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