FI applies the capital adequacy regulations with the aim to ensure that the Swedish banking system is more robustly equipped for withstanding future financial crises.
The objective of capital requirements for banks is to ensure that they have the ability to handle losses, thus preventing and mitigating the effects of crises on the banking system and society. Banks' operations, for example lending and borrowing, entail risks that could result in losses if these risks were to materialise. The banks' prices and earnings should take into account expected losses related to these risks. The capital requirements are designed such that the banks should also be able to handle unexpected losses.
The capital requirements are based on principles designed by the Basel Committee that have been implemented through the EU capital adequacy regulations, Swedish laws, and FI's regulations. The principles contain minimum own funds requirements (Pillar 1), additional own funds requirements (Pillar 2), and combined buffer requirements. To ensure equal treatment of banks that are present in several markets, FI cooperates with authorities in other countries and can reciprocate measures decided by foreign authorities. In this way, capital requirements on Swedish banks' exposures in foreign countries are applied in a similar way to the application in each country. In addition to the capital requirements, there are also requirements on the disclosure of information on risks, capital and liquidity (Pillar 3).
FI publishes the capital requirements for Swedish banks and credit institutions in Supervision Categories 1 and 2 every quarter.
The banks measure their risks and calculate minimum own funds requirements (Pillar 1) following the rules and calculation models set out in the EU Capital Requirements Regulation (575/2013/EU).
The minimum own funds requirement is 8 per cent of the value of the bank's assets and other assumptions adjusted for their risk, which is called the risk-weighted exposure amount (REA).
The requirement is calculated for credit risks, market risks, and operational risks.
Credit risks are risks related to, for example, loans, loan commitments, and guarantees issued by the bank. The capital requirement for credit risks is calculated using standardised risk weights or internal ratings-based approaches. Standardised risk weights are when a risk-weighted exposure amount is calculated by multiplying the value of a commitment, for example a loan, by a pre-determined weight. An internal ratings-based approach is when a risk weight is calculated for each loan based on an assessed probability that a certain part of the loan will not be paid back and cannot be recovered via pledged collateral. Internal ratings-based approaches consider the bank's historical losses and must be approved by FI.
Market risks are the risk of changes in the value of the bank's securities, derivatives, and currency and commodity positions. The capital requirement is calculated using a number of different methods, such as standardised approaches, internal models, and percentual calculations, depending on the type of risk. Internal models must be approved by FI. The calculated capital requirement amount in SEK is multiplied by 12.5 to generate a risk-weighted exposure amount for market risk.
The capital requirement for operational risks should cover losses caused by events evolving from failed processes, human error, faulty systems or external events. The capital requirement is calculated using the basic indicator approach, the standardised approach, or the advanced measurement approach (AMA). The capital requirement calculated using the basic indicator approach is 15 per cent of the bank's operating income. The capital requirement using the standardised approach is calculated in a similar manner, but with different percentages – between 12 and 18 per cent depending on the business area. AMA is an internal ratings-based approach where the capital requirement is based on expected and unexpected losses due to operational risks. The approach must be approved by FI The calculated capital requirement amount in SEK is multiplied by 12.5 to generate a risk-weighted exposures amount for operational risks.
FI has adopted a decision that a risk-weight floor of 25 per cent applies to Swedish mortgage exposures within the rules for Pillar 1. More about this risk-weight floor and FI's decision is found in the following memorandums.
The banks must hold capital that adequately covers all risks to which they are or may be exposed. To ensure that a bank knows which risks it can be exposed to, there are rules set out in the Banking and Financing Business Act (2004:297) that require a bank to identify, measure, govern, internally report, and exercise control over the risks associated with the bank's business.
The banks must evaluate their capital need for non-Pillar 1 risks in what is called the Internal Capital Adequacy Assessment Process (ICAAP) and determine their total capital need. FI conducts a supervisory review and evaluation process (SREP) for the bank's governance structures, processes and procedures related to its ICAAP and assesses the bank's risks and capital need. After an SREP, FI decides on an additional own funds requirement and provides a guidance on additional own funds. The bank's and FI's risk and capital assessments are both parts of the Pillar 2 framework.
FI has published approaches for evaluating which risks are not covered by the minimum own funds requirements and for which FI decides on additional own funds requirements. The risks covered by these approaches are interest rate risks and other market risks in ancillary activities, concentration risk, pension risk, and risk weights for both corporate exposures and commercial real estate.
FI will start to apply the changes to the application of Pillar 2 that are described in the memorandum New capital requirements for Swedish banks (FI Ref. 20-20990) when the necessary legislative changes enter into force. However, some changes affect the banks' capital requirements fist when FI has conducted a new SREP. FI has outlined the practical implementation of the changes in Pillar 2 during the transition period up through the next SREP, see "Så ska banker tillämpa kapitalkrav fram till nästa översyn och utvärdering" (2020-12-02, In Swedish).
Requirements on maintaining different types of capital buffers are set out in the Capital Buffers Act (2014:966). A bank may use the buffers, although under specific circumstances and restrictions. Large buffers make banks more resilient to losses, which decreases the probability that banks would fall below the minimum requirement and problems would spread to other parts of the financial system.
Banks must hold a 2.5 per cent capital conservation buffer in addition to the minimum own funds requirements and the additional own funds requirements. The buffer is an additional layer of capital that the bank should be able to use to cover losses without breaching the minimum capital requirements and additional capital requirements.
FI evaluates annually which of the Swedish banks are systemically important and which must hold a buffer that aims to provide extra protection to negative effects that problems in the bank could cause in the financial system. SEB, SHB and Swedbank are currently subject to the requirement and must hold an institution-specific capital buffer of 1 per cent for systemically important banks.
This buffer must protect against systemic risks that are not covered by other capital requirements. FI reviews every other year the systemic risk buffer and which banks are subject to it. SEB, SHB and Swedbank are currently subject to the requirement and must hold a systemic risk buffer of 3 per cent.
During periods of strong economic growth and high credit growth, banks should build up capital buffers that they can then draw upon during periods of financial uncertainty. The objective of the countercyclical capital buffer is to enhance the banks' resilience and prevent future financial crises. FI sets the countercyclical capital buffer quarterly based on the current economic conditions.
The guidance for additional own funds should cover risks that are not covered by the minimum own funds requirements in Pillar 1, the additional capital requirements in Pillar 2, or the combined buffer requirements. The guidance is based on the outcome of stress tests and other assessments that are bank-specific.
Pillar 3 is the part of the Basel Accord where credit institutions are obligated to disclose additional information about their operations. The objective of these requirements is to ensure that counterparties are better able to assess if they want to enter into a customer, lender or investor relationship with the credit institution.