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IS THERE A LESSON FROM THE SWEDISH
BANKING CRISIS OF THE EARLY 1990’s?
Background The 1990-1992 financial crisis was inspired by the economic recession which affected Sweden and other European countries and lasted from 1991 to 1993. In the 1980’s, the credit losses of the Swedish banking system fluctuated between a minimum of 0.2% and a maximum of 0.5% of all loan stock; in 1989^1 credit losses averaged 0.3%. However, by 1992 the credit losses had reached 20% of all loan stock 2 ; how this situation developed, and the methodology applied to eventually solve it provides a very interesting case study in the relationship between banks and the state.
Until the mid-1980’s, the Swedish banking system had been a haven of prudential behaviour and conservatism; the Social Democratic government which held power for 44 years until 1976 had ensured a high degree of regulatory supervision over the banks in order to stifle excess profitability and any form of market dominance. Despite this background, Sweden was forced into liberalising and deregulating its banking and financial markets in 1985 due to pressures from its major trading partners in Europe. At this stage loan losses had been small in proportion to earnings and thus had no serious effect on operating profits. In 1985, the rate of return in the big six banks 3 is calculated to have amounted to around 20% of shareholder equity 4.
Following liberalisation and deregulation, there was a massive increase in lending activities which by 1990 had reached what in hindsight we would now see as reckless levels of lending. A huge bubble in the property sector and in the construction industry drove values constantly upwards; a significant number of finance companies (secondary financial institutions) developed during this period which became active in the property market, and whose funding derived from the major banking institutions.
(^1) O’Rourke A R, (1996), “The Nordic Financial Markets”, SFE Edinburgh, ISBN 1 872231 10 1, pp26- (^2) O’Rourke A R, (1996), “The Nordic Financial Markets”, SFE Edinburgh, ISBN 1 872231 10 1, pp26- (^3) The “big six” were - Föreningsbanken; Göta Banken; Nordbanken; Skandinaviska Enskilde Banken; Sparbanken; Svenska Handelsbanken (^4) O’Rourke A R, (1996), “The Nordic Financial Markets”, SFE Edinburgh, ISBN 1 872231 10 1, p
The recession resulted in a decline in GDP amounting to -1.1% in 1991, -1.2% in 1992 and sharpening to -2.1% in 1993 5. Furthermore, in 1990 consumer inflation leapt from 6.4% in 1989 to a record 10.5%; whilst this abated to 9.3% CPI growth in 1991 before declining to 2.3% in 1992, the high levels of inflation during the crucial 1990-1991 period 6 had a profound effect in driving forward the banking crisis that began to develop.
The bank failures As a result, real interest rates rose strongly and property prices began to fall as the number of buyers began to decline. At the same time existing borrowers, mainly commercial due to the relatively small size of the Swedish personal property market compared to the UK, began to have difficulties with meeting payments not only as interest rates rose but as real rental income declined. The effect of defaults, given the high risk nature of property investments and the low level of the underlying collateral, saw a number of the finance companies fail through 1990 and into the first quarter of 1991. At this early stage, the state was unwilling to take any specific role in supporting the property investment and finance company system. However, due to the close linkages between these secondary institutions and the main banking system, and in addition to the lending the banks had made directly into the property market, their level of exposure to poor loans and bad debt problems became rapidly more apparent by the second quarter of 1991. At this point it became clear that one of the big six, Nordbanken, was in serious difficulties as it failed to meet its capital adequacy ratio. The government acted relatively swiftly, injecting SEK5.1bn of capital (GBP493m) 7 and dismissing the entire board of directors of the bank. Once the state began to investigate the level of problems in the bank, it was necessary for a further government re-capitalisation of SEK12bn (GBP1.2bn) to take place which gave the Swedish crown a significant minority shareholding in the troubled bank. In addition all non-performing loans were transferred to a toxic asset entity, Securum AB.
Towards the end of 1991, the contagion appeared to have spread to a number of the savings banks, institutions which had previously been regarded in high esteem for their prudential lending policies. One of the largest sparbanken , Första Sparbanken, announced that it had taken serious losses on lending into the property market. Initially the state provided a SEK3.5bn (GBP 338m) guarantee, later converted into a loan, to the Sparbanksstiftelser – the central foundation of the entire network of Swedish savings institutions. The bank’s situation worsened in the first quarter of 1992 and a further SEK3.5bn loan was made to the Sparbanksstiftelser; as a result the state required the savings banks to pledge their equity stake in the central banking institution of the savings banks (Sparbanken Sverige AB, now Swedbank) to the government.
