The experiences questions lessons taken from sweden
Download
1 / 27

The Swedish Financial Crisis - PowerPoint PPT Presentation


  • 141 Views
  • Uploaded on
  • Presentation posted in: General

The experiences , questions & lessons taken from Sweden. The Swedish Financial Crisis. OUTLINE. 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

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha

Download Presentation

The Swedish Financial Crisis

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


The experiences , questions & lessons taken from Sweden.

The Swedish Financial Crisis


OUTLINE

  • 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 crisis

  • Conclusion


Questions to keep in mind.

  • 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?


Swedish Economic Background and Roots to the Crisis. (1970s-1980s)


Swedish Economic Background & Roots to the Crisis

Sweden, 1970’s to 1980’s


Swedish Economic Background & Roots to the Crisis

Source: Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review vol 15 n°3, Swedish Statisitics pp 82


Swedish Economic Background & Roots to the Crisis

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


The role of Deregulation (1985-1990)


Roots to the Crisis: Deregulation

  • 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.


Roots of the Crisis: Deregulation

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 movements

      Capital inflows

  • Upward pressures on the exchange rate

  • Contributed to the overheating of the economy.


Roots of the crisis: Credit Expansion

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


Roots to the Crisis: The Bubble

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


Roots of the Crisis: The Bubble

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


The Crisis.(1989 – 1992)


The Crisis

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


Extent of the Crisis

  • 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.


Stockholm Stock Exchange Indices: Monthly Averages 1982:1 – 1999:9

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


Bank Profits and Credit Losses 1990-1991 (Billion SEK, 12 month moving average)

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


Crisis Management


Crisis Management

Financial Measures

  • Restore confidence

    • Government issued an unlimited guarantee to all depositors.

  • The banking liquidation or reconstruction strategy was explained to the public.

    • A new agency, Bank Support Authority

    • Losses were announced

    • Method establish to decide exactly which banks need to be liquidated.

  • Strict Valuation Rules

    • Banks were marked-to-market

  • Bleed the Shareholders & bankers


Crisis Management (2)

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


Crisis Management (3)

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)


Crisis Management (4)

  • 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.


Was the quick recovery due to global improvements or good policies?

  • 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)


  • Was the quick recovery due to global improvements or good policies?

    • 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


    Conclusion

    • 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?


    Bibliography

    Articles:

    • Calomiris, Klingebiel,& Laeven. (2004) Taxonomy of the financial crisis resolution mechanisms cross country experience. World Bank policy research papers.

    • ErgungorE. (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/


    ad
  • Login