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March 17, 2009 8:30 pm
In calmer times, Stockholm would not be an obvious destination for economic policymakers hoping to improve their understanding of the financial system. The capital of a small economy on the fringes of Europe typically spends most of its time responding to events whose origins lie elsewhere.
Yet in the past year growing numbers of eminent visitors have passed through the revolving doors of the imposing black granite block on the Brunkebergstorg that houses the Riksbank, Sweden’s central bank. Their mission: to learn whether Sweden’s response to the crisis that rocked its financial system in 1992 can offer lessons for dealing with the current global meltdown.
Particularly in the US, politicians and commentators express enthusiasm for what has become known as the “Swedish model” for tackling failing banks. It has come to be seen as a template for rapidly sorting out problems through nationalisation and the dumping of toxic assets into “bad banks”. For rightwing commentators, it has become a metaphor for a slide into central planning.
President Barack Obama has hinted that he views a swift, Swedish-style approach as preferable to Japan’s response to its 1990s banking problems, which contributed to a “lost decade” of growth. Tomorrow, Bo Lundgren, the head of Sweden’s debt office who was among those to have worked on clearing up his country’s banking mess, is due in Washington to offer insights to the Congressional Oversight Panel, which supervises the US government’s troubled asset relief programme. Matthew Richardson and Nouriel Roubini, both professors at New York University’s Stern Business School, recently declared: “We are all Swedes now.”
Yet the reality is less simple. Interviews with several figures involved in designing and implementing the Swedish bail-out suggest there are some parallels with the current crisis. However, there are also important differences.
Indeed, one of the first things visitors who ask about the 1992 bail-out are told is disconcerting. “There is nothing Swedish about what people call the Swedish model,” says Stefan Ingves (left), the Riksbank’s governor, in his spartan office. Mr Ingves was a finance ministry official in the early 1990s and headed the Bank Support Authority, the agency Sweden set up to resolve its crisis. “What we did was to put the thing together but we did not invent the wheel – we used the knowledge that we could find wherever we could find it in other parts of the world.”
Visitors also receive reassurance that they are not too late; Sweden grew serious about its crisis only after two years of dithering and individual bank support packages between 1990 and 1992. By that time, Mr Ingves says, “we had done a number of ad hoc cases and realised that since they tended to come back it was hard to get it right the first time”. It was only in mid-1992, when the country nationalised Nordbanken, that Mr Ingves says there “grew a feeling that [the wider banking crisis] could just spiral out of control”.
So officials, thinking about a plan to buy time, devised a system-wide programme that could apply to all banks. In September 1992, the government announced a guarantee for all bank creditors apart from shareholders, along with a wider restructuring.
Mr Ingves says that moment was six months in the planning. Unlike the US with Tarp, the Swedish authorities decided not to put a figure on the size of the guarantee. “If you pick a low number, people say it’s not going to be enough; if you pick a very high number they say, ‘oh, is that the problem?’” the central banker observes.
The Bank Support Authority he would head was authorised to offer support to any bank that requested help, but on strict terms. Any bank seeking support had to submit to a forensic examination of its books – and, if necessary, an injection of government capital. Contrary to the myth that surrounds the Swedish model, the authorities nationalised only two banks: Nordbanken, which was already state-controlled, and Götabanken. Co-operative and savings banks were merged but other private banks ultimately chose to raise private capital.
“It was never the intention of the government and the Bank Support Authority to sort of take over as many banks as possible,” says Mr Ingves. “The issue was to be ready to sort out the mess in the system. To do so we needed a process that made it possible for us to evaluate whether a bank was actually OK, had a small problem or a huge problem.”
Arne Berggren, the finance ministry official responsible for bank restructuring, is blunt about the approach he took. It was clear from the outset that the government would act as a commercial investor, demanding equity stakes in return for capital. “We were a no-bullshit investor – we were very brutal,” he says. The authorities also insisted on control. “You take command. If you put in equity, you have to get into the management of the business, [otherwise] management is focused on saving the skins of the [remaining private] shareholders.”
Dag Detter, who oversaw all of Sweden’s state-owned enterprises in the mid-1990s, says it is crucial that such companies are run with commercial objectives, are insulated from political interference and are transparent in their actions in order to maintain the trust of the public and the markets. “If any of these three principles is ignored, taxpayers will suffer along with the commercial assets in state ownership.”
