Practical considerations


On April 15 2014 and May 6 2014 the European Parliament and the EU Council adopted a directive establishing a framework for recovery and resolution of credit institutions and investment firms (the EU Bank Recovery and Resolution Directive). Generally, the directive – which is intended to maintain financial stability – provides the possibility for certain financial institutions to restructure or wind up their businesses without resorting to taxpayer assisstance. Instead, shareholders will be the first and creditors will be the second to bear the costs and losses of a failure.

The initiative behind the framework followed Lehman's implosion in 2008, which led to the financial crisis. During the past decade, states have been forced to intervene and rescue system-critical financial institutions in order to prevent a devastating domino effect on the financial markets. Such institutions have been considered 'too big to fail', which means that they have been rescued due to their capacity to cause significant spill-over effects on other financial institutions if they fail. In some cases, bail-outs have been made on favourable terms for the institution's owners and creditors. In addition, knowing that they will be bailed out because of their systemic impact on the market, big banks may take larger risks and obtain cheaper funding, which in turn leads to unfair competition and can increase the risk of a subsequent financial crisis.

Sweden was one of the last countries in the European Union to implement the directive, but has now incorporated it into law, mainly through two new acts which came into effect on February 1 2016:

  • the Act on Resolution; and
  • the Act on Prevention of State Aid to Credit Institutions.

Significant changes have also been made to the Banking Act and other related legislation. Relevant provisions are also found in Financial Supervisory Authority Regulation FFFS 2016:6.


The Act on Resolution introduces a resolution mechanism by which failing credit institutions can restructure without major disturbances to public activities. Accordingly, resolution will be used as an alternative to bankruptcy or liquidation. The National Debt Office is the public body responsible for meeting objectives of the resolution procedure (ie, to prevent serious disruption in the financial system). When a financial institution is put into resolution, control of it is handed over to the National Debt Office. In such cases, the office may demand that the institution's counterparties perform their agreement or cease performing. Before using any tools or powers which could lead to the creditors suffering losses, the office must take measures requiring the shareholders to carry all losses first. One objective of the Act on Resolution is that creditors come out no worse from a resolution than they would have had the failing institution gone into bankruptcy or liquidation.

In order to cover the costs relating to resolution procedures, a 'resolution reserve' will be formed. Financial institutions must pay an annual fee to the National Debt Office for this purpose. The fee is calculated (generally speaking) on the basis of the indebtedness of each institution and has been estimated to be between SKr6 billion and SKr7 billion annually for the Swedish market combined.(1)

According to the Act on Prevention of State Aid to Credit Institutions, viable credit institutions are entitled to temporary preventive state aid in order to counteract a serious disruption of the financial system. Aid can be provided through:

  • loans;
  • guarantees of issued debt securities; and
  • capital injections.

Although it is difficult to predict the effect of the Swedish acts, it is certainly important to harmonise the rules on the crisis management of financial institutions among EU member states. Meanwhile, critics argue that since implementation of the Bank Recovery and Resolution Directive has varied in timeframe and in details between jurisdictions, this creates unfair competition, as well as legal and commercial uncertainty.

Practical considerations

Implementation of the directive was preceded by a long period of consultations and heavy preparations within credit institutions. One example was the production of resolution plans or 'living wills' that meet the requirements of all relevant authorities. Another practical matter is the possibility for the National Debt Office to request any credit institution to present a register of its financial and other material agreements.

Financial institutions must include a bail-in recognition provision in their agreements with third parties where the relevant agreement is governed by a jurisdiction outside the European Economic Area.(2) The bail-in recognition requirement applies to any agreement where a financial institution has liabilities. 'Liabilities' is understood at this point to include not only liabilities under borrowing arrangements, but also contractual liabilities that arise or may arise under syndicated loan agreements where an institution has undertakings to fund participations or indemnify other lenders, or where it has duties as agent or security agent.

The minimum contents of a bail-in clause can be found in the draft technical standards produced by the European Banking Authority. Both the Loan Market Association and the Loan Syndications and Trading Association have further produced template clauses that can be included as deemed appropriate by the parties in any relevant transaction. The relevant legal provisions are found in Chapter 5, Section 2 of the Act on Resolution.

To comply with the act, Swedish financial institutions must ensure that a correctly drafted bail-in recognition clause is included in their agreements where any liabilities are governed by non-European Economic Area law. It remains to be seen whether the National Debt Office will use its powers under Chapter 5, Section 3 of the act to publish any general exceptions and clarifications in relation to certain jurisdictions where a bail-in clause will not be needed.

For further information on this topic please contact Sara Göthlin or Petar Bojovic at Advokatfirman Törngren Magnell KB by telephone (+46 8 400 283 00) or email (sara.gothlin or [email protected]). The Törngren Magnell website can be accessed at


(1) 2015/16:5, Page 645.

(2) The Loan Market Association provides materials including suggested language for bail-in clauses and a schedule of implementation – see