Sweden is rightly admired for the way it handled its banking crisis in the early 1990s (and its ensuing fiscal challenges).
In yesterday’s Financial Times, Dag Detter looks back for some lessons for Europe as it struggles to resolve its current banking crisis:
When the Swedish banking system crashed in 1992, the government faced an identical problem. Yet in the end, Sweden’s taxpayers came very well out of their experience of bank ownership. How was this achieved, and what lessons can be learnt for Madrid and the EU’s new bank resolution policy?First, move fast. Spain and bankers have been in denial about the scale of bad lending for too long. The Rajoy government rightly came to office this year on a promise to force banks to write down bad loans. The situation has predictably turned out to be much worse than assumed, but their policy is the right one. Painful as it is, transparency on the scale of bad debt is vital for the market to be confident that it understands risk and uncertainty in Spain and can therefore price it properly.
Catharsis can come only with a purge of bad assets. Banks should present plans to handle problem assets, strengthen controls and improve efficiency. This might require government or even supranational assistance in the orderly closure of moribund institutions. In addition, “bad” bank parts must be demerged from the “healthy” to facilitate recapitalisation. The state should never be left holding the junk while the healthy part of a bank wriggles free.
Second, maintain commercial principles. In Sweden, each state bank investment was made on what would have been commercial terms in a normal market, always with the aim of maintaining competitive neutrality. The terms of the investment must be structured in a way that gives the bank and its owners no grounds to request more state funding than is necessary, combined with the incentives to facilitate a swift exit. Yet it must be sufficient to ensure that the bank can return to profitability without additional government assistance.
The whole piece is worth a read.