In their latest European banking note, Citi analysts (for, errr — cough cough –they should know) look at the claim “we are all Swedish now”. That, of course, being a reference to the Swedish banking crisis in which the state nationalised two of the country’s largest public banks for a number of years at the beginning of the 1990s.
As Citi quickly points out, the team is not advocating any particular policy approach. Rather:
We have a rather more prosaic objective: we want to present a recap of what actually happened to Swedish bank stocks and the industry in the late 1980s and the 1990s.
And so follows some myth-busting.
Number 1) The Swedish model was not one of mass nationalisation, in fact as Citi explain, the Swedish Model involved relatively limited state capital injections into the banking system, even thoughit did involve a guarantee for all banks’ liabilities and liquidity provision.
Number 2) Investors in surviving banks saw their shares fall peak to trough in the early 1990s by circa 95 and 85 per cent.
Number 3) The banks sector shrank dramatically during and after the crisis years, with sector loans down 25 per cent from their peak, and the loan/deposit ratio down from a peak of 140 per cent to 80 per cent. Swedish GDP declined during 1991 to 1993, bankruptcies more than doubled and the unemployment rate quintupled. But all was recovered by 1994 with cumulative lost output of about 4.5 per cent of GDP.
The Citi analysts also treat us to the republication of a rather candid interview on the crisis with current Swedish Central Bank governor Stefan Ingves, a senior civil servant at the time, in which he explains how government intervention unfolded.
“Well a bank shows up, bank management tells you that we think we’re going to go under fairly soon, unless we get some help from the government. To get involved in the process we told them ‘Fine, we’ll deal with you, but then you have to sign an agreement that gives us access to whatever information we feel that we need to have about your bank’, and then we sent in our people into the bank, huge numbers of auditors were hired, and in great detail we determined exactly how the bad assets were to be evaluated.”
“The bank had no choice but to follow the rules that we set … and after a number of months when you go through this, because it actually takes quite a while to do proper due diligence of a very large bank, you come up with an idea about what the size of the hole in the balance sheet is … based on that number we then started thinking about what to do with the bank, whether it ever would be viable, or whether you actually needed to split the bank in two parts…. (good bank/bad bank) … or whether you should merge it, privatise it, or do whatever it takes to eventually actually turn it back to the private sector.”
“Eventually … we realised that it would not be possible to deal with the banks on an ad hoc bank-by-bank basis, that we needed a clear, easy-to-understand structure within which we could work. When that became clear to us, we added the general guarantee … (this) gave us the opportunity to buy time …. it became possible to sort of park the banks and deal with one at a time while the general public accepted and understood that no bank will … fail immediately overnight.”
An international government-imposed due-dilligence process across the entire banking system before any further steps are taken is certainly one way to go.
Related links:
Nationalisation Magnus Opus – FT Alphaville
Chemotherapy or morphine? – FT Alphaville
Nationalisation linkfest – FT Alphaville