Sweden
Financial Sector Assessment Program: Detailed Assessment of Observance of Standards and Codes

This paper discusses key findings of the Detailed Assessment of Observance of Standards and Codes in Sweden. The assessment reveals that the laws and regulations on banking activities and their supervision are in place in Sweden. The composition of the Board of the Swedish Financial Supervisory Authority (FI) is not regulated in law or other ordinances. The position of the FI in relation to other public agencies in possible crisis situations is not defined in law. The FI has also made a motion to the government for a large increase in the number of specialists in its employ.

Abstract

This paper discusses key findings of the Detailed Assessment of Observance of Standards and Codes in Sweden. The assessment reveals that the laws and regulations on banking activities and their supervision are in place in Sweden. The composition of the Board of the Swedish Financial Supervisory Authority (FI) is not regulated in law or other ordinances. The position of the FI in relation to other public agencies in possible crisis situations is not defined in law. The FI has also made a motion to the government for a large increase in the number of specialists in its employ.

I. Observance of Basel Core Principles for Effective Banking Supervision

A. General

1. The assessment of compliance of the Basel Core Principles for Effective Banking Supervision in the supervisory work of the Swedish Financial Supervisory Authority (Finansinspektionen; “FI”) was performed by Allan D. Fink of the Federal Reserve Bank of Chicago and Mr. Tuomo Malin of the Finnish Financial Supervision Authority.

B. Information and Methodology Used for Assessment

2. The assessment was performed on the basis of the Methodology of the Basel Core Principles and the Draft Methodology Document prepared by the IMF and World Bank titled Enhancing the Global Effort Against Money Laundering. The Swedish Financial Supervision Authority submitted a self-assessment of the Core Principles prior to the mission. Additionally, on request, the authority produced a self-assessment on the draft on money laundering. The main sources for the assessment were the laws and supervisory regulations and guidelines concerning credit institutions. Law texts were obtained on the web site of the Swedish Parliament, the English versions on the site of the Bankers’ Association. The supervisor’s regulations were, for the most part, available only in Swedish. Additionally, the assessors received relevant material from the central bank. Meetings took place with representatives from the main commercial banks.

3. The assessors did not encounter any major barriers in making their assessment despite the scarcity of documents available in English.

C. Institutional and Macro Prudential Setting, Market Structure Overview

4. In Sweden there are three different types of banks: commercial banks, i.e., limited liability banking companies, savings banks and a few cooperative banks. All these types of banks are entitled to engage in all types of banking activity. The number of banks has declined sharply as a result of mergers, a tendency that has been most marked among the savings banks. From some 450 savings banks of the 1950s, the number had decreased to 85 by the late 1990s. Since the middle of the 1980s, however, numerous new banks have been established in Sweden. The market structure can be described as two-tiered with five large banks (Handelsbanken, Skandinaviska Enskilda Banken, Nordbanken and Förenings Sparbanken as well as the Swedish subsidiary of a major Danish bank) having a combined market share of about 75–85 percent; the residual market is shared among around 100 smaller banks. The home market for Swedish banks has to a greater extent been seen to embrace not only the traditional Nordic area but the whole region surrounding the Baltic Sea.

5. The four major Swedish banks are very broadly held. The largest owners are the Swedish government (less than 20 percent in Nordea), the Wallenberg-led investment company Investor (some 10 percent in SEB), the employees’ pension fund (some 10 percent in Svenska Handelsbanken), and the former savings banks foundations (some 20 percent in Swedbank, which was earlier a savings bank, which merged with a cooperative bank and became a commercial bank). Approximately one third of bank shares are held by non-Swedes. The medium and small-sized banks are generally held by one dominating owner, which in turn may have a widely spread ownership, such as Skandia. All savings banks are non-profit organizations and they are held by foundations.

6. The Swedish Financial Supervisory Authority is a government authority responsible to the MoF. It exercises supervision over banks, credit market companies, and additionally e.g., insurance companies, insurance brokers and securities companies. The role of FI is to ensure that statutory regulations are complied with, that secure and sound practices are applied and that confidence is maintained in the stability and functionality of the financial markets. The cost of FI’s activities is defrayed out of charges levied on banks and other supervised entities. The FI’s annual budget is decided by the government. One of FI’s primary tasks is to promote satisfactory consumer protection; additionally the National Board for Consumer Complaints, a government authority, has as its role to offer an alternative to legal action in court in connection with disputes between consumers and business firms. The Board has a separate banking to consider disputes between banks or other credit institutions and their customers.

7. The Central Bank Act assigns to the Riksbank the responsibility to ensure a stable and efficient payment system. It also assigns to the Riksbank the responsibility for monetary and exchange rate policy (including the management of the gold and currency reserves), as well as managing the issue of notes and coins, providing a clearing function for banks as well as accepting deposits from banks and granting them loans. The Central Bank also functions as lender of last resort providing financial aid to banks experiencing liquidity problems.

