Resolution planning

Effective financial crisis management requires extensive planning and preparation. The Debt Office plans extensively in order to maintain the readiness for managing a bank or other institution that encounters a crisis.

Läs på svenska

As a basis for its banking-crisis management planning, the Debt Office relies on regulatory frameworks, as well on policies and methods that the agency has developed.

The Debt Office’s planning process involves assessing whether an institution in crisis should be managed through resolution and, if so, how this is to be done and whether it can be carried out in an orderly manner. The process can be divided into four stages, see below.

The Debt Office only plans for resolution for the institution in question if it considers that its bankruptcy or liquidation could lead to a serious disruption of the financial system.

Planning process

The 4 steps of the Resolutionprocess: 1-Analysing the operations, 2-Assessing the need for resolution, 3-Establishing a resolution strategy, 4: Assessing resolvability

For a detailed description of the different stages of the planning process, click on the plus sign.

Resolution planning process

The planning is determined by what type of operations the institution conducts. The Debt Office therefore begins by obtaining data and scrutinising the institution. Among other things, we analyse whether the institution conducts operations that are termed critical functions because their discontinuation would likely lead to a serious disruption of the financial system. A critical function is identified with the aid of a specific analysis framework.

The occurrence of critical functions is a decisive factor in assessing whether an institution should be managed through resolution in stage 2. These functions may also be of significance for how the Debt Office forms the institution’s resolution strategy in stage 3.

As a general rule, a failing institution is to be managed through bankruptcy or liquidation. Only if the Debt Office considers that bankruptcy or liquidation could lead to a serious disruption of the financial system do we plan for resolution in accordance with stage 3. We therefore first examine whether the institution can be managed through bankruptcy or liquidation. This determination is made on the basis of the resolution objectives and is ultimately an assessment of whether or not the institution can be deemed systemically important.

The institutions that the Debt Office currently deems systemically important are presented here: This year’s decisions on resolution plans and MREL

The assessment made in the planning is in principle the same assessment that the agency will perform in a real crisis. In the event of an actual crisis, the Debt Office will decide whether putting a failing institution into resolution is in the public interest. In both the planning phase and in a crisis, this assessment is based on the resolution objectives.

The resolution objectives specify that the Debt Office’s crisis management shall uphold the following interests:

  1. Ensure that critical functions are maintained,
  2. avoid significant adverse effects on financial stability,
  3. protect public funds,
  4. protect depositors and investors, and
  5. protect customer funds and assets.

The Debt Office is not bound to the assessment made in the planning phase. If the circumstances of an actual crisis turn out to be significantly different, the Debt Office can put an institution into resolution even if we did not identify that need as part of the planning.

For the institutions deemed systemically important in the planning, the Debt Office establishes a resolution strategy in the next stage. The strategy is designed taking into account the nature of the institution’s operations, and it covers the following considerations:

  • Which of the resolution tool(s) and other resolution measures are to be implemented in resolution.
  • Where – if a corporate group is concerned – the tools and measures are to be applied in the group (either only at the parent-undertaking level: “single point of entry”, or in several of the institutions that are part of the group: “multiple point of entry”).
  • Whether the entire institution’s operations must be managed through resolution or if parts not considered critical can be left to be wound up through bankruptcy or liquidation.

For all institutions that the Debt Office plans to manage through resolution, the preferred strategy is to implement the so-called bail-in tool as the sole tool. For groups, the plan is to put only the parent undertaking into resolution (single point of entry), which means that the group is kept intact and its aggregate losses and recapitalisation requirements are managed through implementing the bail-in tool in the parent undertaking. The Debt Office assumes control of the institution until resolution has been completed. Control of the institution is subsequently returned to the new owners, i.e. the creditors that have had their liabilities converted into shares. You find a link to the implementation report about bail-in tool here, Guidance on resolvability.

For medium-sized institutions, the Debt Office’s planning also includes an alternative to the preferred strategy. The alternative is based on the bail-in tool being implemented in combination with the so-called bridge institution tool. This strategy entails that the failing institution’s operations are moved in their entirety to a bridge institution through a transfer of shares. Under this strategy as well, the institution’s recapitalisation needs and its losses are handled by applying the bail-in tool. The bridge institution is controlled by the Debt Office, which has two years to restructure or divest the operations, or wind them up as an alternative.

