Lars Nyberg, 29 September 2011

Sweden’s Lessons from

Financial Crises

Global Interdependence Center Conference, Stockholm

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

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GDP growth (left-hand axis)

After-tax real interest rate(left-hand axis)

Private credit growth (right-hand axis)

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In the fall of 1992, policymakers decided on far-reaching and acute measures

20-30 September: Bi-partisan austerity

packages I and II

16 September: 500 % interest rate

24 September: General bank

guarantee

19 November: Floating krona

9 September: Gotabanken guarantee

18 December: Parliamentary decision on Bank Support Authority

15 Januari: Inflation target

August: Foundation of Securum

August September October November December January

Fiscal Policy

MonetaryPolicy

Financial Stability

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

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Fiscal Policy

Monetary policy

Financial Stability

Fiscal policy framework

Inflation targeting

Independent central bank

Financial Stability Report

Fiscal consolidation

Deregulation and competition fostering

Basel II III

Sustainable pension system

Crisis management exercises

Inattention: No law for bank resolution

The fiscal policy framework has supported sound public finances

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1995

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2010

Public debt/GDP An explicit surplus target: 1 percent of GDP on average over a full business cycle

A three-year rolling nominal ceiling for central government expenditures (including pension system)

Balanced municipal budgets

A strict, top-down budgetary process

…in contrast to those of many other countries

Source: IMF WEO april 2011

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USA

Grekland

Irland

Italien

Portugal

Spanien

Public debt, percent of GDP

Swedish banks have grown…

Bank assets in relation to GDP, June 2010

…and become dependent on market funding

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500

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Foreign Currency SEK

Market funding of major Swedish banks, SEK billion

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

Central bank balance sheets, percent of GDP

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ECB Federal Reserve Riksbanken

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Riksbank’s policy interest rate, percent

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

6 October: Extended deposit

insurance

1 October: First USD auction

18 September: T-bill issue to cover shortage

September October November December

Govern-ment

Riksbank

8 October: Liquidity facility

for Kaupthing

20 October: Guarantee program

and bank support law

27 October: Liquidity facility

for Carnegie

10 November: Nationalization

of Carnegie

16 December: Swap line with

Latvia

6-8 October: 3-6-months SEK facility

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

Large government debt in Sweden

No major international crisis

Domestic real estate crisis

Swedish bank solvency problems

Sound public finances in Sweden

European debt problems

World liquidity crunch

Swedish bank liquidity problems

1990-1994 2007-

Important differences between the current situation and that of 2007-08

Unexpected situation

Global crisis

International liquidity crunch

Evolving, expected crisis

Crisis in EU and USA

Sovereign debt problems

2007-2008 2010-

The deficiencies in 2007 have served as lessons for supervisors and policy-makers

Low equity ratio

Low quality of capital

Weak funding liquidity

Weak supervision

No macroprudential perspective

RRP not in place

Global bank problems

EU supervision problems

Resolution framework