8. The legal framework for the banking sector is provided in the Banking Business Act that contains provisions regulating the business a bank may engage in e.g., the granting of credit. The act also contains essential provisions concerning the tasks of FI in the supervision of banks. Commercial banks are also subject to the Companies Act. There are special acts for savings banks and cooperative banks (so-called members banks). The Act on Capital Adequacy and Large Exposures for Credit Institutions and Securities Companies contains rules on how to calculate the capital base and capital adequacy to cover credit risks and market risks. The act also includes provisions stipulating limits for the exposure of credit institutions in relation to their clients, and rules concerning consolidated supervision. The Act on Financial Operations has provisions on licenses for and the activities of credit market companies, i.e., limited liability companies which have received a license from FI to engage in financing activities, such as credit mortgage institutions and finance companies.

9. The Secrecy Act regulates to what parties and on what conditions FI is obliged to divulge confidential information. Disclosure is mandatory to the parliament and the government. Furthermore, information may be disclosed to the Public Prosecution Authority, the Police force, the Riksbank or to another supervisory authority. The government’s annual directive regarding the supervisor’s overall objectives and reporting obligations is publicly available. FI operational goals and objectives as presented in its annual plan are also publicly available. The performance of FI relating to its objectives is accounted for in the annual report, that is published and subjected to the review by the Swedish National Audit Office. Each year, as a result of its financial stability analysis, FI publishes a report to the government on the stability of the financial system. The Riksbank also publishes its financial stability reports twice annually.

10. FI is an independent government authority without outside interference in its operational functions. The authority has a description of the internal processes and procedures. A government committee’s proposition dating back to three years includes plans, as yet unimplemented, to increase the authority’s powers. The supervisor cannot, however, with the present level of remuneration compete with the private sector. To improve its capacity to supervise particularly the more complex activities of banks, e.g., related to market risks, the supervisor has to be able to increase its competitiveness as an employer. The renewed capital accord as well as the preponderance of financial conglomerates in the Nordic financial system put in question the adequacy of the supervisor’s human resources.

11. The profitability of the largest Swedish banks increased in 2000. The return on equity ranged between 22 percent and 24 percent, with the exception of the Nordea group (18.6 percent). Credit losses have been on very low level, however they increased to SKR 1.9 billion in 2000. Nonperforming loans went up SKR 4.5 billion to SKR 23.5 billion. The tier 1 capital ratio for commercial banks was 7.9 percent in June 2000, with a slight upward trend from the previous years. Credit growth has been most rapid on the part of households (8.1 percent up from 1999) while total lending to the Swedish public increased by 4.7 percent.

D. General Preconditions for Effective Banking Supervision

12. After the disbanding of the Bank Support Authority there have been no standing institutional arrangements for handling banking crises. New arrangements for the resolution of distressed banks have been dealt with in a Committee paper of 1998 where it was proposed that a bank would be placed into public administration where this is necessary in the interests of system stability or where reconstruction is warranted—otherwise the bank is to be declared bankrupt or put into liquidation. The government would be able to take control of a bank’s business without taking over ownership of the bank; there would be no option of a compulsory takeover. The new government authority, the Crisis Management Authority, would assume control of the running of the business of a bank by representing all of its shares at general meetings. A government guarantee could be issued in order safeguard that the bank in public administration would meet all commitments arising during the life of the guarantee. At the present time there is no institutional framework for problem bank resolution. In spite of the limitations on the guarantee in the proposal above, the moral hazard aspect can not be discarded, altogether. The government would find itself in a position where it would be effectively regarded as the guarantor of the bank in public administration.

13. The purpose of the Act on Deposit Guarantee Scheme is to improve consumer protection in connection with the public’s deposits at banks and certain securities companies by providing a guarantee for deposits of up to SKR 250,000 per customer at each institution. The act contains rules regulating which deposits are covered by the guarantee, when the right to compensation arises, and what fees shall be paid by the institutions covered by the guarantee. Administrative duties lie at the Deposit Guarantee Board.

Table 1.

Detailed Assessment of Compliance of the Basel Core Principles

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Table 2.

Summary Compliance of the Basel Core Principles

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C: Compliant.

LC: Largely compliant.

MNC: Materially non-compliant.

NC: Non-compliant.

NA: Not applicable.

E. Recommended action plan and authorities’ response to the assessment

Recommended action plan

Table 3.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

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F. Authorities’ Response to the Assessment

14. The authorities are in broad agreement with the mission’s assessment of FI’s observance of the Basel Core Principles for Effective Banking Supervision. FI has asked for substantial budgetary enhancements to address the resource shortcomings noted. A proposal to reform the regulation of banks and credit institutions that would give FI the necessary early intervention powers has been put forward for public comment, with the objective of submitting a bill to parliament by Autumn 2002. The authorities point out that as concerns country risk, FI determines through onsite and offsite inspections that banks policies and procedures are appropriate and adequate.