Once the government had taken control of the two banks, it set about ring-fencing their troubled assets into separate “bad banks”. Central to this decision was the recognition that the management of good and bad loans requires fundamentally different skills. “Bankers want to keep their customers. That’s how you define success,” says Mr Ingves. “If you’re running a ‘bad bank’, success is to get rid of your customers – and that means that you have to have a different mindset when you deal with these issues.”
Private banks were also encouraged to place their bad loans in separate entities. However, in contrast with the recent debate in the US, the authorities never contemplated removing bad assets from those banks. “We refused to buy assets from privately owned banks because it would have been impossible for us to agree on the price and we were never in the business of giving privately held banks subsidies,” says Mr Ingves.
Does this mean the US, UK and other countries that have committed vast sums to insure bad assets, on the books of banks that remain at least partially in private hands, have lost the plot? Mr Ingves is too polite to say but there is no doubt in his mind who will pay: “How you want to define the loss between the public sector and the old shareholders, that’s a value judgment, that’s a political judgment,” he says.
But for all the potential lessons, many factors suggest the Swedish experience is an imperfect guide to navigating the current crisis.
First, Sweden’s banking system was relatively small. When Stockholm issued its guarantee, banks’ total liabilities represented little more than a year’s gross domestic product. As a result, the guarantee was more credible than it would be today, when the banking systems of small countries such as Ireland are many times larger than their economies. “Nobody questioned the credibility of the government of Sweden,” says Gabriel Urwitz, who was chief executive of Götabanken until shortly before it was nationalised. “They issued the guarantee and the rest of the world accepted it.”
Another difference is that Sweden’s banks in 1992 were simpler than today’s large, com plex financial institutions. Bad assets consisted mainly of loans to commercial property developments that defaulted when interest rates rose and the country entered recession. The result was that banks were left with portfolios of hotels and office blocks including the London Ark, a landmark building that greets visitors driving in to central London from Heathrow Airport – but not mortgage-backed securities, derivatives or other complex debt instruments. Even so, it took the authorities six months to complete their examination of the banks’ books.
Third, the bail-out was conducted amid political consensus. When the finance ministry outlined the guarantee in September 1992, it had no legal powers to do so; the necessary legislation was not passed until months later. Support from the main Social Democrat opposition party allowed it to act as if the laws were already in place. This is in contrast with the US, where congressional Republicans caused turmoil in the markets last September when they initially rejected Tarp.
Yet the most important part of Sweden’s banking bail-out may have been the devaluation of the krona, a move that the government had actively resisted. In November 1992, the authorities gave up their defence of the currency, allowing it to float freely. This move, which coincided with an economic upturn in Europe, is likely to have given Sweden a boost by stimulating demand for exports. Whatever the reason, GDP started to grow again in the second quarter of 1993.
Whether the political consensus would have held in the event of a prolonged slump is open to debate. Even the architects of the bail-out cannot be sure what influence their actions had. “Our objective was to minimise the economic cost and bring down the length of the crisis,” says Mr Berggren. “Maybe we were successful. We will never know.”
If the Swedish experience can provide some pointers for today’s stressed-out policymakers, the country’s subsequent approach offers a lesson in what not to do. Having tackled the crisis, the authorities conspicuously failed to put in place longer-term reforms to help avert similar problems in the future. “The regulatory framework we put in place in the early ’90s had sunset clauses. So the sun set and that was it,” says Mr Ingves. “The politicians felt, ‘that won’t happen again’,” says Staffan Viotti, an adviser to Mr Ingves and adjunct professor at the Stockholm School of Economics.
During the recent credit boom, Sweden’s banks embarked on another growth spurt, expanding their lending throughout the Nordic region and particularly in the Baltic states, where Swedish lenders account for a large chunk of the banking system. So when the global financial crisis struck, the Swedish government was once again forced to step in, pledging to guarantee up to $205bn (£146bn, €158bn) of bank borrowings while also setting up an SKr15bn ($1.8bn, £1.3bn, €1.4bn) fund to invest in banks. Three of Sweden’s four largest banks, including Nordea – fashioned in part from the former Nordbanken – have raised fresh capital. In response to the new crisis, legislation was rushed through after 16 years of being ignored.
As they leave the Riksbank for Stockholm’s Arlanda airport, therefore, visiting central bankers and policymakers may ponder that perhaps the most important lesson is the one the Swedes failed to learn themselves.
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