The Swedish Banking Crisis and the Swedish Model.

Pehr WissénInstitute for Financial Research SIFR

June 23 2009

1

2

” How did you go bankrupt? ” Bill asked. ” Two ways, ” Mike said.

” Gradually and then suddenly. ”

Ernest Hemingway ” The Sun also Rises ”

1. Background; Macro

3

Market share for the five largest banks

• Finland 90%• Denmark 87%• Sweden 83%• Norway 60%• EU15 58%

• Source: Swedish Bankers Association 2000

4

Deregulations

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

5

After the deregulation

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

6

Macro policy

• Inflationary fiscal policy• Fixed exchange rate

Tax policy:• Nominal interest deductible at 50% marginal

tax rate• Low property tax

7

The fixed exchange rate

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

• Banks intermediaries

8

2. The Housing Bubble

9

Climate for a Bubble

The combination of:1. A fixed exchange rate2. Deregulation.3. Deductability for interest payments4. Low after tax interest rates5. Capital controls which locked in investments gave good ground for a bubble

10

11

12

Prices of office buildingsReal price indexes for prime location office buildings

Source: Newsec and Sveriges Riksbank

0

100

200

300

400

500

82 85 88 91 94 97 00 03 06 09

Stockholm Göteborg Malmö

13

Swedish house pricesNominal house price indexes

Source: Statistics Sweden

0

100

200

300

400

500

600

700

86 88 90 92 94 96 98 00 02 04 06 08

0

100

200

300

400

500

600

700

Riket Storstockholm Storgöteborg Stormalmö

3. The financial/banking crisis.

14

15

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.

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.

16

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

17

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.

18

19

Losses then and nowOperating profits and credit losses, major Swedish banks, billion SEK, 2008 prices

Source: Sveriges Riksbank

-20

0

20

40

60

80

100

dec-90 dec-92 dec-94 dec-96 dec-98 dec-00 dec-02 dec-04 dec-06 dec-08

Resultat före kreditförluster Kreditförluster

20

4. The Swedish Model

21

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

22

23

24

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

25

The bad banks

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

expected

26

5. An International Comparison

27

28

29

30

31

32

6. The present crisis and the Swedish banking system

33

34

Source: Hyun Song Shin 2009