Lessons from Swedish bank resolution policy

The following is a post from the site Euro Intelligence, published just 5 days ago regarding the Swedish solution to the banking crisis.  I am providing this version with the author’s permission, who should be credited with much of the Swedish bank resolution solution’s creation.  A longer version is linked at the bottom of this post.

Lars Jonung, who wrote this piece, is now a research adviser at the European Commission in Brussels. He was previously professor of economics at the Stockholm School of Economics. He has published many books and articles in English and Swedish and is the co-author of the leading macroeconomic textbook in Swedish.

You should also note that Jonung served as chief economic adviser to the Prime Minister Carl Bildt in 1992-94 when the Swedish solution was implemented. I would also say that his characterization of events in this piece is very much at odds with what Alan Blinder recently said in a New York Times piece. Given Jonung’s prominent role in the process, this discrepancy should be noted.

Banks all over the world are in deep trouble. This has created an interest in the successful bank resolution policy adopted in Sweden in the early 1990s. But can the Swedish model of yesterday be applied in other countries today?

When Sweden was hit by a financial crisis in 1991-93, its response comprised a unique combination of seven distinctive features: 1) swift policy action, 2) political unity, 3) a blanket government guarantee of all bank liabilities (including deposits but excluding shareholder capital), 4) an appropriate legal framework based on open-ended government funding, 5) complete information disclosure by banks asking for government support, 6) a differentiated resolution policy by which banks were classified according to their financial strength and treated accordingly, and 7) an overall monetary and fiscal policy that facilitated the bank resolution policy.

Two major banks were taken over by the government. Their assets were split into a good bank and a bad bank, the “toxic” assets of the latter being dealt with by asset-management companies (AMCs) which focused solely on the task of disposing of them. When transferring assets from the banks to the AMCs, cautious market values were applied, thus putting a floor under the valuation of such assets, mostly real estate. This restored demand and liquidity, and thus put a break on falling asset prices.

The Swedish model proved successful. The banking system was kept intact. It continued to function, swiftly emerged from the crisis and remained mainly in private hands. Taxpayers did not lose out in the long run. The net fiscal cost of the bank resolution 15 years after the crisis is close to zero. The policy priority of saving the banks, not the owners of the banks, kept moral hazard at bay.

The bank resolution policy was carried out transparently and openly. The centre-right government under Carl Bildt cooperated with the social democratic opposition, creating public trust in the resolution process.

Today’s global crisis is different from the Swedish crisis of the 1990s in important respects. The Swedish financial system was small, with only half a dozen major banks. It was also bank-based, with few major non-bank financial actors, and was less sophisticated and less globalized than the current world financial system.

Still, there are lessons from the Swedish resolution policy that may serve as guiding principles today.

First, the Swedish experience demonstrates that a genuine threat of public receivership or nationalization does galvanize banks into action. With this threat hanging over them, private banks in Sweden made great efforts to solve their problems themselves by asking their owners for capital. The lesson is that no government support should be given to a financial institution with zero or negative equity until its present owners have surrendered their control and ownership.

Banks and their networks of debtors and creditors should be saved – not bank owners and not bank managers. Once this principle is commonly accepted, government rescues will be easier to carry out. Moral hazard will be reined in – today and in the future. Taxpayers will more readily accept the necessary public expenses.

Presently, policy choices are often hampered by a political dislike of public receivership (nationalization) – even if such a step would be economically more efficient and just. The Swedes, however, put ideology and fear of big government aside. Their priority, from the Conservative party to the Social Democrats, was to find a quick, workable solution.

Today, major steps towards pseudo-nationalization have been taken in many countries, creating the worst of all possible worlds: governments are financing bad banks without outright owning them and failed managers and owners are not punished. This creates public distrust in the resolution policy as a whole. Temporary public receivership with a clear exit strategy is a more efficient approach, and less costly to the taxpayers. As any student of finance knows, the value of a bankrupt bank is zero.

Second, the Swedish experience suggests that all banks that are put under public receivership should be split immediately into a good bank and a bad bank, under the control of an independent authority with the goal of terminating the operations of the bad bank in a specified time frame, say within less than 10 years. This avoids Japanese-style “zombie” banks. Alternative solutions include purchase-and-assumption transactions, in which a part of a bank’s good assets and matching liabilities are sold to another bank.

The good bank should continue operation and be re-privatized as soon as possible. The bad bank should manage the bad assets taken from the old bank with a view to selling them in due course. This will help recreate a market for such assets.

Third, the Swedish case shows that the bank resolution policy should have an open-ended financial commitment from the government to be credible and efficient. At this stage of the global crisis, it is impossible to estimate exactly the cost of rescuing a financial system in any country. However, the ad hoc measures that have been taken in many countries seem to be an open invitation for struggling banks and institutions to demand more funds. Any attempt to fix a sum for the rescue effort undermines its credibility. It should be made clear that the government is ready to mobilize the resources needed. Fighting a financial crisis is like fighting a war. Losing is simply unthinkable.

Finally, the process of bank resolution should be transparent, based on full disclosure of the steps taken and the valuations of assets made. Openness fosters public trust in the bank resolution policy and in the financial system that will emerge after the crisis. And trust is the basic building block of any banking system.

