The Swedish Banking Crisis and the Swedish Model.

1. The Swedish Banking Crisis and the Swedish Model. Pehr Wissén Institute for Financial Research SIFR June 23 2009

2. ” How did you go bankrupt? ” Bill asked. ” Two ways, ” Mike said.” Gradually and then suddenly. ”Ernest Hemingway ” The Sun also Rises ”

3. 1. Background; Macro

4. Market share for the five largest banks • Finland 90% • Denmark 87% • Sweden 83% • Norway 60% • EU15 58% • Source: Swedish Bankers Association 2000

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

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

7. Macro policy • Inflationary fiscal policy • Fixed exchange rate Tax policy: • Nominal interest deductible at 50% marginal tax rate • Low property tax

8. The fixed exchange rate • Customers borrowing in baskets of foreign currencies, investing in domestic commercial property • Banks intermediaries

9. 2. The Housing Bubble

10. Climate for a Bubble The combination of: • A fixedexchange rate • Deregulation. • Deductability for interestpayments • Low after tax interest rates • Capital controlswhichlocked in investments gavegoodground for a bubble

12. Prices of officebuildingsReal priceindexes for primelocationofficebuildings Source: Newsec and Sveriges Riksbank

13. Swedish house pricesNominal house priceindexes Source: Statistics Sweden

14. 3. The financial/banking crisis.

15. The Crisis • Triggers • ERM crisis • Tax reform • Propagatingmechanisms • The demise of the financecompanies • Liquiditydisappearing from the commercialpaper market • Commercial property • Fire sales • Illiquidity • Massive credit losses • Housing: The thirdwave • Transaction volumesdown • Small credit losses.

16. 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.

17. 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

18. 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.

19. Losses then and nowOperating profits and credit losses, major Swedish banks, billion SEK, 2008 prices Source: Sveriges Riksbank

21. 4. The Swedish Model

22. 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

25. 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

26. The bad banks • Expected to be in operation 10-15 years • Wound up in 1997 with a better result than expected

27. 5. An International Comparison

33. 6. The present crisis and the Swedish banking system

34. Source: Hyun Song Shin 2009