Bail-In Talks in Sweden Zero In on Refinancing Risks to Banks

Concerns that banks will struggle to refinance debt used in a new regulatory buffer are shaping efforts in Sweden to design rules for avoiding government bailouts.

The country’s bank resolution agency says Sweden’s approach to a minimum requirement for own funds and eligible liabilities, or MREL, will reflect that refinancing risk. The agency’s position brings it a step closer to the Swedish Financial Supervisory Authority, and removes a stumbling block in talks between the two after a series of disagreements over the new buffer requirement.

“MREL debt can have a maturity as short as one year, which means the stock needs refinancing,” Tom Andersson, the Swedish National Debt Office’s expert on resolution, said in an interview. “We see that kind of risk as well.” Refinancing risks “will be an aspect that will be taken into account.”

Panic Selling

The European Banking Authority has also flagged refinancing risk. The London-based regulator warned in July that a failure to roll over debt could put banks at risk of being restricted automatically from making distributions. Investor concerns about coupon payments on additional Tier 1 debt triggered a selloff earlier this year.

The so-called bail-in buffer is part of Europe’s broader package of measures designed to address the threat of bank failures and the desire to protect taxpayers, known as the Bank Recovery and Resolution Directive. MREL will be assigned to each bank on an individual basis to absorb losses and, in some cases, to recapitalize. The buffer is the linchpin in Europe’s plan to avoid bailouts, but countries are implementing it differently.  

Sweden’s debt agency has proposed that banks with a capital requirement of 20 percent of risk-weighted assets face an MREL of 32 percent, two-thirds of it in debt. That would apply to Sweden’s biggest banks, including Nordea Bank AB. But the FSA has said that both the level and the debt proportion are too high and could create incentives for risk-taking. The FSA also argues a high level raises the risk of a breach, putting operating licenses at risk, and would expose banks to refinancing risks when they’re most vulnerable.


A key question that has yet to be settled is that of subordination. The volume of debt that Sweden’s 10 biggest banks have outstanding is enough to comply with MREL if subordination isn’t required. If it is, none of those banks complies.

Under ideal circumstances, all debt “should be subordinated,” Hans Lindblad, director general of the National Debt Office, said earlier this month. “Whether we’ll get that far, I don’t know, but that would be the ideal situation from a resolution perspective.” The FSA disagrees. While subordination may make resolution easier, it also “can exacerbate the already significant refinancing risks.”

Germany’s parliament adopted legislation last year subordinating senior unsecured bonds to currently equal-ranking liabilities, such as unsecured deposits and derivatives. The Swedish debt agency is proposing that while different types of capital can be included in MREL, there will be restrictions, Andersson said.

$89 Billion

While subordination would simplify resolution by clarifying who takes losses first, it also could mean Sweden’s four biggest banks would need to replace as much as 588 billion kronor ($89 billion) of existing debt, according to Moody’s Investors Service.

Nordea, Sweden’s only global SIFI, said in May it may issue so-called Tier 3 debt to meet the requirement. Global SIFIs need to comply with so-called total loss-absorbing capacity requirements, or TLAC, which contain an automatic assumption of subordination.

According to Andersson, two things will affect Sweden’s decision: how Europe decides to implement TLAC and the impact on bank issuance. The latter, he said, “is more a phase-in question rather than a level question.”

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