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LQD: Banking crisis showdown: Norway versus Sweden (and the Finns)

by Trond Ove Mon Oct 6th, 2008 at 01:10:33 PM EST

I have been a bit mystified by why everyone seems to be celebrating the swedish bank rescue plan of the 90's, since I seemed to distinctively remember it being criticised in Norway for being wasteful and neo-liberal.

So I finally got around to searching for some comparison of the banking crisis in Norway and Sweden, and found this interesting paper prepared by the Norwegian National Bank: Bent Vale, The Norwegian Banking Crisis, Norges Bank Skriftserie 33, 2006


The differences in approaches between the handling in Norway and Sweden wasn't as big as I thought however. Norway was the "pioneer", and was much more agressive than Sweden and Finland in nationalising failing banks, but they all more or less followed the same pattern.


What distinguishes the Norwegian crisis and its resolution from other banking crises -in particular the crises in the other Nordic countries?

  • The Norwegian crisis started before the crises in Finland and Sweden and had its peak one year prior to the other two.

  • The stock of non-performing loans as a percentage of GDP in Swedish and Norwegian banks was about the same, but banking problems in Norway started to emerge at some smaller and medium-sized banks about two years before the crisis peaked and was deemed systemic.

  • The two bank-owned guarantee funds [in Norway] handled most of the failures in smaller banks by capital injections and guarantees.

  • Unlike deposit insurance funds in the other Nordic countries, and most other European countries, these funds had -and still have -a fairly wide mandate.

  • Once the crisis reached systemic proportions the government took swift action, and a separate institution for crisis handling was set up.

  • Government support was contingent on strict requirements being met, e.g. existing shareholders accepting a write-down to cover losses to the extent possible.

  • The requirements were stipulated as general guidelines, and there was no attempt at micro-management of the banks'operations.

  • A separate entity to manage and recover non-performing loans -an asset management company or a "bad bank"-was not set up. This was different from the crisis resolution in many other countries (Sweden, Finland, the S&L crisis in the US, and several Asian countries) where government funded asset management companies were used.

  • No blanket guarantee for banks' liabilities was issued by the Norwegian authorities.

  • The gross fiscal cost of crisis resolution was 2 per cent of GDP in Norway. This was smaller than in both Sweden and Finland where comparable numbers were 3.6 per cent and 9.0 per cent respectively.

  • After the crisis, GDP and bank solvency recovered rapidly.

  • The Norwegian government maintained a portion of its bank ownership long after the crisis was resolved. Prior to the crisis, these banks had all been privately owned.

According to a paper by Peter Englund (The Swedish Banking Crisis: Roots and Consequences, Oxford Review of Economic Policy, 1999) the main difference in Sweden seems to be that the government bought bad debts from stricken banks and managed them in a state owned company, Securum, which sold off all its asset as soon as GDP stopped falling (ie. when the assets could only go up in value). This company alone was responsible for half of the total loss to the tax payers in Sweden. (2.1 percent of 1996 GDP according to Englund).

Another small difference is that while Norwegian stock holders got nothing from the state during the nationalisation, the swedish owners got 3 billion swedish kroner. (Approximately 5 percent of the total bailout cost.)

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If anyone wants to dig into the Finnish crisis, go ahead. I don't have the time atm. I have a feeling their problems were more systemic thought, with their biggest trading partner imploding, etc.
by Trond Ove on Mon Oct 6th, 2008 at 01:13:38 PM EST
Analysis by the Bank of Finland here

Download pdf

You can't be me, I'm taken

by Sven Triloqvist on Mon Oct 6th, 2008 at 01:32:46 PM EST
[ Parent ]
According to that article, 60 percent of the funds spent to shore up the banking sector in Finland went to a haphazard attempt at saving the finnish savings banks.

41 of them were forced into a merger and taken over by the state, which sought to float the new national savings bank on the stock market.

But the whole plan went to hell because the new bank was bleeding depositors, and eventually the state sold off all the branches to rival banks and took over the bad debts itself.

The bank was bleeding deposits in part because of the terms of the merger, and the fact that the other banks were actively undercutting it to gain its depositors.

But I just glanced through the article so I guess I could have misunderstood something. The link is a horribly bad pdf file. 4,5 mb to present 52 pages of black and white text. It brought my computer virtually to a standstill when I opened it.

by Trond Ove on Tue Oct 7th, 2008 at 03:22:52 PM EST
[ Parent ]
What I've heard is that the cost of the Swedish banking crisis was not 3.6 % of the GDP but 6 % of the GDP, and also that Securum in the end didn't cost anything - it recouped its costs.

Ironically, the only banks that had to be saved were Gotabanken and Nordbanken. Gotabanken were taken over by the semi-state owned Nordbanken which later had to be saved itself. The bad loans of Gotabanken/Nordbanken were the ones handled by Securum.

In this nationalisation process, the irony was that it was the states own bank that had been the most outrageously stupid lender and the one that needed saving - by the state.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Oct 6th, 2008 at 05:14:29 PM EST
Liquidations were completed by 1997 at a smaller cost to the taxpayers than was anticipated. Securum returned to the state nearly SEK14 billion ($1.8 billion in 1997 dollars) of its SEK24 billion ($4.5 billion in 1997  dollars) initial capital--admittedly, in depreciated kronas.

