Deposit insurance Sweden

Deposit insurance is a state-provided guarantee of deposits in all types of accounts at banks, securities companies and some other institutions. Earlier the deposit covered only certain accounts, but since October 6, 2008, the deposit insurance covers all types of accounts, regardless if the account is available for immediate withdrawal or not.

If an institution where you have money goes bankrupt, the insurance provides compensation up to 100,000 euro per customer. It covers deposits in all types of accounts.

The purpose of deposit insurance is to provide greater security for the public’s deposits and contribute to the stability of the financial system. It was introduced in Sweden in 1996 pursuant to an EC directive. Similar schemes exist in other EU countries, as well as many countries outside the EU.

Institutions belonging to the deposit insurance scheme pay a fee to the Debt Office.

Investor compensation is payable only if an institution goes bankrupt and it is impossible for you, the investor, to recover your securities or cash.

Investor compensation covers securities handled by certain securities companies, securities brokers and some other institutions on behalf of customers in the course of providing investment services (such as the purchase, sale and deposition of financial instruments).

Securities means shares, bonds and various types of derivatives. The scheme also covers funds that an institution receives in conjunction with providing an investment service for which it is accountable.

As a customer, you may be compensated for lost assets up to a value of 250,000 kronor per institution.

The Investor compensation scheme was introduced in Sweden in 1999 based on an EC directive. Similar schemes exist in other EU countries, as well as many countries outside the EU.

Institutions belonging to the investor compensation scheme pay a fee to the Debt Office.
 

How investor compensation works
When you engage a bank, securities company, securities broker or some other institution to provide an investment service, such as the purchase, sale and deposition of financial instruments, the institution is required to hold your securities separate from its own.

The scheme also covers funds that the institution receives in conjunction with providing an investment service for which it is accountable. Since your financial instruments and funds must be held separate from the institution’s assets, they will ordinarily be returned to you in the event of a bankruptcy.

If however the institution cannot return your property, as for example in a case wherein, following the bankruptcy, it cannot be determined which assets are yours and which belong to the institution, you are entitled to investor compensation. However, you must yourself file a claim for compensation with the Debt Office within one year of the day of the bankruptcy decision.

The compensation is limited to a maximum of 250,000 kronor per customer per institution. If two or more people make a joint deposit, each is treated individually for these purposes.

Financial instruments covered by investor compensation
Investor compensation covers financial instruments such as shares, bonds and various types of derivatives such as warrants and futures. They are defined in the Securities Market Act (2007:528).

To whom is investor compensation available?
The insurance covers private individuals, companies and other legal entities.

