Swedish banking crisis from 1990 to 1992
The Swedish banking crisis from 1990 to 1992 was a severe banking crisis in Sweden triggered by a speculative bubble in the property market .
prehistory
Sweden's economy experienced a boom in the 1980s . Low real interest rates (the interest rates were nominally high, but the high inflation rate made real estate investments appear lucrative), a liberalization of cross-border capital transactions and, above all, tax law led to massive increases in real estate prices. Part of the “ Scandinavian model ” is a high income tax burden . In the 1980s it was possible to deduct up to 50 percent of the loan interest from taxable income. This not only represented a high incentive to purchase real estate, but above all to lend it highly.
The banks financed the acquisition of real estate to a large extent, trusting the value of the real estate. This fueled demand further: a large-scale real estate bubble formed. Between 1987 and 1993, properties worth 400 billion crowns were built.
The crisis
The bubble burst in the early 1990s. The economy deteriorated. House prices began to fall. Above all, however, the Swedish krona came under considerable devaluation pressure. In 1990 the first banks ran into problems due to market developments and had to file for bankruptcy.
In the fall of 1991 the crisis reached the first major market participant: the largest Swedish bank, Nordbanken (mostly state-owned) , was on the verge of collapse. The Swedish state injected fresh share capital into the bank and took over the shares that were still privately owned. The bad loans were outsourced to a bad bank .
However, this did not restore the confidence of investors and shareholders in the stability of the banking sector. All banks were sitting on a mountain of bad credit . The Swedish banks' liabilities amounted to 175 billion crowns. The banks' equity did not allow them to carry out the necessary write-offs. In 1992, the first savings bank (today's Swedbank ) was about to collapse. Here, too, the bad loans were outsourced to a bad bank for which the state was liable. In order to ensure the survival of the bank, the Swedish government had to give a guarantee for all deposits of this savings bank.
The crisis peaked in September 1992. The Swedish krona was under massive devaluation pressure. On September 17, 1992, the Swedish Reichsbank had to raise the key interest rate to 500 percent to support the krona. This measure overwhelmed the Swedish banks and borrowers. In Sweden, it is traditional to use variable interest rates to finance real estate. This means that interest rate hikes not only affect newly concluded loan agreements, but everyone.
The liberation act took place on September 24, 1992. The Swedish government extended its guarantee to all banks. The unlimited guarantee was valid for all creditors of these institutions. At the same time, bad banks were also set up for the other banks, relieving the banks' balance sheet. These measures worked. Confidence in the banks was restored and the banks saved.
The consequences
Sweden's banking system was unrecognizable. Four large banks now made up the vast majority of the banking market. A large number of banks had been merged with other houses. This reduced the intensity of competition. The banks were able to significantly increase their margins and thus quickly make up for the losses from loan defaults. At the same time, significant streamlining measures were taken, which resulted in Swedish banks being among the most profitable banks in the world from the mid-1990s.
The economy was able to recover quickly. This made it possible to keep the costs for the state limited. The cost to the state was initially around 65 billion crowns. This corresponded to 4% of the gross domestic product. In this sum he had taken on bad loans and transferred them to the newly created Bankstödsnämnden ("Office for Bank Support "). In the course of the following years, the state was able to get back or liquidate at least as much of the loans (“scrap papers”) that the overall action led to a profit for the taxpayer.
Even if the government received many praise for its crisis management, the measures were unpopular. In 1994 it lost the parliamentary elections and the Social Democrats took over the government again.
Individual evidence
DIW: Nordic Banking Crises in the 1990s, page 94, January 28, 2009
Web links
- How other countries are bailing out their banks , article by Helmut Steuer in the Handelsblatt , March 18, 2008
- “I never thought that we would have to do that again” , interview with Bo Lundgren (Sweden's Deputy Minister of Finance from 1991 to 1994) in the Frankfurter Allgemeine Zeitung , October 9, 2008
- Sweden's recipes for overcoming the banking crisis , article by Ingrid Meissl Årebo in the Neue Zürcher Zeitung , October 11, 2008
- Conscription in the bank , article by Wolfgang Gehrmann in Die Zeit , January 15, 2009