The International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) of Sweden in 2002 and concluded that overall the unified regulator, the Swedish Financial Supervisory Authority (FI), exhibits a high degree of compliance with international standards and codes. The report, however, does not specifically address Sweden's overall compliance with the Basel Core Principles (BCPs). The FI is the authority in charge of banking supervision in the country. The FSSA also noted that although Sweden has a sound legal framework and prudential regulations in place, there are several shortcomings in regulations and implementation that impedes Sweden's compliance with the BCPs. The main shortcomings identified by the report relate to the FI's inadequacies in staff and resources, the FI's limited scope for remedial action, and the lack of proper regulations relating to country risk, operational risk and exchange rate risk. The Swedish authorities, per the FSSA, were cognizant of some of the deficiencies in the supervisory regime, and had started working towards their amelioration. A more recent IMF report, the 2006 Article IV, notes that the legislative framework for bank resolution still needs improvement.

General Overview

The 2006 Article IV consultation report by the IMF notes that the financial sector is stable, with high bank profitability and capital levels, and Swedish banks possess a fair ability to absorb moderate economic shocks. However, the IMF did find that asset prices and banks' exposures to highly leveraged transactions needed close monitoring. The 2006 Article IV report mentions the 2002 IMF FSSA observations about the deficiencies in the supervisory regime, and notes that the legislative framework for bank resolution needs to be improved. It finds that, as of 2006, a legislation to create an integrated framework for managing and unwinding distressed institutions is being drafted.

According to the 2002 IMF FSSA, the financial regulatory and supervisory arrangements are highly compliant with international codes and standards. Nonetheless, there are certain deficiencies in the Swedish Financial Supervisory Authority's (Finansinspektionen, or FI) capacity and regulatory power to effectively supervise the financial sector. These pertain to staffing and resources; scope of remedial action; licensing criteria; loan evaluation and loan loss provisioning; large exposures and connected lending; country risk and other risk management; internal control and audit; and consolidated and global supervision. The Swedish authorities, per the FSSA, are cognizant of the resource needs of the FI, and the FI has asked for substantial budgetary enhancements. A bill was also in the works at the time of the FSSA to enhance the corrective action powers of the FI, and was likely to be tabled in Parliament by the end of 2002. There is little further information publicly available as to the status of this bill. As regards monitoring the adequacy of country risk management in banks, the FI responded that it is achieved during onsite and off site inspections of institutions.

The FI website states that it has the power to authorize, supervise, and monitor all companies operating in Swedish financial markets, including banks and other credit institutions. It was created in 1991 through the merger of the former banking and insurance supervisory agencies with the aim of creating a single integrated regulator of the banking, securities, and insurance sectors. The website discloses that the role of the FI is "to promote stability and efficiency in the financial system as well as to ensure an effective consumer protection." The FI is accountable to the Ministry of Finance (Finansdepartementet, or MoF).

The 2002 IMF FSSA also observed that Sweden has a well-developed and stable legal and institutional framework in place that is conducive for adequate supervision. Its legal, accounting and actuarial practices are modern. The laws and supervisory rules in Sweden "set a high standard of regulation" (p. 19). The Banking Business Act provides the legal framework for banking supervision in Sweden. It contains provisions on the activities that banks can engage in, and the supervisory tasks of the FI. The Act on Capital Adequacy and Large Exposures for Credit Institutions and Securities Companies contains rules on computing capital base and capital adequacy in accordance with credit and market risks; exposure limits; and consolidated supervision.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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The 2002 IMF FSSA notes that the FI exercises prudential supervision of the financial sector, including banks. Relevant laws and decrees on the FI and banking supervision in general frame the FI's responsibilities and objectives. The FI also publishes its policies and objectives relating to financial sector supervision. The role of the 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" (p. 43). The FI website states that the role of the FI has been stipulated by the Swedish Government and Parliament "to promote stability and efficiency in the financial system as well to ensure an effective consumer protection."

1.(2) Operational independence and adequate resources.