  BANKS IN SWEDEN
Crisis of the 1990's and the Situation 2003
Background of the crisis
Towards the end of the 1980's, Sweden experienced a couple of years of bubble
economy. A significant factor driving the bubble was the domestic credit market. In
1985, Sweden deregulated this market which resulted in a very strong credit expansion
due to a pent-up credit demand. This expansion resulted in a business boom, a huge
lending to the real estate sector, rising asset prices - and overheating.
Finally however, the bubble years came to an end and the economic situation changed
dramatically. In 1990, the boom in real estate ended and asset prices started falling. Also
at this time, there was a governmental crisis and a pressing need for tighter fiscal policy.
The introduction of a much awaited tax reform turned out to be ill-timed and
exacerbated the situation as it created higher interest rates for borrowers. The problems
were aggrevated further by the crisis hitting the European exchange rate mechanism in
1992. A capital outflow followed and the creditworthiness of Swedish banks were
further undermined.
All this caused a sharp contraction in the Swedish economy resulting in rising credit
losses for the banks. The massive expansion of lending with real estate as collateral had
now become a big problem. The rise was quite dramatic. In the 1980's, the loan losses of
banks normally fluctuated between 0,2 and 0,5 percent of their loan portfolio. In 1992,
at the height of the crisis, credit losses amounted to more than five percent of total
loans. For the banking sector as a whole, this represented a rise from around two billion
SEK to 75 billion SEK.
The so called finance companies were first hit, and soon after the banks were affected.
In 1991, two major banks announced that they needed new capital in order to meet the
stipulated capital ratio of eight percent. As the main owner of one bank (Nordbanken),
the state injected new capital. For the other bank (Första Sparbanken), a loan guarantee
was provided. The situation deteriorated further, and in 1992 a third bank's
commitments had to be guaranteed (Gota Bank). In the autumn of 1992, the stability of
the financial system was at risk. What first had been seen as isolated cases now proved
to be a systemic crisis. It became obvious that comprehensive measures were needed.
In December 1992, the Swedish Parliament passed a bill addressing the situation.
Firstly, a state guarantee was provided in order to restore confidence and to ease the
immediate pressure on banks. Secondly, a framework for an all-encompassing work-out
process was put in place, including the establishment of a Bank Support Authority.
The State bank gurantee
The state bank guarantee: Through this far-reaching decision, the state guaranteed that
banks and certain other credit institutions could meet their commitments on a timely
basis. The purpose was to ensure the stability of the payment system and to safeguard
the supply of credit. This guarantee protected all the bank's creditors, except for the
shareholders. And there were no upper limits. But the state would not endeavour to
become an owner of banks or other institutions. These measures, which were temporary,
were also based on commercial principles. Support could come in the form of
guarantees, loans or capital contributions. Also important, the guarantee was not
directed to any specific creditor. Despite the potential negative effects on the
functioning and efficiency of financial markets of introducing such a guarantee, this
measure was nevertheless seen as necessary in the highly uncertain and critical situation
that had developed.
The work-out process - The Bank Support Authority
A fundamental component of the work-out process was the establishment of a Bank
Support Authority. This authority became responsible for managing the support system,
and for evaluating each and every one of the affected institutions. The authority's
mission was to provide government support to those institutions that were viable in the
longer run and that would need only temporary government assistance. The method was
to classify the credit portfolios of the banks at market prices, to assess the value of the
property collateral, and to carry out sensitivity analyses. Thereafter, a decision was
reached.
Setting up a new and separate authority of this type meant extra work, but was necessary
for a proper and genuine work-out process. Assigning these new support tasks to any
existing institution, such as the Bank of Sweden or the Financial Services Agency,
would have been problematic. Organizing a work-out process of this nature could have
been in conflict with their other tasks.
Separate the bad loans from the good ones
Another part of the restructuring work was to separate the bad loans from the good ones
within each bank. The sizeable volume of non-performing loans in certain banks also
made it appropriate to transfer these loans from the regular operations into separate
work-out companies. This was a rational exercise as bad loans require a different
management expertise compared to normal credit operations. As a result, the
Bank Support Authorty became engaged in setting up and capitalizing two such
companies (Securum and Retriva).
Capital injections
Another crucial step was deciding on capital injections. Here, private owners did
contribute in the recapitalization of the banks. The state, however, contributed the
largest share of capital (83 percent). Virtually all of the state support went to two banks
(98 percent - for Nordbanken and Gota Bank). Important already from the outset was the
government's intent to become only a temporary new owner in the banking sector.
Privatization should follow once the time was right (Nordbanken, after the takeover of
Gota Bank, was partly privatized in 1995).
As it turned out at the end of this process, three banks did receive government support
(Nordbanken, Sparbanken Första (through savings bank foundations), Gota Bank). The
other four leadings banks (Föreningsbanken, S-E-banken, Swedbank, Svenska
Handelsbanken) did not receive any assistance, although one of them had been granted
government support in the form of a temporary safeguard for its capital ratio
(Föreningsbanken), and two of them had initially applied for support (S-E-banken,
Swedbank).
Results?
How did it all go? The direct costs for the state totaled 65 billion SEK, which is roughly
four percent of GDP. Much of this was then later on recovered through dividends and
