Restructuring and Forgiveness in Financial Crises C: The Swedish Banking Crisis of 1990-1994

Abstract

In the Spring of 1992 the Swedish government faced a dilemma. The country was in the midst of an economic downturn stemming from the collapse of asset prices (especially in real estate) that had spiked as a result of a credit boom that followed the deregulation of the Swedish banking system in the mid-1980s. Initially the impact of the downturn on the country’s banks had seemed to be limited to a small number of specific firms that the government moved to assist on an ad hoc basis in 1991. However, evidence was mounting that the banking crisis was reaching a systemic level. Guided by such principles as the need for broad political consensus, prompt action, transparency, and the imposition of strict conditions including shareholder losses in exchange for support, the Swedish government crafted a response centered around a blanket guarantee of all bank liabilities, an immediate recognition of all bank losses, support for banks that was based on each bank’s specific financial condition and prospects, and the use of asset management companies to resolve the troubled assets of struggling banks. This approach, coupled with an improving economy, helped restore the Swedish banking system to profitability by 1995. While the fact that the Swedish banking sector of the early 1990s was much less complex than most major financial systems today cautions against drawing any firm conclusion about the appropriateness of deploying specific Swedish policy responses in new crises, the various principles that guided the Swedish response could well be of interest in addressing future systemic events.