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The 2002 IMF FSSA notes that the FI is administratively controlled by the MoF, but enjoys operational independence. It is financed by levies from the financial sector via the national budget. The 2006 FI report states that the sources of funding of the FI include the mandatory fee paid by the supervised entities to the central government as well as fees paid by the companies to the FI for permits, licenses, and applications. The FSSA, however, finds that the FI suffers from inadequacy of resources, especially pertaining to skilled and knowledgeable staff. This is because of the FI's non-competitiveness as an employer in a period of complex supervision of financial conglomerates and new frontiers of risks undertaken by supervised entities. The FSSA calls for increasing the remuneration offered to FI employees to attract skilled and knowledgeable personnel. Despite the above descriptive information, there is little information publicly available that directly addresses Sweden's compliance with this principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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Per the 2002 IMF FSSA, the FI issues licenses to banks. The FSSA, however, finds that the FI's powers of sanction are limited to issuing warnings before revoking a license. The FI website updates this information, reporting that the enforcement powers of the FI range from administrative fees to withdrawal of licenses. Nonetheless, there is insufficient information publicly available as to Sweden's compliance with this principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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The 2002 IMF FSSA finds that the FI does not have adequate powers to take proactive actions in ongoing supervision and that its powers of sanction is limited to issuing warnings before revoking a license. The FI website, however, notes that enforcement powers of the FI range from administrative fees to withdrawal of licenses. Nonetheless, there is insufficient information publicly available as to Sweden's compliance with this principle.

1.(5) Legal protection for supervisors.

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There is insufficient information publicly available that directly addresses Sweden's compliance with this principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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The 2002 IMF FSSA notes that "the position of the Financial Supervisor [FI] in relation to other public agencies in possible crisis-situations is not defined in law" (p. 44). The 2006 IMF report, however, mentions that Sweden has a well established framework of regional cross border supervisory cooperation and that the country continues to enhance it. A 2007 Central Bank of Sweden (Sveriges Riksbank, or SR) report also states that the interaction between the MoF, the FI, and the SR in preventive supervision, crisis management and international supervision is close and important. However, there is insufficient information publicly available as to Sweden's compliance with this principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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There is insufficient information publicly available as to Sweden's compliance with this principle. The 2002 IMF FSSA notes that barring a few minor exceptions, banks are given the privilege of deposit taking.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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The 2002 IMF FSSA notes that during the licensing process, the FI restricts its fit and proper assessments to the Board and the chief executive officer of the bank. Also, the economic condition of the principal shareholders is determined only through the public financial statements. The FSSA advises the application of the fitness and propriety criteria to all the members of a bank's management, including the senior executives and the managers of the foreign offices of banks. Further, the FI needs to be granted the power by law to require a change in the composition of the Board if the skills and knowledge of the Board members are not up to the mark. Despite the above descriptive information, there is little information publicly available that directly addresses Sweden's compliance with this principle.

4. Authority to review and reject transfer of ownership.

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According to the 2002 IMF FSSA "changes in the ownership of banks...are subject to the supervisor's authorization" (p. 44). Nonetheless, there is scant information publicly available as to Sweden's compliance with this principle.

5. Authority to review major acquisitions and investments.

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As noted in the 2002 IMF FSSA "major acquisitions are subject to the supervisor's authorization" (p. 44). Apart from this statement in the FSSA, there is little information publicly available that directly addresses Sweden's compliance with this principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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There is insufficient information publicly available as to Sweden's compliance with this principle. Per the 2002 IMF FSSA, the "capital adequacy requirements are consistent with the Basel Capital Accord" (p. 44). The FSSA, nevertheless, observes that the FI does not have the power to raise the capital requirements for banks on the basis of risk or to raise the general level of provisioning and reserves of banks. The FI only monitors and ensures that the supervised institutions reach their own goals of tier 1 capital. A 2007 report by the FI titled "Application for IRB approach: Credit Risk" informs in this regard that the European Union's Capital Adequacy Directive based on the Basel II Accord came into force in January 2007. Under the rules, banks, credit institutions and investment firms can seek permission from the financial regulator to use an internal ratings-based approach (the IRB approach) for calculating the capital requirement for credit risk. In pursuance of the European Commission (EC) Capital Adequacy Directive, Sweden passed a bill proposing that the FI could review, upon request, the reliability of the institutions' IRB approach to measure credit risk. Also, the report states that though there is no law in place, the FI already has draft regulations on the IRB approach, and there are working material on which the FI will base its review of the institutions' IRB approach till the regulations are formally adopted.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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The 2002 IMF FSSA observes that the FI does not have legally binding powers to raise the general level of provisioning and reserves of banks, or to mandate banks to strengthen their credit granting standards. Nonetheless, there is scant information publicly available as to Sweden's compliance with this principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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The 2002 IMF FSSA found certain deficiencies in Sweden's observance of this principle. It therefore recommends that the FI be given legally binding powers to be able to mandate banks to strengthen their lending practices and increase the level of their reserves and loan loss provisions. In case of a high level of problem assets, the FI also needed the power to force a bank to adopt policies enhancing the overall financial strength of the bank. However, there is insufficient information publicly available as to Sweden's compliance with this principle.