privatizations. The work-out period lasted four years, which was shorter than had been
expected. This was partly thanks to a swifter than expected economic recovery in
Sweden. Currency depreciation, government budget consolidation and lower interest
rates had created a favorable macroeconomic environment. The economic cycle picked
up and the banks' balance sheets soon improved. As a result, the state was able to
abolish its guarantee as of 1 July, 1996.
Why was the rescue successful?
There are a couple of explanations. A broad political consenus and insight into how
serious and acute the situation was created the necessary framework for bold decisions.
The conservative government at the time and the social democrats in opposition acted in
unison. Also, the rescue package came early. The fact that Sweden at the time
experienced three parallell crises - a currency crisis, a fiscal crisis and a banking crisis -
added to the sense of urgency. Important was also that the rescue package was
comprehensive and fully transparent. Vested interests were not protected - neither the
management of banks nor owners. The engagement of foreign and private experts in the
fields of corporate restructuring and real estate was likewise crucial. Also important was
how well the government, the central bank, the Financial Services Agency and the Bank
Support Authority cooperated. The end-result was a quick return to a robust and
competitive banking system.
Was the bank support necessary?
And did it have to be this extensive? Two leading Swedish officials at the time - Stefan
Ingves and Göran Lind - have asked the same questions. They concluded that such
questions must be assessed in relation to the situation as it was in the autumn of 1992.
Confidence in Sweden's financial sector, as well as in its currency, was very weak. A
very acute problem had to do with the banks' dependency on sizeable and continuous
foreign currency borrowing. The government concluded that without a prompt
restoration of confidence, the stability of the payment system was clearly threatened, and
with possible grave consequenses for the economy as a whole. In this situation, farreaching
and clear measures were needed in order to demonstrate ability and
determination. The desired results were achieved. In retrospect, it is impossible to know
if other actions would have had the similar speedy and positive effects.
Swedish banking market today
Today, the Swedish banking market is controlled by four banking groups. Together, they
account for more than 80 percent of the industry's total balance sheet. These four banks
have all chosen different ways to compete. As a result, they each hold strong market
positions but differ as regards customers, pricing of services and ways of distribution.
Two of these four banks were seriously affected by the crisis in the early 1990's and
survived thanks to the support provided by the government. One of them had initially
applied for government support. Today, they are all quite profitable.
Nordea is the largest financial services group in the Nordic and Baltic Sea region, but
now with only 250 branch offices in Sweden. Nordea originates from four Nordic banks
- from Sweden (Nordbanken including Gota Bank which it acquired in 1993), Finland,
Denmark and Norway. As of December 2001, all operations in this Nordic area are
carried out under the same brand name of Nordea. Handelsbanken has through a recent
acquisition become a leading player in the Swedish mortgage market. By having had a
policy of prudent lending in the late 1980's, Handelsbanken managed without applying
for government support during the banking crisis. SEB become a key player in insurance
through the acquisition of a large insurance company in 1997. With the purchase of a
German bank in 2000, SEB became a truly European bank. This means that over half of
the bank’s employees are now working outside Sweden.
FöreningsSparbanken, which has become known as the bank for the small-sized
companies, was established in 1997 through a merger between the Savings Bank of
Sweden and Föreningsbanken.
What are the present trends in the Swedish market?
The first e-banking services were launched in 1996 - that is banking over the internet.
After only five years in operation, approximately 45 percent of all Swedes regularly
used the e-banking system. According to recent polls, as many as 35 to 40 percent of
bank customers said they now use the internet as their main way to communicate with
their bank. This is now putting pressure on the local branch office structure of the banks
as the traditional way of serving the customer is changing. Traditional offices are more
and more being replaced by offices focused on counselling.
Niche banks are emerging. These banks are focused on the private consumer and mainly
distribute their services via the internet or by telephone. During 2001 and 2002 for
instance, two of the biggest supermarket chains in Sweden started their own banks.
Within their selected niches, these banks can be significant competitors to the major
Swedish banks. The niche banks' offer of higher interest rates to the depositor is now
forcing the larger banks to improve their own offers.
During the 1990's, there have been a number of mergers and acquisitions in the Swedish
banking sector. The number of banks has declined sharply, a tendency that is most
obvious among the savings banks. From some 450 savings banks in the early 1950s, the
number today is just above 75. With increased concentration, regional banking is
disappearing as a way to compete. The regional banks that do want to remain
independent have taken different kinds of initiatives in order to enhance regional
cooperation and to stimulate a favourable economic development in their regions. Only
by having strong local companies emerge will they secure future business for their
banks.
Further consolidation can be expected. In 2001, plans for a merger between SEB and
FöreningsSparbanken were presented. However, these plans were rejected by the
European Commission. The constant pursuit of efficiency and profitability forces the
banks to look for new ways to cut costs and strengthen market positions. Some say that
the Swedish market is too small for four major banks. Mergers with, or takeovers by,
other European banks are not unlikely. In addition to increased consolidation, this would
also mean a further internationalization of the Swedish banking sector.