O. Emre Ergungor,  "On the resolution of financial crises: the Swedish experience," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Jun. 2007, page 6-7

So Securum lost nearly two thirds of its assets when adjusted for inflation. Over half if we ignore inflation.

And I have no idea where you got that GDP cost estimate from.

by Trond Ove on Tue Oct 7th, 2008 at 03:36:15 AM EST
[ Parent ]
Also, to continue an earlier discussion with Starvid:

Swedish investors cool to risks of stock ownership - The Local

Small-time investors in Sweden transacted 36,300 stock trades a day in August, an increase of 1 percent from July, but a 16 percent drop compared to August of last year.

Normally private stock trading increases by about 10 percent after the summer months.

"Savers didn't return to the stock exchange in August like they used to, but instead stayed away...

The number of Swedes who own stocks has steadily decreased in recent years and is at its lowest level in eight years, according to Avanza.

"We're getting close to having two million savers who own stocks. That can sound like a lot but there are many who only own a share in Ericsson or TeliaSonera. It's an altogether older group who sell to use the money for their retirement," said Hemberg.

"It's probably the case that most Swedes aren't made to own stocks. When there is this much uncertainty, people discover how hard it actually is. Mutual funds are simpler and not as sensitive. Bank accounts have also been winners in the last year."

(Though two million, that would still be c. 30% of all adults.)

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Tue Oct 7th, 2008 at 04:27:26 AM EST
[ Parent ]
Most people do not have direct share ownership but rather mutual funds. That's about 90 % IIRC. When you include the pension system it's more like 98 %.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Oct 8th, 2008 at 11:48:57 AM EST
[ Parent ]
My GDP estimate was plain wrong. The real number was about 4 %, close to your 3.6 %.

Some people say that the end cost to taxpayers was about 2 % of GDP, but the majority view is that it ended up recouping almost all the costs, or even made a profit.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Oct 8th, 2008 at 11:28:50 AM EST
[ Parent ]
Interesting...

But since you provide no sources, it is a bit difficult to respond properly.

by Trond Ove on Wed Oct 8th, 2008 at 11:41:31 AM EST
[ Parent ]
But the best source I can find in five minutes.

   "If I go into a bank," said Bo Lundgren, who was Sweden's deputy minister of finance at the time, "I'd rather get equity so that there is some upside for the taxpayer."

    Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today's dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

    But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

I've heard the same from a number of other Swedish media sources. Though considering the quality of Swedish journalism, that's probably reduces the likelihood that I'm right. </snark>
   

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Oct 8th, 2008 at 11:47:45 AM EST
[ Parent ]
I recommend that you take a look at the articles I linked to in this diary. I think you will find them interesting.

It is a bit sad how there seems to be such a chasm between academia and "serious" journalism in cases like this. Especially when relevant academic papers are actually easy reads and makes more sense than the scribblings of financial journalists in over their head.

I don't believe for a second that the final cost was "closer to zero", but I have no problem believing that thats what the journalist was told by an overenthusiastic bureaucrat somewhere.

Well, that is beside the point however.

The Scandinavian approaches were pretty similar. The main difference, ie separating bad debts into a separate company, is interesting thought, for several reasons.

First of all, the Norwegian banking crisis was slightly earlier than the Swedish, so the Swedish bailout was undoubtedly influenced by the how it was done in Norway. Why did they choose the different approach?

My only idea so far is the simple one - politics. Norway was run by social-democrats during the crisis, Sweden by what passes for conservatives there. To each his own.

by Trond Ove on Wed Oct 8th, 2008 at 12:16:30 PM EST
[ Parent ]
I've mentioned the "Swedish Bank Rescue" several times without referring to the "Norwegian Bank Rescue" because I was ignorant of the nature, terms, and outcome of the Norwegian Bank Rescue.

Thank you for the information!

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Oct 7th, 2008 at 01:52:47 AM EST
Thanks very much for this.
I would be interested in a bit more about what led to the Norwegian crisis in the first place, (and the rest) with an obvious interest in comparisons to (and lessons that might be learned about) the present-day debacle.
 

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Tue Oct 7th, 2008 at 05:13:06 AM EST
The article has a whole chapter on the reasons for the boom. Deregulation is singled out as the main culprit. Neither bank managers or the public were used to a free market for financial services, since the whole financial sector had been thoroughly controlled through a corporatist system since the second world war.

The bubble was made worse by the fact that at the same time as the deregulation, there was also significant cuts in the control agencies, which led to a lack of public oversight.

So there are some similarities.

Most of the banking crisis in Norway was handled by the remains of the corporatist system thought, which is probably why the final cost for tax payers were so much lower in Norway compared to Sweden and especially Finland. That is, the bank guarantee funds took care of most of the collapsing banks.

But if you are interested the linked article is an easy and informative read.

by Trond Ove on Tue Oct 7th, 2008 at 03:02:35 PM EST
[ Parent ]
Trond Ove:
The article has a whole chapter on the reasons for the boom. Deregulation is singled out as the main culprit. Neither bank managers or the public were used to a free market for financial services, since the whole financial sector had been thoroughly controlled through a corporatist system since the second world war.

