More Swedish Bank Blogging

Swedish bank blogging is undoubtedly the new craze on the interweb.  I enjoyed this story of the poney-tailed Swedish finance minister scolding Geithner for his plan and the linked-to story dubbing the Swedes “the acknowledged masters of bank rescues” (As an honour, it reminded me a little of when Ireland were the acknowledged masters of Eurovision.)  Charlie Fell also has a nice piece in today’s Irish Times comparing the NAMA plan with what happened in Sweden.

One recurring line of discussion about Sweden is that the scale of its nationalisation plan was fairly small.  As everyone and their grandmother knows by now, Sweden only nationalised two banks, one of which was already majority state-owned, and these banks had only 22% of the Swedish banking system’s assets.  (On the other hand, around the same time Norway nationalised the majority of its banking system, did not use asset management agencies, and achieved a successful stabilisation at little cost to the taxpayer.  But that’s another story.)

In the US, this has lead many to argue that Sweden doesn’t provide them with a useful model.  For instance, President Obama said:

So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks.

Paul Krugman has pushed back hard on this issue, pointing out that there are only 19 banks undergoing the Treasury Department’s stress tests. I think a better argument for the lack of precedent is that many (perhaps all) of these 19 banks are incredibly complicated operations and that running Citigroup or Bank of American is totally unlike running a medium-sized Swedish bank. Of course, on this issue, Simon Johnson would argue that getting control of too-big-and-complex-to-fail institutions is a necessary part of preventing a global crisis like this happening again.

In our case, the argument has not been about numbers of banks.  We only really have two systemically important banks and the nationalisation arguments revolve around them.  Also, these banks have pretty plain-vanilla operations with nothing like the complexity of a Citigroup.  The argument that has put by Irish commentators (including some regular commenters on this website) for why Sweden represents a bad example is that only 22% of bank assets were nationalised, whereas AIB and BOI account for the vast majority of bank assets here.

I think this criticism misses an important point, which is that the Swedes took a systemic approach to solving their problems.  All banks had their assets assessed by a Valuation Board which lead to very significant write-downs at all the major banks.  Those that were able to survive with the help of outside capital did so (this is not likely to be an option for our leading banks now), those that needed limited government capital received this capital in the form of ordinary shares, and those that were clearly insolvent were nationalised.  See again the testimony of my favourite former Swedish finance minister, Mr Lundgren.

To my mind, the repitition of the 22% figure smacks of wishful thinking.  It would be great if only 22% of our banking system was insolvent.  However, all available information suggests the scale of the problem is far larger.  And the evidence from Sweden suggests that systemic banking problems require systemic solutions.

3 replies on “More Swedish Bank Blogging”

Karl, during your appearance on Prime Time last night (30April09) Peter Bacon was explaining why the Nama (aka Asset Management) route was chosen over the Asset Guarantee/Insurance route in order to reboot our banking system.

This begs the question was nationalisation even considered??

Update: It appears not from his report to the Ntma

Notwithstanding that Nama and Nationalisation are not mutually exclusive I’d love to hear him explain why Nationalisation was not considered in his report. Maybe you could ask him the nest time…

@ Ahura – extremely important. From the European Commission report into the Swedish ‘model’:

On de-pegging the Krona and allowing it to rapidly depreciate by almost 30%: “The depreciation was the main driving force behind the recovery which started shortly thereafter in 1993. In the years that followed, exports became the engine of the Swedish economy. Between 1992 and 2008, exports roughly doubled as a share of GDP. There is no other period of similar positive export performance in Swedish economic history.”

Also important was an independent monetary policy: “Once the krona was floating, monetary policy was able to focus on domestic conditions. The
Riksbank declared an inflation target in January 1993 to be valid from 1995. The Riksbank gradually lowered interest rates, although critics claimed that the reductions were too cautious. The vicious circle of falling asset prices was arrested. The ensuing fall in interest rates eased the pressure on the banking system, as the economy started to recover. In July 1996, the crisis legislation and the blanket guarantee were abolished.”

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