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Sweden’s Lessons from Financial Crises Global Interdependence Center Conference, Stockholm

Lars Nyberg, 29 September 2011


The 1990-94 financial crisis in Sweden

Policy and bank evolution between the crises

The global financial crisis in Sweden

Comparisons and lessons learned


Rapidly falling demand around 1990 put Sweden and her banks under severe stress 5

30

4

25

3

20

2

15

GDP growth (left-hand axis)

1

10

After-tax real interest rate (left-hand axis)

0

5

Private credit growth (righthand axis)

-1

0

-2

-5

-3

1

2

3

-10


In the fall of 1992, policymakers decided on far-reaching and acute measures August

September

Fiscal Policy

Monetary Policy

Financial Stability

October

November

December

January

20-30 September: Bi-partisan austerity packages I and II

16 September: 500 % interest rate

9 September: Gotabanken guarantee August: Foundation of Securum

24 September: General bank guarantee

19 November: Floating krona

15 Januari: Inflation target

18 December: Parliamentary decision on Bank Support Authority


The 1990-94 financial crisis in Sweden

Policy and bank evolution between the crises

The global financial crisis in Sweden

Comparisons and lessons learned


After the acute phase of the crisis, important structural reforms were made

Fiscal policy framework Sustainable pension system Inflation targeting Independent central bank

Financial Stability Report Financial Stability

Crisis management exercises Basel II Deregulation and competition fostering

ď Ž

Inattention: No law for bank resolution

III

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

Monetary policy

1994

1993 Fiscal Policy

Fiscal consolidation


The fiscal policy framework has supported sound public finances 

An explicit surplus target: 1 percent of GDP on average over a full business cycle

Public debt/GDP 80 70

A three-year rolling nominal ceiling for central government expenditures (including pension system)

60

Balanced municipal budgets

20

50 40 30

10

A strict, top-down budgetary process

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


‌in contrast to those of many other countries Public debt, percent of GDP 180

180

USA Grekland

160

160

Irland Italien

140

140

Portugal Spanien

120

120

100

100

80

80

60

60

40

40

20

20

0

0 00

02

04

06

08

10

12

14

Source: IMF WEO april 2011


Swedish banks have grown‌ Bank assets in relation to GDP, June 2010


…and become dependent on market funding Market funding of major Swedish banks, SEK billion 3 000

2 500

2 000

1 500

1 000

500

0 98

99

00

01

02

03

04

Foreign Currency

05

06

07 SEK

08

09

10

11

12


Banks have truly become internationally exposed Breakdown of the major Swedish banks’ profits before loan losses, 2010

The major Swedish banks’ loan losses, SEK billion per quarter


The 1990-94 financial crisis in Sweden

Policy and bank evolution between the crises

The global financial crisis in Sweden

Comparisons and lessons learned


The Riksbank has combatted the crisis with low repo rates and liquidity measures Riksbank’s policy interest rate, percent

Central bank balance sheets, percent of GDP

5

30

4

25

3

20 15

2 1 0

10 5 0

07

08 Riksbanken

09 ECB

10

11

Federal Reserve

12


The Riksbank’s SEK and USD liquidity facilities were phased out in 2010 Riksbank’s extraordinary liquidity measures, MSEK


In the fall of 2008, Government and Riksbank intervened in close coordination September

Government

Riksbank

18 September: T-bill issue to cover shortage

October

6 October: Extended deposit insurance 20 October: Guarantee program and bank support law

November

December

10 November: Nationalization of Carnegie

6-8 October: 3-6-months 27 October: 1 October: SEK facility Liquidity facility First USD 8 October: for Carnegie auction Liquidity facility for Kaupthing

16 December: Swap line with Latvia


The 1990-94 financial crisis in Sweden

Policy and bank evolution between the crises

The global financial crisis in Sweden

Comparisons and lessons learned


Crises are different 1990-1994   

Large government debt in Sweden No major international crisis Domestic real estate crisis Swedish bank solvency problems

2007

  

Sound public finances in Sweden European debt problems World liquidity crunch Swedish bank liquidity problems


Important differences between the current situation and that of 2007-08 2007-2008

2010-

Unexpected situation

Evolving, expected crisis

Global crisis

Crisis in EU and USA

International liquidity crunch

Sovereign debt problems


The deficiencies in 2007 have served as lessons for supervisors and policy-makers Global bank problems

EU supervision problems

Resolution framework

  

Low equity ratio Low quality of capital Weak funding liquidity

Weak supervision No macroprudential perspective

RRP not in place


LN presentation Swedbank Sept2911