Download The Swedish Banking Crisis of 1991

The Swedish Twin
Financial Crisis of 1991/92
By Karl Walentin
The Swedish Banking
Crisis of 1991
Events
 Credit losses increased from 0.25% of
lending volume in 1989 to 8% of lending
volume in 1992.
 2 of the 5 major Swedish banks basically
became bankrupt.
 “Finance companies”, less regulated
intermediaries, majority went bankrupt
during Nov. 1991-March 1992.
Crisis management
1. The government rescued the 2 big banks.
2. Unlimited depositor guarantee issued by the
government.
3.a) Strict valuation rules enforced from
beginning of crisis. (“mark-to-market”)
b) Creation of “bad bank divisions” (Asset
Management Corporations)
Possible reasons for the
Banking Crisis
 Long economic boom 1982-1990
 Financial deregulation in the 1980’s
- Abolished capital controls
- Relaxed bank/lending regulations
 Adjustment problems
- Weak government supervision
- Unexperienced bankers
 Very expansive credit & low quality of
loans.
 Tax policies changed in 1990/1991 to
encourage saving and discourage
borrowing
 Disinflation resulted in high real interest
rates. Problem magnified by high
international interest rates.
 Asset price bubble(?)
The Swedish Currency
Crisis of 1992
 Summer of 1992 shaky currency markets in
Europe.
- British pound, Italian lira, Spanish peseta
devalued
 In September Finland’s currency was floated
 The parity of the Swedish krona “survived”
this attack. Overnight rates were set to 500%.
 On November 19 the Swedish central
bank gave up the fixed exchange rate.
The currency immediately depreciated.
 Iceland, Norway, Ireland… ERM
Possible reasons for the
Currency Crisis
International factors
 German reunification
 EMU threatened, Danish referendum
Domestic factors
 Vulnerable fiscal position
- Public debt 40% of GDP
- External borrowing ratio 30% of GDP
- Budget deficit 3% of GDP and
increasing
 Bad history of high inflation and
recurring devaluations
 The banking crisis
 “Cradle to grave welfare state” causing
budget deficits (?)
Sources:
Wall Street Journal, “Biggest Swedish bank acts…”, Jan 22, 1993
OECD/Financial Market Trends, “National financial markets: Nordic countries…”, Feb, 1993
Euromoney, “The end of a Nordic Winter”, Oct, 1995
Riksbanken (The Swedish CB), Speech by Lars Heikensten.