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Chapter 7: The Swedish Solution

 
Chapter 7
The Swedish Solution.
 
          After this chapter you will find a reprint of an article that appeared in the Daily Telegraph in March 2009. It describes the action taken by Sweden to deal with two failed banks in 1992. The first step was to guarantee all non equity deposits without any limit. This ensured that the banks’ depositors did not panic and allowed the banks to be nationalised and run until such time as they were solvent again. The shareholders lost everything. It is not clear what happened to the senior directors but I assume they did not receive any compensation for failure such as our failed banks’ directors have received.
 
          Of all the irritating features of our bank rescues in the UK none have annoyed the general public more than the contrast between the enormous rewards for failure given to several senior figures in our banks and the job losses of the rank and file employees, not to mention the losses and bankruptcy of the customers who had their loans called in. 
 
          No senior bank manager should be allowed to hold a contract which rewarded him if his bank failed. No other private business people enjoy such a guarantee; they go down with their ship. If my business had failed I would have been responsible to the last penny of debt. It makes you very careful with other people’s money as well as your own.
 
          The essential step of guaranteeing all deposits is virtually cost free because the very act of giving the guarantee ensures it will not be needed.
 
          There was never any need to buy or subsidise so called toxic debt. It can be either sold for whatever it will fetch or left to reach its maturity date, once the bank was safely nationalised.
 
          The above action would have cost very little in the short term and could well have given the state a decent profit when all debts matured.
          This way of dealing with failed banks would go a long way towards ensuring that they took great care not to fail. It could have avoided the problems caused by banks being too big to fail, although the addition of 100% Registered Money would add an even stronger safeguard as well as reducing the burden of taxes.

The following article by Henry Samuel appeared in the Daily Telegraph on 20th March 2009 of an interview with Bo Lundgren.

Bo Lundgren, head of Sweden's National Debt Office played a leading role in averting the collapse of the Swedish banking sector when a property bubble burst in the early 1990's.  Sweden nationalised two failing major banks in 1992: the already state-owned Nordbanken and the privately owned Gota bank.

The first and crucial step was to restore liquidity by issuing a "blanket guarantee"for all non-equity claims on Swedish banks.  This was vital to restore confidence and was something that has not been done in the US and UK.

It is also crucial not to put a figure on the guarantee, according to Stefan Ingves, the governor of the Riksbank, Sweden's central bank.  Mr Ingves was a finance ministry official in the early 1990s and led the Bank Support Authority, created to resolve the crisis.  If you pick a very low figure, people will say: "That's not credible, we think the problem's bigger than that". If you pick a very high figure, then people say: "Oh gosh is it that big a problem?"

The Government did not extend its credit guarantee to shareholders of the nationalised banks, who were wiped out.

In the UK, the Royal Bank of Scotland refused to go this far, but the Swedes insist this acts as a wake up call to shareholders of troubled but still solvent banks to shape up or ship out.  This decision spurred two private banks to raise more private capital.

A stress test was worked out to determine how bad the problems were in each bank for the coming three years and banks were ranked as healthy or as candidates for nationalisation, and those in between were told to clean up their act or face being taken over by the state,

Next, the toxic assets of the nationalised banks were ring fenced into two separate bad banks and run by independent asset management companies.  The good assets were placed in a single, merged bank.

Private banks were also urged to place their non-performing loans in separate bad banks.  However, unlike what was mooted in the US, there was never any question of the authorities buying bad assets from banks that remained in any way privatised.  The central bank refused to do that because they could never agree on the price.  Too high a price would have been a gift  from taxpayers to shareholders and too low a price would not have been accepted.

It is clear that Sweden disapproves of Britain and the US committing huge sums to insure bad assets of private or part private banks.