The Swedish Experiment – How to Solve a Banking Crisis the Swedish Way

Following the collapse of the housing bubble in the early 90s, the Swedish banking system inevitably found itself in crisis.

This reached its peak in 1992, no doubt caused by careless regulatory practices as well as its property boom coming to an end, with the banking system financially ruined.

The government had no choice but to take drastic measures to remedy this as soon as possible. Here’s a condensed explanation of how they pulled it off, with the seven key factors that made the banking resolution a success in such a short amount of time.

Political Unity in the Face of Financial Crisis

An essential feature of the so-called Swedish model is without a doubt, the political unity amongst the political parties that came into play from the beginning.

Both the Centre-Right which was the party in government as well as the Social Democrats in opposition banded together to resolve this crisis instead of making it out to be a political issue. This led to ease the implementation of measures that would go on to lend support to the financial system and get it back onto its feet.

A Blanket Guarantee to Protect the Krona

The government was promptly forced into action and went on to announce that they would pledge all local banks’ deposits and creditors, thereby protecting them from future losses. A complete legislation package was to be launched later that year stating this blanket guarantee to ensure that “households, enterprises and other holders of claims can feel secure”

Taking Swift Action

By acting immediately, the government together with the parliament and the Riksbank managed to instil public confidence proving that “It is more important to act early than to get it exactly right.” as one wise Riksbank employee put it.

Open-Ended Funding for Banks

The establishment of a Bank Support Authority or Bankstödsnämnd, proved to be a more systemic approach and the choice to give open-ended funding showed that there was the political commitment to support the financial system was unwavering.

By carrying out due diligence and consulting external experts from abroad, the Bankstödsnämnd required all banks to give full disclosure of their books. This was instrumental in facilitating the resolution policy.

Maintaining Fairness

By saving the banks, the owners of the banks were held accountable and made to absorb their losses. In this way, the public was more likely to perceive the policy as just and not working in favour of the bank owners.

Leave a Reply

Your email address will not be published. Required fields are marked *