9. Prudential limits and management information system on concentration of exposure.

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The 2002 IMF FSSA recommends the FI to require reporting by banks on the geographical concentrations in lending. Nonetheless, there is scant information publicly available as to Sweden's actual compliance with this principle.

10. Arm's length rule and monitoring for connected lending.

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The 2002 IMF FSSA notes that although the law regulates connected lending in Sweden, the FI has not used its powers to issue regulations pertaining to the reporting of connected lending. In this respect, the FSSA recommends that the FI issue such regulations and require banks to report to it regularly on an individual or aggregate basis. Supervision of connected lending also needs to be enhanced by allowing the FI to set individual limits to connected lending and deduct the amount of concessionary loans to connected parties from the bank's capital. Despite the above descriptive information, there is little information publicly available that directly addresses Sweden's compliance with this principle.

11. Policies and procedures for country risk and transfer risk.

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At the time of the 2002 IMF FSSA, Sweden had not yet issued supervisory standards on country risk, operational risk and exchange rate risk. The FI was found to rely on the quarterly reports on banks' exposures to country risk published by the SR. The FSSA recommended that the FI (1) issue regulations pertaining to country risk management; (2) require banks to report on geographical concentrations on lending. However, there is insufficient information publicly available as to Sweden's compliance with this principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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There is insufficient information publicly available that directly addresses Sweden's compliance with this principle.

13. Comprehensive risk management processes.

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The 2002 IMF FSSA notes that the FI has not been in the habit of performing a systematic risk analysis of banks, but with the reorganization and introduction of a new model of supervision in 2001, such analyses and risk assessments will be undertaken. Under the reorganized structure of supervision, the FI has designated group managers to coordinate institutional supervision, emphasizing functional supervision. The FSSA, nevertheless, recommends that the FI issue supervisory standards on exchange rate and operational and other risks. Nevertheless, there is scant information publicly available as to Sweden's compliance with this principle.

14. Adequate internal controls.

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The 2002 IMF FSSA finds that the FI is largely reliant on the internal audit reports submitted by the banks to assess their internal control policies, procedures and practices. The FSSA recommends that Sweden empower the FI by law to require a change in the composition of the Board if the skills and knowledge of the Board members are not up to the mark. Nonetheless, there is scant information publicly available as to Sweden's compliance with this principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

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The Financial Action Task Force (FATF), in 2006, released a mutual evaluation report of Sweden's compliance with the FATF's recommendations on anti-money laundering and combating the financing of terrorism (AML/CFT). Per this report, customer identification and other AML obligations for a wide range of financial institutions are contained in the Act on Measures against Money Laundering (as amended in 2005). The FATF report finds that though customer identification measures have been implemented in Sweden, full customer due diligence (CDD) requirements are not implemented. Financial institutions are also required to keep records of STRs for one year and file them under the Money Laundering Registers Act. Thus Swedish law requires financial institutions to examine closely all suspicious and unusual transactions. However, the report finds that only a handful of financial institutions submit STRs, and therefore raises doubts on the efficacy of the implementation of these regulations. Per the 2006 FATF report, Sweden has internal controls, compliance and audit requirements in place. However, financial institutions are not legally required to screen employees before hiring them. Despite the above descriptive information, there is little information publicly available that directly addresses Sweden's compliance with this principle.

16. Effective supervisory system consisting of on-site and off-site supervision.

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There is little information publicly available as to Sweden's compliance with this principle. However, the 2008 FI report states that the FI conducts on-site supervision that include examinations of the banks' risk management routines and internal control systems. They sometimes lead to imposition of sanctions, such as withdrawal of permits or issue of a warning.

17. Regular contact with bank management and understanding of bank's operations.

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There is insufficient information publicly available that directly addresses Sweden's compliance with this principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

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There is insufficient information publicly available that directly addresses Sweden's compliance with this principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

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The 2002 IMF FSSA finds that the FI "has an intensive cooperation arrangement with the external auditors appointed by it" (p. 44). The same does not hold true with the auditors chosen by shareholders of the supervised entities and their audit reports are not sent to the FI on a regular basis. The FI also does not have the power to revoke the appointment of an external auditor; and it is heavily reliant on the internal audit reports produced by the banks. However, there is little information publicly available that directly addresses Sweden's actual compliance with this principle.

