The Swedish Banking Crisis and the Swedish Model.

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The Swedish Banking Crisis and the Swedish Model.

• Pehr Wissén
• Institute for Financial Research SIFR
• June 23 2009

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How did you go bankrupt? Bill asked. Two
ways, Mike said. Gradually and then suddenly.
Ernest Hemingway The Sun also Rises
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1. Background Macro
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Market share for the five largest banks

• Finland 90
• Denmark 87
• Sweden 83
• Norway 60
• EU15 58
• Source Swedish Bankers Association 2000

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Deregulations

• Deregulation 1982-1985
• Lending ceilings
• Interest rate controls
• Liquidity quotas
• Capital controls

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After the deregulation

• Credit boom
• New market environment for the banks
• Increased competition
• Lax lending standards
• Lending boom outside the banking sector

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Macro policy

• Inflationary fiscal policy
• Fixed exchange rate
• Tax policy
• Nominal interest deductible at 50 marginal tax
  rate
• Low property tax

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The fixed exchange rate

• Customers borrowing in baskets of foreign
  currencies, investing in domestic commercial
  property
• Banks intermediaries

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2. The Housing Bubble
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Climate for a Bubble

• The combination of
• A fixed exchange rate
• Deregulation.
• Deductability for interest payments
• Low after tax interest rates
• Capital controls which locked in investments
• gave good ground for a bubble

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Prices of office buildingsReal price indexes for
prime location office buildings
Source Newsec and Sveriges Riksbank
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Swedish house pricesNominal house price indexes
Source Statistics Sweden
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3. The financial/banking crisis.
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The Crisis

• Triggers
• ERM crisis
• Tax reform
• Propagating mechanisms
• The demise of the finance companies
• Liquidity disappearing from the commercial paper
  market
• Commercial property
• Fire sales
• Illiquidity
• Massive credit losses
• Housing The third wave
• Transaction volumes down
• Small credit losses.

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The sequence of events

• Fall 1991 Nordbanken and Första Sparbanken in
  crisis. Government providing equity for
  Nordbanken.
• Spring 1992 Situation worse for Nordbanken,
  Första Sparbanken and Gota.
• Considered a systemic crisis.
• Fall 1992 Government blanket guarantee.
  Political consensus.

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Sequence of events.

• Fall 1992 Liquidity in foreign currency from the
  Central Bank.
• Riksdag decided on an unlimited frame for
  government support
• Spring 1993 Bank Support Authority formed.
• All major banks exept one ( Handelsbanken )
  applied for government assistance.
• Nordbanken and Gota nationalized

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Sequence of events

• Spring 1993 The other banks raised equity from
  private sources.
• Bad banks formed by all banks. Securum and
  Retriva for the government owned banks.
• July 1st 1996 Blanket guarantee and special
  legislation abolished.

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Losses then and nowOperating profits and credit
losses, major Swedish banks, billion SEK, 2008
prices
Source Sveriges Riksbank
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4. The Swedish Model
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The Swedish model

• The blanket guarantee.
• There was no deposit insurance
• Funding the banks in foreign currency
• Takeover of failed banks
• Forming bad banks for the acquired banks
• Private banks setting up bad banks
• Eventual sale of bad banks and acquired banks

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The bad banks

• Securum and Retriva
• Set up to allow normal management of the good
  banks.
• Not a purchase of assets
• Bad loans set aside one bad bank for each bank
• Careful valuation of the bad assets
• Full tranparency

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The bad banks

• Expected to be in operation 10-15 years
• Wound up in 1997 with a better result than
  expected

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5. An International Comparison
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6. The present crisis and the Swedish banking
system
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Source Hyun Song Shin 2009