Lessons from Sweden’s Banking crisis of 1992

There is a lot of comparison of the crisis with Sweden’s 1992 crisis. For a primer on the Swede crisis and lessons learnt see this. It is a speech by Urban Bäckström, then state secretary at Sweden’s Finance Ministry. The speech is given at Kansas City Fed Symposium -1997. There is some literature here as well.

Sweden’s Banks also had taken huge exposure to real estate and housing markets. The markets had just been deregulated as well. This led to higher debt and speculative bubbles. The outcome was higher inflation and the cycle turned. The banks assets became Non performing and there was a banking crisis.

What did Sweden do? They recapitalised banks and set up a guarantee fund to provide liquidity and assurance over banks. Bäckström says there are two approaches to a crisis management:

The Swedish Bank Support Authority had to choose between two alternative strategies.  The first method involves deferring the reporting of losses for as long as is legally possible and using the bank’s current income for a gradual writedown of the loss-making assets. One advantage of this method is that it helps to avoid the bank’s being forced to massive sales of assets at prices below long-run market values. A serious disadvantage is that the method presupposes that the bank problems can be resolved relatively quickly; otherwise the difficulties compound, leading to much greater problems when they ultimately materialize. The handling of problems among savings and loan institutions in the United States in the 1980s is a case in point.

With the other method , an open account of all expected losses and writedowns is presented at an early stage. This clarifies the extent of the problems and the support that is required. Provided the authorities and the banks make it credible that no additional problems have been concealed, this procedure also promotes confidence. It entails a risk of creating an exaggerated perception of the magnitude of the problems, for instance, if real estate that has been taken over at unduly cautiously estimated values in a market that is temporarily depressed.

And which method did Sweden follow?

The Swedish authorities opted for the second method: disclose expected loan losses and assign realistic values to real estate and other assets.

And which approach has US been following? Clearly, the first. no wonder markets collapse each time there is a policy measure. There is no credibility in the statements and markets expect worse is to follow.

Bernanke says TARP will cost much lesser than USD 700 billion. However, recent IMF estimates say total looses from US based assets alone is USD 1.4 trillion and further USD 675 billion of capital would be needed. So, clearly we have a big disparity and Markets are not going to believe policy actions. Mint rightly says these number don’t matter anymore. 

Time to acknowledge the problems. Otherwise, we are going to see more collpases going forward.

11 Responses to “Lessons from Sweden’s Banking crisis of 1992”

  1. Eric Hundin Says:

    I found your blog on MSN Search. Nice writing. I will check back to read more.

    Eric Hundin

  2. Sweden » to go further studies in Sweden or not…?? Says:

    […] Lessons from Sweden’s Banking crisis of 1992There is a lot of comparison of the crisis with Sweden’s 1992 crisis. For a primer on the Swede crisis and lessons learnt see this. It is a speech by Urban Bäckström, then state secretary at Sweden’s Finance Ministry. … […]

  3. Lessons from Sweden’s Banking crisis of 1992 | World Financial Crisis Blog Says:

    […] View original post here: Lessons from Sweden’s Banking crisis of 1992 […]

  4. Utkarsh Sinha Says:

    Clearly, one of the best financial blogs I read every single day. ‘Mostly Economics’ is good work, Amol. Keep writing.

  5. Sweden’s rescue plan « Mostly Economics Says:

    […] rescue plan I had posted about lessons from Sweden’s Banking crisis of 1992. However, the crisis has engulfed Sweden banking system as well. The linkage is less via the […]

  6. How should policymakers signal/communicate in times of fin crisis? « Mostly Economics Says:

    […] one, reveal the true extent of the crisis upfront and suggest policies to overcome them (as Sweden did in its 1992 crisis). Two, take policy steps as the crisis shapes up (just like US has done in this crisis). The […]

  7. It wasn’t just the Swede Crisis of 1992, it was a Nordic region Crisis « Mostly Economics Says:

    […] One keeps coming across the need to draw lessons from the crisis. I had posted about lessons from Sweden crisis of 1992  and realised how bad a job Fed/Treasury have been doing. I came across this post from Baseline […]

  8. Did Sweden in its 1990 crisis nationalise the banks? « Mostly Economics Says:

    […] and Third have been ignored and there is absolutely no clarity with any policy response. I had pointed earlier as well that biggest lesson from Sweden’s crisis was its transparency and communications. […]

  9. Ten Swedish Lessons for India’s Budget Consolidation Program « Mostly Economics Says:

    […] emphasis is on transparency and stuicking to the plans. This was also the lesson Swedish policymakers learnt (and tried to teach) during the 1992 Banking crisis as […]

  10. An insight into US Treasury fire-fighting policies « Mostly Economics Says:

    […] Kashkari says, he tried to give too many details and the broad message was lost. Even in Sweden’s 1992 crisis it was quite tough to communicate but they found a way. I think Us clearly erred initially of […]

  11. A debate over Fed independence « Mostly Economics Says:

    […] markets post Lehman. And it was all very non-transparent and one was clueless (see my posts on this here and here). All the transparency and disclosures about Fed operations came much later. True there […]

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