The experiences , questions & lessons taken from Sweden.

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The Swedish Economic Background (1970s-1980’s)

Role of Deregulation (1985) Credit expansion & the housing bubble

The Crisis (1989 – 1992) Extent of the crisis

Crisis Management Lessons and policy implications from the

crisisConclusion

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What caused this crisis? Deregulation? Fixed exchange rate? Bad policies?

How was the Swedish Crisis resolved so quickly? Good policy or global economic growth?

What are the policies we can adopt and the lessons we can take from this crisis today?

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Sweden, 1970’s to 1980’s

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Source: Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review vol 15

n°3, Swedish Statisitics pp 82

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Household saving rates, 1980-1995 (percent of disposable income)

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80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95

year

per

cen

t Norway

Sweden

Finland

Source: Steigum, E (2008). “Monetary instability, financial deregulation and crisis: Some Nordic lessons.” Norweign School of Management.7

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1980’s High regulation of banks and insurance

companies.▪ Lending ceilings & placement requirements.

1983-1985 Theses regulations were progressively

lifted.

1989 Regulation on international transactions

were finally lifted.9

1. Financial sector weaknesses

Lack of expertise Difficulty adapting to the change from a sheltered environment

to a much more open & competitive situation.

Increased risk-taking High leveraging High-risk concentration in certain economic sectors

Primarily real estate (60% of all loan losses) Presumed no exchange rate risk

Banks as borrowers themselves insisted on loans denominated in foreign currency

Believed not to have hedged against this risk.

Government no longer borrowing in foreign currency Borrow from banks that borrow abroad

Government transferred the exchange rate risk to domestic banks.

2. Fixed exchange rate with free capital movementsCapital inflows Upward pressures on the exchange rate Contributed to the overheating of the economy. 10

Source: Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review vol 15 n°3, Wallendar(1994) pp 84

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Source: Steigum, E (2008). “Monetary instability, financial deregulation and crisis: Some Nordic lessons.” Norweign School of Management.

Real estate real price bubbles in Oslo (1981=100) and Stockholm (1983=100)

0

50

100

150

200

250

300

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

year

ind

ex

Oslo

Stockholm

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Source: Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review vol 15 n°3, Wallendar(1994) pp 87

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1989… triggers the crisis!

1. Internal factors. Bad timing on new saving policies Tax reform on interest payments Inflation focused macroeconomic policy

2. External factors . German unification Global Economic slowdown ERM break down- float of the krona

3. Commercial property reached it’s peak. Instant reaction by the stock market 52% fall in the real estate index Foreign credit lines withdrawn

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1990 bubble burst and the residential real estate prices dropped 25 % .

From the late 1980’s to 1992 non performing bank loans mushroomed from 0.2% to 5%.

From 1991 to 1993 Sweden’s GDP fell by a total of around 6%.

Unemployment shot up from 3% to 12%. Public sector deficit worsened to as

much as 12% of GDP. 16

Source: Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review vol 15 n°3, Wallendar(1994) pp 87

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Source: Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review vol 15 n°3, Wallendar(1994) pp 90

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Financial Measures

1. Restore confidencea. Government issued an unlimited guarantee to all

depositors.

2. The banking liquidation or reconstruction strategy was explained to the public.a. A new agency, Bank Support Authorityb. Losses were announcedc. Method establish to decide exactly which banks need

to be liquidated.

3. Strict Valuation Rulesa. Banks were marked-to-market

4. Bleed the Shareholders & bankers20

Financial Measures (cont.): AMCs

How do they work? Splitting the ailing bank into a ‘good bank’

and ‘bad bank’ ‘bad’ assets go to the AMC at carefully

assessed market values Regrouping and improvement of assets Wait for a reasonable price

Time consuming but better than a fire sale Allowed bank to get back to more important

strategies

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AMC’s (cont.):

High degree of independence from political and regulatory constraints.

They were deliberately over capitalised (SEK 24 billion, an amount equal to the Swedish defence budget)

Enabled the AMCs to carry out their salvage operations autonomously and did not have to request funding from legislature which might have tried to influence their decisions

Exempt from regulation on the timing of collateral liquidation (estimated it would take a decade)

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Fiscal Policy Not much it could do as it was already

extremely deficitary.Monetary Policy

Dual role:▪ Stimulating the economy and ease burden on

borrowers.▪ Ensure capital flows need to rebuild depleted

foreign currency reserves.

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Growth of the Swedish economy paralleled the global economic boom of the 1990s.

▪ Foreign demand for Swedish goods and services rose from 0.89 % of GDP in 1990 to 1.2% of GDP in 1995.

Liquidations were completed by 1997 at a smaller cost than tax payers had anticipated

▪ AMC return 1.8 billion dollars in 1997 of its 4.5 billion (in depreciated kronas)

“Did sensible policies pay off or did the rising tide lift all boats?” (Ergungor, 2007)

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No proof to answer this question directly.

Can only evaluate the resolution strategy from previous crises (Ergungor et al, 2006) confidence needs to be restored quickly The process must be transparent Maintenance of market discipline A plan to jump start credit flows in the financial

system by repairing the damaged political consensus and independence

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What caused this crisis? Deregulation? Fixed exchange rate? Bad policies?

How was the Swedish Crisis resolved so quickly? Good policy or global economic growth?

What are the policies we can adopt and the lessons we can take from this crisis today?

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Articles: Calomiris, Klingebiel,& Laeven. (2004) Taxonomy of the

financial crisis resolution mechanisms cross country experience. World Bank policy research papers.

Ergungor E. (2007) On the Resolution of the Financial Crises: The Swedish Experience. Policy Discussion Papers. Federal Reserve Bank of Cleveland.

Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review on Economic Policy vol 15 n°3, pp 80-97

Heikensten, Lars (1998), Financial Crisis, experiences from Sweden, mimeo

Jackson J. (2008) The US Financial Crisis: lessons from Sweden. Congressional Research Service Library of Congress. CRS report for Congress.

Steigum, E (2008). “Monetary instability, financial deregulation and crisis: Some Nordic lessons.” Norweign School of Management

The New York Times. ”How Sweden Solved it’s Banking Crisis” September, 2008.

Data: Swedish central bank: http://www.riksbank.com/

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