II. IAIS Insurance Core Principles

A. General

15. On July 1, 1991, the Supervisory Service was merged with the supervision of banks and other credit organizations into FI. This merger was accompanied by legal changes that from August 1, 1991, permit financial conglomerates: insurance companies may hold shares in credit institutions and vice versa, and both types of companies may be owned by a holding company, thus forming a financial group.

16. Supervision of insurance companies and of friendly societies (provident and mutual-benefit institutions) is the responsibility of FI, which is an independent State agency. Its work is governed only by legislation and by government Ordinances, which must be published. Final decisions on matters of principle may rest, however, with the government. Administrative courts resolve complaints raised against decisions taken by FI.

17. FI has a total staff of about 170 persons, of which about only 30 (or 18 percent) work in the Department of Insurance and Mutual Funds. This department is divided into three units according to the corresponding area of responsibility: Licensing & Legal Matters, Supervision, and Risk Analysis. The Board of FI settles matters of principles. The Board has the Director General as the chairman and presently the following members: two members of parliament; one representative each from the MoF, the Bank of Sweden, and the National Board for Consumer Policies; three other members with financial and business experience; and two representatives of the employees.

18. There are no permanent advisory bodies. FI is at liberty to turn to independent experts and does use this option from time to time.

19. The International Association of Insurance Supervisors (IAIS) was formed in 1992. Its core objective is “to ensure improved supervision of the insurance industry on a domestic, as well as on an international, level in order to maintain efficient, fair, safe and stable insurance markets for the benefit and protection of policyholders.” As part of this agenda the IAIS develops standards for insurance supervision. These standards emerge from principles that identify the fundamental elements of effective supervision and the areas in which the supervisor should have authority or even have control.

20. Given the major emphasis on stability inherent in the FSAP, this assessment is based on the Insurance Core Principles (CPs) of the IAIS, which focus on prudential supervision, but also address market conduct and cross border issues. The CPs cover 17 key issues. The conclusion is that of 17 assessed principles, Sweden observes 6 principles and broadly observes also 11 principles.

B. Information and Methodology Used for Assessment

21. This FSAP assessment has been undertaken on the basis of (1) a self assessment by FI; (2) discussions with senior FI staff; (3) a review of the key legislation relevant to FI and explanations given of the constitutional framework for government administration in Sweden (the most relevant documents being available only in Swedish); and (4) review of a range of FI publications, including its Annual Report and annual Financial Stability Report, and of its website.1

22. FI’s self-assessment provided the basis for this FSAP assessment. However, the absence of English translation of the most relevant documents impaired the assessment, causing time-consuming explanations of the Swedish texts by the Swedish colleagues of FI.

C. Institutional and Macroprudential Setting—Overview

23. The supervision concerns only private insurance. Social insurance is administrated by special agencies. Social insurance covers guaranteed and income-related pensions, health insurance and industrial injuries. There are also special arrangements for unemployment insurance. Nevertheless, private insurance plays an important role, which seems to be increasing as some benefits from social insurance are subject to reduction. Employers’ and employees’ associations also have agreed upon benefits, the Second Pillar, supplementing the social insurance cover. This includes pension plans, group life and industrial injuries. Other group and individual insurance arrangements are also widespread.

24. Private insurance is mainly carried out by insurance companies, but there are also some friendly societies. These societies still play a certain, though diminishing role in the sphere of pensions, other life insurance and sickness insurance. They are of different types and sizes, from small local funeral expense funds or sickness funds to nation-wide pension institutions. They are legally different from insurance companies in that they may not act on the market and provide insurance on a commercial basis.

25. An insurance broker is defined as an independent intermediary paid either by commission from the insurance company or by fee from the client. An insurance broker or an insurance broker firm has to be registered and supervised by FI. Insurance brokers must meet certain requirements as regards professional indemnity insurance, professional qualifications and fit- and properness. Brokers are allowed to collect premiums and assist clients in settling claims, but not to administrate such assets. They must inform the client about the commission from the insurer, if the client so requires.

26. It is the duty of FI to ascertain that insurance companies remain solvent and conduct their business in accordance with laws and regulations. Supervision implies consideration of legal, financial, technical and economic matters. As already mentioned, the Swedish legislation has, as far as domestic companies are concerned, laid down the principles of solvency, transparency and good insurance standard.

27. Supervision of the business of a licensed insurance company involves examination of the annual returns which must be submitted to FI before August 1 and, in addition, inspections at the place of business. Some companies have a special auditor appointed by FI (ca. 40 at the moment). Each company, except pure reinsurance companies that do not reinsurance life business or long-term non-life business, must keep a record of the assets covering the technical provisions and follow certain investment regulations.