In the final stage of the planning process, the Debt Office evaluates whether resolution, according to the established strategy, is a feasible and reliable approach. We do this by evaluating whether the resolution strategy can be applied without precipitating a serious disruption of the financial system. More specifically, this is a matter of identifying any material impediments to maintaining the institution’s financial and operational continuity in resolution. The assessment is made by evaluating the institution using the particular requirements, guidelines, and guidance that the Debt Office employs in its resolution planning. These include:

Significance to the financial system is the deciding factor

We conduct crisis planning for all banks and financial institutions regardless of whether they are critical to the functioning of the financial system in Sweden or not. However, the planning for a systemically important institution is much more extensive than that for an institution not deemed to have a significant impact on the system. The effects of a systemically important institution’s failure could spread to other parts of the financial system and result in major consequences. To prevent that from happening, systemically important banks and institutions can be put into resolution.

The resolution plan includes, among other things, the following assessments:

  • Does the bank or institution have critical operations such as large volumes of deposits and lending?
  • Which resolution tools and measures shall be applied? If the institution is part of a group, in what part of the group are the measures to be implemented? Examples of such measures include the Debt Office selling all or part of the operations, or that liabilities are written down or converted into new equity.
  • What level of resources in the form of capital and eligible liabilities is the bank required to hold? We set a requirement for the volume of such resources that each bank must hold. This is called MREL (minimum requirement for own funds and eligible liabilities). It is to ensure that the bank has sufficient resources to enable the Debt Office, if needed, to perform a bail-in, which is one of the resolution tools.

Having a well-thought-out strategy in advance means that we can begin crisis management straight away. Taxpayers shall always be protected.

Simplified planning for smaller institutions

Less extensive planning is required for institutions that the Debt Office considers suitable to be managed through bankruptcy or liquidation without any significant impact on the financial system or the broad economy. Certain parts of the planning for such institutions can be less elaborate or eliminated entirely, and the planning does not need to be updated as frequently. 

The possibility for the Debt Office to use simplified planning is based on rules other than those governing the planning process for resolution. The considerations to be made according to the rules for simplified planning use a quantitative model with fixed thresholds for when simplified planning may not be applied. This means that cases can arise in which an institution – despite having been deemed suitable for bankruptcy or liquidation – can nevertheless be subject to simplified planning.

The Debt Office’s determination of whether simplified planning is appropriate for an institution is made as follows:

  • First, a quantitative assessment is performed based on the O-SII score that Finansinspektionen (the Swedish Financial Supervisory Authority) calculates as part of its oversight and evaluation of an institution’s importance to the financial system. Institutions with an O-SII score above 105 are not eligible for simplified planning.

  • For institutions with an O-SII score below 105, a supplementary qualitative assessment is subsequently performed. If this assessment shows that the institution can be wound up through bankruptcy or liquidation with no significant impact on the financial system or the broad economy, simplified planning is used.

The planning is summarised in resolution plans

The planning for all institutions, irrespective of whether they are to be managed through resolution or by being put into bankruptcy or liquidation, is encapsulated in a resolution plan for each institution. For the institutions that the Debt Office intends to manage through resolution, the plans are updated annually. As a starting point, the Debt Office makes decisions on these plans every year in December.

For institutions that we consider suitable to be wound up through bankruptcy or liquidation and that are subject to simplified planning, the plans are significantly less comprehensive and the resolution plans are updated and established every third year. 

Banks and institutions report information

In order for the Debt Office to prepare for effective crisis management and develop resolution plans, certain information is required from the banks and institutions. All banks and institutions subject to the regulations, including those that are not systemically important, are required to submit the information we need to draft resolution plans.

Information for banks and institutions that shall report information

List of banks and institutions in scope

Finansinspektionen (the Swedish Financial Supervisory Authority) provides a list of the companies covered by the Resolution Act (2015:1016). The list comprises a wide range of categories of firms. However, only financial institutions on the list, e.g. joint-stock banks, savings banks, member banks, credit market companies, and investment firms, are subject to reporting obligations.

To Finansinspektionen (only available in Swedish)

Related content

Minimum requirements for eligible liabilities (MREL) Press release 18/12/2019: Annual decisions taken on planning for crisis management of Swedish banks Read more in the European Commission’s delegated regulation on simplified obligations