Swedish Lessons for EU Bank Owners

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.