28. The large nation-wide companies are members of a general federation of insurers, the Swedish Insurance Federation (Sveriges Försäkringsförbund), the objective of which is to deal with matters of common interest to Swedish insurers. The local companies have, on their side, two different but parallel organizations to look after their special interests. In addition, there is an association of general agents of Swedish branches of foreign insurance companies. Since 1994 insurers with licensed agencies or branches in Sweden may, with the consent of the Board, join the Swedish Insurance Federation as members.

29. Insurance brokers have a separate organization.

30. All companies transacting motor liability insurance–domestic companies as well as Swedish branches of foreign companies–are required to be members of the Motor Liability Insurance Association. The main objectives of this association are to take care of matters connected with the insurers’ common responsibility for damage caused by uninsured owners or drivers of vehicles or untraceable drivers that have caused accidents, and to take measures to facilitate insurance arrangements for foreign cars visiting Sweden or Swedish cars going abroad.

31. There are labor market federations for negotiations between insurers on the one hand and employees and employed agents on the other hand.

32. There are several industry organizations for cooperation within the framework of competition legislation or for more general contacts.2 In addition, the Swedish Actuarial Society, the Swedish Insurance Society and the Insurance Bureau for Consumers’ Enquiries should be mentioned.

33. Relations between the organizations of the insurance market and FI are not regulated by any legislation but are conducted on an informal basis. They include regular information as well as cooperation in committees and ad hoc groups.

34. At the end of 2000, 482 insurance companies were established on the Swedish market. Together, the insurance groups and firms that belong to the Federation covered nearly 100 percent of the Swedish life market and 94 percent of the non-life market.

35. Life insurance companies’ premium income rose by 25 percent to SKR 102.7 billion in 2000. The unit-linked insurance companies’ premium income was up 43 percent, while traditional life insurance companies increased their premium income by 13 percent. The year 2000 was thereby the first in which unit-linked insurance premiums surpassed premiums for traditional life insurance. Life insurance companies on average maintain good solvency ratio, amounting to 11 in 2000.

36. Non-life insurance companies’ premium income in 2000 amounted to SKR 34.9 billion, 5 percent higher than in 1999. On average, they also hold a 17.2 solvency ratio in 2000. Labor market insurance companies had aggregate premium income of SKR 15.8 billion, down 23 percent on 1999.

37. At year-end, insurance companies managed a total of SKR 1,820 billion, 4 percent higher than at the previous year end. Of this amount, SKR 894 billion (49 percent) was invested in shares and participations, and SKR 711 billion (39 percent) in bonds. Of aggregate investment assets, foreign assets made up SKR 623 billion (34 percent).

38. The importance of the insurance sector relative to the banking system has been increased from 1995 to 2000 continuously, illustrated by the ratio of domestic insurance liabilities to domestic bank deposits increasing from 0.8 to 1.2.

D. General Preconditions for Effective Insurance Supervision

39. The legal framework mainly consists of the Insurance Business Act, regulations, and guidelines for the operations of FI is sufficient. In addition there have been improvements in terms of supervisory tools or legal amendments on the way, which are coming into force next year. So far, almost all IAIS Insurance Core Principles (CP) are observed or broadly observed formally by FI.

40. However, the present serious difficulty in getting skilled staff and the resulting insufficient number of skilled employees have forced FI to define priorities. This of course leads to supervisory weaknesses and vulnerabilities in the insurance sector in the areas that have not been prioritized. For instance in the context of the supervision of financial conglomerates, the vulnerability of the insurance part may affect the other financial sectors of the financial conglomerate concerned in the form of contagion risk. Such a contagion in turn can cause a financial instability of the Swedish national economy with cross-border effects.

41. Because of the resource constraints FI doesn’t have the time desirable to examine the reports insurers send to the authority, which is one of FI’s primary tasks. FI also needs to find time to continue to develop new methods that would allow a risk-based supervision approach. Hence an effective insurance supervision seems to be jeopardized at the moment.

42. The general social system in Sweden provides a large part of the security needed by individual citizens in different situations. The Social Insurance Board or other public institutions do not compete with the private insurance sector. As a part of the recent reform of the pension system, there is, however, a mandatory unit-linked pensions saving in which the insured has the option to choose external investment funds from a list administered by the Premium Pension Authority.

43. There are some life insurance companies, which confine themselves exclusively to providing pensions and certain other payments for employees under a collective scheme. Employers and employees are partners in these companies. There are also a number of private life insurers and friendly societies working in the same field.

44. In accordance with the above-mentioned disassociation between social and private insurance, preconditions for effective insurance supervision are fulfilled.

E. Principle-by-Principle Assessment

Table 4.

Detailed Assessment of Observance of the IAIS Insurance Core Principles

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