Stockholm Solutions
| Author | Stefan Ingves/Göran Lind |
| Position | Governor of the Sveriges Riksbank/Advisor to the bank's Executive Board |
| Pages | 21-23 |
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A crucial lesson from the Nordic experience is the need for prominent state involvement in crisis resolution
Page 21
Since the onset of the current financial turmoil that began in the United States, policymakers have been looking at previous financial and banking crises to learn lessons about how to deal successfully with the fallout. Many have looked to the case of Sweden and other nordic countries that went through financial crises during the early 1990s.
The nordic upheavals of the early 1990s were the first systemic crises in industrialized countries since the 1930s, not counting the banking problems directly related to World War ii. The nordic crises were preceded by the widely studied U.S. savings and loan (S&L) crisis, which was not truly systemic, but affected a subsector within an otherwise functioning large financial market.
The nordic banking crises were thus eye-openers. How could such problems occur in otherwise well-organized and managed economies and financial systems?
The reason we are still thinking about them is that the nordic countries showed how to effectively deal with such crises.
The nordic countries taught the world powerful lessons about the need for prominent state involvement in the resolution process: it was the state rather than the private sector that led the systemic restructuring exercise, seeking to bring in private sector owners and investors as much as possible. The nordic responses also showed the role of the state in the protection of asset values of banks when private asset markets collapse and how to use special asset management companies and loan workout units, which have to be government owned, if no private investors are available-as they seldom are in a systemic crisis. Such bodies can protect value through careful management and avoid the losses brought about by fire sales.
The authors were deeply involved in resolving the Swedish crisis of 1991-93, so this article focuses on the Swedish experience and how it relates to the present turmoil.
The present international financial turmoil has led many involved in the financial markets to reconsider long-held beliefs about how markets operate. nevertheless, we have seen much of this before-albeit on a smaller scale.
Each banking crisis shows a different combination of causes, but the main ingredients are most always there, as they were in the nordic countries: bad banking, inadequate market discipline, weak banking regulation and supervision, and inadequate macroeconomic policies related to financial liberalization.
Page 22
Once under way, financial crises follow a common pattern:
* Underlying weaknesses become apparent.
* An acute crisis is triggered by a particular event.
* The crisis is propagated and aggravated.
* Steps are taken to mitigate and resolve the crisis.
Our analysis looks at some of the similarities and differences between the Swedish crisis and the present crisis and proposes ways to tackle the current situation.
The underlying cause of most crises is loose granting of loans, often related to real estate, based on overly optimistic risk assessments in conjunction with easy money and macroeconomic imbalances. The cycles in real...
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