So true...I remember well that 'everybody' went 'mad'...bankers included.  There were stories of people leaving banks with plastic bags full of cash...euforia set in! Ordinary people could borrow money all of a sudden, and they did...      

by Solveig (link2ageataol.com) on Tue Oct 7th, 2008 at 03:27:36 PM EST
[ Parent ]
I read an interview with a middle aged man a few years back. He was still paying off a Porsche he bought with borrowed money in the mid 1980s. He was 18 years old, had no job and no savings at the time.
by Trond Ove on Tue Oct 7th, 2008 at 03:33:41 PM EST
[ Parent ]
On Jeromes nationalistion-thread I wrote:

A swedish kind of death:

The best description I have found is from swedish wikipedia. The article is not very good (it appears to lean heavily on one source and lacks proper sourcing) but I will translate the key part anyway as it illustrates the mix of actions taken. Unfortunately I lack the sources to improve it.

Followed by a translation of the relevant part of the swedish wikipedia-page. Tribext appears to resist my attempts to copy the translation with the fancy "Copy HTML, url, title".

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Oct 8th, 2008 at 10:01:13 AM EST
So what do we learn?

If I try to summarize a program, the norwegian government:

  1. Did not issue any guarantee for banks that was not taken over.

  2. Took over failing banks, but stockholders had to take the main brunt of the losses before the government stept in with new equity.

  3. Kept the assets long after the crisis was resolved.

Now, I would like to point out that this was the least expensive for the government. This is not equal to least expensive for society or best for the economy. Though I suspect that the fire-brand sales of bad assets from Securum (that took over the bad assets in Sweden) was hardly beneficial to the economy at large.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed Oct 8th, 2008 at 10:13:13 AM EST
Whether it was most beneficial for the economy as a whole to do it the Norwegian way is almost impossible to say, since there are so many differing factors at play in even these three relatively similar countries. But I think we can say for sure that the Norwegian economy did not suffer much harder than the swedish or the finnish did in the 1990's. (Actually it suffered less, but then we didn't have the same external constraints as the Sweden and Finland.)

And since the cost to the state was so relatively low, and the state is per definition the last security net for the financial sector, it seems to make sense to choose an option which is likely to lower the final cost to the tax player, even if it means wiping out private stock owners.

On top of the socioeconomic cost, when the focus is on bailing out the owners, the "moral hazard" element to investing in finances goes out of the window. You end up with a system where investors and bank executives in the biggest financial institutions know that they get bailed out if they mess things up again.

Meaning that it will pay for them to do this again, since they will keep their gains, gobble up the competition and get a government bailout for their trouble. A la Goldman Sachs.

I agree with Jerome on this one. Nationalise the lot. Strict salary and bonus caps would also be nice.

by Trond Ove on Wed Oct 8th, 2008 at 10:36:39 AM EST
[ Parent ]
I agree with that.

I was more thinking about the differences in how the managment was performed, like:

A separate entity to manage and recover non-performing loans -an asset management company or a "bad bank"-was not set up. This was different from the crisis resolution in many other countries (Sweden, Finland, the S&L crisis in the US, and several Asian countries) where government funded asset management companies were used.

This is harder to evaluate, and as you say there where differences in external factors between the countries. (Most notably Finland lost lots of its exports when the Soviet Union collapsed.)

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Oct 8th, 2008 at 10:52:15 AM EST
[ Parent ]
Well, Securum was managed by "experienced bankers." Who benefited from selling its assets at the beginning of a long boom market? Had they followed the political guidelines they were given, that is holding on to assets as long as neccessary to maximise returns, the company would not have lost nearly as much.

Separating the troubled assets from their originators seems to me to be another easy way of socialising losses and privatising profits.

by Trond Ove on Wed Oct 8th, 2008 at 11:20:06 AM EST
[ Parent ]
Separating the troubled assets from their originators seems to me to be another easy way of socialising losses and privatising profits.

As Securum took over the bad assets of the banks already taken over by the governement, I do not see how this applies?

Who benefited from selling its assets at the beginning of a long boom market?

Obviously, primarily those that had the resources to buy it up. But who knew that it was going to be a long boom market when they sold it off?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Oct 8th, 2008 at 11:39:26 AM EST
[ Parent ]
On the first point. If the state had just recapitalised the nationalised banks and only refloated them on the market after they had sorted themselves out, there would have been strong institutional pressure to maximise the profit on these assets.

By separating the bad assets and putting bankers in control of them, there was strong institutional pressure to sell the assets off as soon as the economy started turning around.

The fact that they couldn't know that the boom would be so long does not excuse them for selling state assets at the absolute beginning of it. And economy is not all alchemy. It is possible to draw up general trend lines.

by Trond Ove on Wed Oct 8th, 2008 at 11:51:30 AM EST
[ Parent ]
Fair enough, I just wanted to sort that one out.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed Oct 8th, 2008 at 11:59:03 AM EST
[ Parent ]


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