20. Ability to supervise on a consolidated basis.

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The 2002 IMF FSSA notes that "the main legal basis for consolidated supervision is in place" (p. 44). The FSSA, however observes that the FI does not have powers under the law to stop Swedish banks from establishing branches in jurisdictions where host country supervisory arrangements are not sufficient vis-à-vis the risks involved or where local laws and regulations hinder the free flow of supervisory information. The FI also lacks the power to mandate the closure of overseas offices or limit the scope of their activities. The FSSA therefore recommends that the FI adopt a policy of proactively evaluating the supervisory arrangements in the host country to safeguard effective home country supervision in Sweden. The FSSA also recommends that the FI be empowered by law to circumscribe the activities engaged in by the foreign establishments of banks. The FSSA advises the FI as supervisor of Swedish conglomerates to "adopt the active role of the lead supervisor in the context of coordinating the planning and performing of joint examinations by supervisors from different jurisdictions" (p. 47).

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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The 2002 IMF FSSA notes that the "laws and regulations concerning annual audited financial statements are in place" (p. 45). The generally accepted auditing standards are determined by the Institute of Authorized Public Accountants, and the accounting standards issued by the International Accounting Standards Board are implemented in Sweden by the Financial Accounting Standards Council (Redovisningsrådet). The banks are required to adhere to the general Book-keeping Act and apply the accounting statements and recommendations by the Financial Accounting Standards Council. However, the FSSA finds that the guidelines on liquidity reporting were issued very recently and the FI lacks the power to revoke the appointment of an external auditor. Despite the above descriptive information, there is little information publicly available that directly addresses Sweden's compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

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The 2002 IMF FSSA observes that the FI "has a limited range of remedial actions available" (p. 45). The FI does not have adequate powers to take proactive preventive actions in ongoing supervision and that its powers of sanction are limited to issuing warnings before revoking a license. The FSSA mentions a 1998 committee proposal to enhance the corrective action powers of the FI, but notes that the enhancements do not include the power to inter alia restrict the range of activities of the bank, to suspend dividend payments, to bar individuals from banking, or to replace managers, directors, or controlling owners. The FSSA therefore recommends more legally binding powers to the FI to satisfy the essential criteria of Principle 22. The FI website, however, notes that the FI's enforcement powers range from administrative fees to withdrawal of licenses. The 2006 Article IV report by the IMF mentions the difficulty encountered by the FI in revoking the licenses of two small banks in a timely manner, and notes that this incident underscores the importance of improving the legal framework for bank resolution. The report welcomes Sweden's plans to move forward with framing laws in this area.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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The 2002 IMF FSSA observes that the FI does not have legal power to stop Swedish banks from establishing branches in jurisdictions where host country supervisory arrangements are not sufficient vis-à-vis the risks involved or where local laws and regulations hinder the free flow of supervisory information. The FI was also found lacking powers to mandate the closure of overseas offices or limit the scope of their activities. The FSSA therefore recommends the FI to adopt a policy of proactively evaluating the supervisory arrangements in the host country to safeguard effective home country supervision in Sweden. The 2008 FI report states that the FI conducts onsite investigations at European Union (EU) branches of Swedish institutions, and actively participates in EU level cooperation.

24. International exchange of information with other supervisors.

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Per the 2002 FSSA, the FI has entered into memoranda of understanding (MoUs) on supervisory cooperation with all European Economic Area supervisors, but not with supervisors of some other countries where Swedish banks have a presence. Also, the FSSA notes that the FI does not have the authority to deny a license to a foreign branch if the home country supervisory regime and regulations hinder the free flow of supervisory information. Despite the above descriptive information, there is little information publicly available that directly addresses Sweden's compliance with this principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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The 2002 IMF FSSA notes that the FI, when granting licenses to foreign bank branches and other offices, does not legally ensure that home supervisor approval or no-objection certificate has been received by the entity or that the home country supervisor practices effective global consolidated supervision. Also, the FSSA notes that the FI does not have the authority to deny a license to a foreign branch if the home country supervisory regime and regulations hinder the free flow of supervisory information. Further, MoUs with some of the overseas supervisors supervising entities of Swedish banks had not yet been finalized.