at the same time make it easier for foreign investors to analyse and compare Swedish banks. This may be a factor that will make banks more at- tractive as acquisitions. Moreover, better conditions for cross- border banking may help to increase the geographical diversification of Swedish banking groups, which are less diversified than many of their European peers. Cross-border banking activities make banks less dependent on eco- nomic conditions in their own . The banking union may therefore contribute to more macroeconomic risk-sharing. The experience of the US – which has a form of banking union – supports such a development. integrated banking markets are thus sta- bilising and can contribute to evening out business and household income. At the same time, risk-sharing means that disturbances spread more easily to banks in other counties. It is not obvious that the long-term net effect of these two movements will be positive for a single country like . As long as the banking systems of sev- eral participating Member States display weaknesses, it may be the case that the spread of contagion will dominate. as a financial centre The banking union may come to be of some importance for where financial activities are located in Europe. Nordea presented the possibility of joining the banking union as the main reason for its relocation from to . As rules are applied more uniformly and supervision is designed on the basis of a common approach, the link to national regulatory and supervisory regimes will weaken. time, however, the effects on as a financial centre of being outside the banking union are assessed to be limited as long as banking supervision maintains high quality and economic policy is responsible. Factors such as access to a well-educated labour force, openness in various dimensions, the design of the tax system and political and legal stability are probably of greater importance for the location of financial activities. ’s financial commitment In the banking union all banks contribute mutually to the . This means that, with Swedish participation, Swe- dish banks (and their ) also assume a potential financial commitment for systemically important banks in other participating Member States. The burden on the is likely to be limited in normal circumstances. Using the for loss absorption or recapitalisation will not be an option up until a situation where the bank concerned have made considerable losses and a further bail-in is deemed impossible. Access to fund money for an individual bank undergoing resolution is also limited. It is nonetheless likely that there will be banks in need of financing from the . On the whole, Swedish banks appear to be less risky and more resilient than banks in the banking union. There is, however, considerable variation between banks in the banking union. Against this background, the probability that the will need to be used to recapitalise a Swedish bank is lower than for banks in the banking union. Swedish participation in the banking union might therefore entail a greater financial commitment than if is outside the banking union. If an efficient resolution of a systemically important bank presupposes money from the , Swedish banks will not bear the full cost of this. In other words, the financial commitment for resolution of Swedish banks may be smaller than if remains outside the banking union and the same costs are charged solely to the collective of Swedish banks.