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.