The Swedish model for resolving the banking crisis of 1991 – 93. Seven reasons why it was successful. – Lars Jonung

  1. M.G. in Progress says

    The Swedish model is too Swedish to be good. I think it’s an “isolated” country case not actually replicable for the following reasons: the systemic risk at that time and for the country in question is not comparable with the present situation. So inherent risk and the control environment is totally different particularly because of financial innovation since 1991. Thus there is no way to have the combination of seven distinctive features underlining the Swedish model. In this respect Obama was right saying that the model is not applicable but not just for the number of banks involved and size of the country but just for different systemic risk, counterparties, activities and products involved. Yet some of the concepts of the Swedish model are applicable although I am, since October 2008, more in favor of a parallel new good bank solution, without forcing nationalization.

  2. aitrader says

    Talk about smearing lipstick on a pig. Jonung is really cranking up the Swedish propaganda machine with this piece of horse-puckey. His spit-shining of the Swedish “nationalization” is typical of Swedish state apparatchiks. Take the veracity of his op-ed piece with a large 50 kilogram bag of salt.

    Sweden’s banking crash was no accident. It was caused by Swedish policy makers’ foolish attempts to peg their currency, the Krona, at an unrealistic level vis-a-vis the dollar and pound. Currency speculators, including Soros, took on the Swedes and their peg. The Swedish politicians, and one assumes Jonung was one among this crowd of clowns, responded with interest rate hikes to try to defend the peg. This eventually resulted in overnight interest rates exceeding 500% and a crash of the banking sector.

    And far from any nationalization “plan” or “swift policy action” (talk about redefing the word “swift”) the nationalization of a single bank, Nordbanken, was only undertaken after the Swedish state went hat-in-hand and peddled it to any takers. When not a single buyer at any price appeared ready to take the bank off their hands they then had no other option than to put it on the states books and nationalize it.

    Leif Pagrotsky, another politician active at the time. has written a different account in his op-ed piece in Euro-Intelligence – https://www.eurointelligence.com/article.581+M5b55b38d58a.0.html . Pagrotsky does extend the urban legend of the Swedish “plan for nationalization” (i.e. there was no “plan”) but he is at least honest enough to tell us that it is no model for the current problems in the US or EU economies.

  3. Edward Harrison says


    Had you taken the time to read the full paper linked at the bottom of this short article you would have seen that Jonung makes EXACTLY the same points you do about the peg. Perhaps, you should examine the evidence in full before you go around disparaging people.

    Read the PDF and inform yourself.

  4. aitrader says

    I live in Scandinavia and I think I know a *little* bit more than you when a Scandinavian pig is getting a makeover.

    The Swedes that were involved in the 1991 bank crash debacle have been sounding off like a gaggle of proud geese trying to make it sound like they meant to nationalize *one and only one* bank. Didn’t happen that way. Nationalizing was the only option they had and it did not happen as a matter of policy. It happened because the only alternative was a complete collapse. No amount of goose stepping or goose honking to the contrary will change the facts of what really happened.

    Du kan ändra den här grisens smink och kläder hur mycket du vill. Den är fortfarande en gris.

  5. Edward Harrison says


    du ska inte tro att du bor i Norden och det ger dig omedelbar trovärdighet. Jag föredrar att debatten grundar sig på fakta. Jag har mer kunskap om Skandinavien än du anta.

    My point is, yes, he has a horse in this race given his prior involvement but, on the whole, his assessment has merit. I am less concerned with whether this bank or that bank was nationalized and more concerned with whether pieces of this model are applicable to present day.

    I do like the article you linked to and will link out.

  6. aitrader says

    Not to beat a dead horse but it really behovs you to make it abundantly clear that the Swedish action concerns *one bank*, that it *was not policy*, it was a last resort.

    Pagrotsky, at least, admits that it has little bearing if any on current events.

    Maybe you can be the blogger that finally puts this urban myth to rest.

    Många svenskar skulle tacka dig om du åtminstone försökte säja sanningen i stället för att upprepa densamma politisk propaganda hela tiden.

  7. Edward Harrison says


    Linking out to Pagrotsky will give you what you need. I have already put it in the newsfeed:


    However, I have to say it is the guarantees, the relatively bipartisan process, the independence of the bad bank regulator and so forth which I find MOST important. I am less interested in the potential posturing of Swedish economists and politicians.

    When I first broached this subject I concluded saying:

    This is an immense task that the Swedes took on. Their entire banking system was effectively insolvent. Yet, they were able to fashion a workout scheme that had bi-partisan political support, did not unfairly reward shareholders, dealt with moral hazard, separated regulatory and workout roles so as to reduce conflicts of interest, and that quickly wrote down valuations and liquidated the bad debts as opposed to dragging the process out. The Swedish authorities should be especially commended for dealing with the liquidity and solvency concerns simultaneously, while keeping moral hazard to a minimum.

    In my view, this must be commended because one can see the U.S. solution is thoroughly lacking by comparison.

    Men tack för dina åsikter.

  8. Ranger Turtle says

    Good article Edward; thanks.
    We can’t print money fast enough to nationalize all the bad banks. That’s why we are SLOWLY taking down banks via FDIC (who does it well). However, they need more money, and have asked for a 500B$ loan!

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