(^5) Statistika Centrålbyran - www.scb.se (^6) Statistika Centrålbyran - www.scb.se (^7) At the average mid-market exchange rate prevalent at that time
the Swedish crown in support of the banking system amounted to guarantees of SEK84.6bn (GBP8.2bn) of which 77% was drawn down as loans. The guarantee was equal to 5.4% of nominal GDP. However, the level of state commitment was reduced by the sale of equity held in Sparbanken between 1995 and 1998. Between 1995 and 1997, the state also sold 80% of its holdings in Nordbanken. In July 1996, the Riksdag voted to replace the guarantee of the Swedish crown on all banks by an EU-compliant depository guarantee scheme, financed by the banks, but underwritten by the state.
Resolving the property crisis The Swedish resolution of the results of the property crash provides an interesting example in the use of asset management vehicles as a methodology for dealing with bad debts and non-performing loans. From 1991, the major banks found themselves holders of repossessed real estate for which there was no apparent market; the creation of the debt management companies was an obvious solution. Whilst the first of these
- Securum and Retriva – emerged from the problems of Nordbanken and Göta Banken – other banks with less disastrous loan portfolios saw the creation of these vehicles as a way to clean balance sheets. SE Banken created Diligentia AB to manage its distressed property assets.; as at 31 December 1995, Diligentia’s book value was SEK23.6bn (GBP2.3bn) following the disposal of assets worth SEK7bn (GBP0.7bn) 11. It continued to successfully dispose of the distressed property through 1995-1996, and as a result SE Banken agreed to demerge the company, transfer assets to the bank and then float the remaining property holding company on the Stockholm stock exchange.
The condition of the banks in 2008 The banking crisis had a powerful effect on the structure of the Swedish banking industry. Nordbanken, a major recipient of state support, merged in 1997 with the Finnish Merita and then over the next three years acquired a number of other Danish and Norwegian partners to form the Swedish domiciled Nordea, which is now a major Scandinavian bank. The largest single shareholder of Nordea is the Swedish crown with 19.9% of the equity.
Another consolidation occurred in the savings bank sector; driven by the banking crisis, a number of the local savings banks merged with the central savings institution Sparbanken Sverige in 1992; in 1997, Sparbanken merged with Föreningsbanken to create Swedbank. As one of the big four Swedish banks, the major owner is the Sparbanksstiftelser. The other two major banks are SE Banken and Handelsbanken.
Are there any lessons from this?
- Despite the fact that the Bildt government was initially reluctant to become engaged in the banking crisis as it began to emerge during 1991-1992, by the latter part of 1992 it was clear that the (^11) O’Rourke A R, (1996), “The Nordic Financial Markets”, SFE Edinburgh, ISBN 1 872231 10 1, p
government’s non-interventionist policies could no longer be of assistance. The political deal between Bildt’s conservative/liberal coalition and the opposition Social Democrat/leftist parties indicated the willingness of the political establishment to dispense with ideological differences in order to preserve the national system of banking. Issuing a state guarantee to underwrite all bank assets was a bold move, but this was accompanied by a fairly powerful degree of state intervention in failed banking institutions
- Importantly, a major factor in the eventual resolution of the crisis was creation of the vehicles to hold, manage and sell distressed property assets – Securum, Retriva and Diligentia. By careful release of assets, these vehicles were able through 1994-1996, to recoup a significant proportion of the losses occasioned by the property sector collapse. This model was successful in recouping around 80% of distressed property assets
- Another feature of the crisis was that it was predominantly related to commercial property. The involvement of domestic housing in the crisis was probably in the order of 10%. Since then, Sweden has created strong disincentives for any form of buy-to-let market, a major factor in the UK property bubble. Whilst tenants of social, co- operative and mutual housing institutions have freedom to sub-let property, there are fairly rigid restrictions on the rental of privately owned property by their owners
It is obvious that with a population of just under 9 million, Sweden cannot be directly comparable with the UK. Nonetheless, the Swedish financial crisis during 1990-1993 does provide some interesting issues which may be worthy of discussion and debate in terms of the current situation in the UK.
Tony O’Rourke 5 December 2008
TABLES ( Data from Svenska Bankföreningen ; www.bankforeningen.se)
Table 1
Five largest banks by % assets of total Swedish banking market (December 2007)
Name of bank % of total bank assets
S E Banken 26.6%
Handelsbanken 23.2%
Swedbank 17.0%
Nordea 15.2%
Danske Bank 10.5%
Table 4
Then and now: 1995 and 2007
Name of bank % of total bank assets in 1995
% of total bank assets in 2007
SE Banken 23.5% 26.6%
Handelsbanken 25.3% 23.2%
Swedbank 16.2% 17.0%
Nordea 16.7% 15.2%
Danske 2.4% 10.5%
Note : public deposits = deposits from individuals, enterprises and local government
Table 5
Profit and loss: Data for all Swedish banks (1992-2007) Data in SEK billion
Year Operating profit Net loan losses 1992 - 38.5 bn 57.6 bn 1993 - 16.1 bn 46.4 bn 1994 12.2 bn 14.6 bn 2007 49.6 bn 1.0 bn
