Swedish debt office bail-in proposal seen as credit negative by Moody’s

A Swedish National Debt Office (Riksgälden) proposal on how to implement the EU bank recovery and resolution framework in Sweden is credit negative for senior unsecured debt of the country’s banks, particularly of the four largest, Moody’s said today (Thursday).

Riksgälden submitted a proposal to the Swedish government last Friday (09 August) on how to prepare for the EU Bank Recovery & Resolution Directive (BRRD), which comes into force on 1 January 2015.

“The Debt Office currently has the role of support agency and deposit insurer in Sweden,” said Hans Lindblad, director general of Riksgälden. “Given our present assignment it is desirable for us to keep momentum in the process of preparing for the new authority.”

The Swedish National Debt Office (SNDO) said that the national resolution authority cannot be designated before the second half of next year, but that preparations need to start as soon as possible in order to be operative by 2015.

Moody’s today said that the completion of the BRRD framework increases the likelihood of creditor bail-ins, and that this is credit negative for the senior unsecured debt of Swedish banks. It is credit negative especially for the senior unsecured debt of the four largest Swedish banks — Nordea Bank, SEB, Svenska Handelsbanken and Swedbank — as these have the greatest probability of receiving systemic support, said the rating agency.

It noted that Sweden has historically supported credit institutions that authorities deemed to be systemically important for the Swedish payment system and that the 2008 Bank Support Act provided a framework under which the government can support credit institutions.

“That framework supports our assumption of very high systemic support for the four major banks, translating into a three notch ratings uplift,” said Moody’s. “However, the new rules introduce a number of new credit negative tools and powers, including the possibility to write down or convert debt of an ailing institution during a crisis.”

Riksgälden’s proposal was not available in English at the time of publication. Moody’s said that all of Sweden’s approximately 270 financial institutions will be subject to the resolution tools, including bail-in, and that the SNDO suggests dividing financial institutions into three categories:

• Systemically important financial institutions (SIFIs), for which the resolution authority will prepare individual crisis management plans;

•  Potentially systemically important institutions, for which the resolution authority will prepare a simplified crisis management plan; and

•  Institutions not considered systemically important would be excluded from individual crisis management planning.

Moody’s said that the first category would include Nordea, Handelsbanken, SEB and Swedbank, which together account for 70% of domestic deposits, and possibly others, and that the SNDO foresees 10 institutions falling into the second category.

According to Moody’s, the next steps for Sweden’s authorities this year and in 2014 is to gather information on the SIFIs, and to set minimum requirements for what debt would be eligible for bail-in for all institutions. Developing recovery plans for the four major banks will take place during the remaining months of 2013, said the rating agency, and requires international resolution colleges. International collaboration on the potential resolution of Nordea Bank has already begun because it has been designated as one of 29 global SIFIs, said Moody’s.