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The Swedish Experience - Banking
Resolution and Budget Consolidation
April 23, 2009
Minister of Finance
Anders Borg
Sweden
Ministry of Finance
Background to the banking crisis in the 1990’s
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Ministry of Finance
Credit market deregulation, high inflation and a tax system stimulating borrowing
set the stage for speculation and soaring real estate prices.
A real estate bubble burst, a currency crisis including soaring interests rates turned
the economy into a deep recession.
Increasing budget deficits and sharply rising bank losses and financing problems – an
extraordinary vulnerable situation.
Experiences from the Swedish crisis in the 1990s
• Restore confidence to the market
– State guarantee scheme for banks
– Openness and transparency regarding both measures taken and depth of the
problems
• The importance of swift decision-making
• Ad hoc solutions usually not enough
– A financial crisis demands a general solution
• Today, the financial system is linked together closer
– Requires international coordination
Ministry of Finance
Present financial stability management structure
Ministry of Finance
Ensure liquidity and financing to the banking system including
to promote credit to the public
• The Riksbank to add liquidity to the system in appropriate ways.
• Extended mandate to the National Debt Office to increase:
– volume of state bonds
– guarantees to export credit authorities
– automotive industry borrowing
• A state guarantee scheme to support banks’ medium term financing.
• Additional measures to enhance state lending authorities loans and
guarantees to enterprises.
Ministry of Finance
Guarantee scheme for medium-term bank debt
• State guarantees of funding for banks and mortgage institutions.
• Guarantees available for a fee for non-complex, “plain vanilla” debt
instruments with terms between three months and five years.
• Maximum of 1500 billion SEK of debt instruments, to date approximately 270
billion SEK have been guaranteed.
• Restrictions on management compensation.
• Based on common EU principles.
Ministry of Finance
Recapitalization scheme
• Fundamentally sound banks and mortgage institutions may apply for state
capital contributions to support lending.
• State participates through:
– Market transaction for Tier 1 capital (shares or hybrid loans) on market terms together with
private investors (min 30% private).
– Directed issue of Tier 1 capital (convertibles or shares) on terms determined by the state.
• Maximum limit 50 billion SEK, open six months.
• Restrictions on management compensation for two years.
Ministry of Finance
Framework for state support to banks based on
experiences from the 1990’s
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Ministry of Finance
Government Support to Credit Institutions Act gives the Government a broad
mandate to take action.
Measures depend on status of the institution and the market:
– Guarantee scheme and recapitalization scheme for fundamentally sound institutions
to support lending.
– State capital provided through preferred shares with strong voting rights if a financial
institution should get into serious difficulties.
– Possibility to take over ownership of institution with less than ¼ of regulatory
capital.
The measures designed to safeguard taxpayers’ interests and secure financial
stability.
Long term measures to finance banking crisis
• International experiences show that ultimate costs for the state are difficult to
avoid.
• Tax payers interests should be protected in the long term.
• Banks should contribute to costs according to principles of the financing of
deposit guarantees.
• All institutions take advantage of state support measures as a public good.
• An annual fee to be charged of Swedish banks with the objective to build up a
long term “stability fund” corresponding to 2.5% of GDP.
Ministry of Finance
Operational scheme of financial stability management
• The Riksbank subordinated to the Parliament to support liquidity and guard
payment system stability.
• The Financial Supervisory Authority subordinated to the Government to
supervise individual institutions.
• The National Debt Office subordinated to the Government acting as “support
authority” to negotiate state support agreements with individual banks.
• The Government to decide on individual support agreements as proposed by
the National Dept Office.
Ministry of Finance
State ownership a central resolution issue
• Brings efficiency in management and state control of
restructuring.
• Ensures confidence in state intervention and support measures.
• Gives political advantages – safeguards taxpayers interests and
public finance.
• The systemic stability to be saved, not individual banks.
Ministry of Finance