Présentation

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  • Based on the paper of Kunt and Detragiache 1998… identifies 30 major banking crisis from the early 1980s(mostly PED) with the majority of them having followed a common pattern: this one…..inititated by deregulatory measures.. Led to high creidt expansion.. An apparently unwarranted(to be discussed) sharp increase in asset prices(bubble…burst)…widespread bankruptcies.. Non performing loans…intertwined with a currency crisis.. Credit crunch… gov measures to salvage
  • Weak savings
  • Required to invest in bonds issued by the government and mortgage institutions (due to ambitious programme for residents) (up to 50% in such bonds) interest regulations banks not allowed to be profitable… however this did not prevent sweden from being a country with unusally high indebted households… 1980 household sector debt amounted to 67% of disposible income. Due to gov sponsored system of housing finance and loans for university. (no credit evaluation) Develop finainacial markets to activate a money market for t-bills
  • When deregulation took place bankers saw the opportunity to increase revenue from taking higher risks without seeing the danger. Foreign currency loans allowed them to make an economic rent from interest rate differentials, avoid high domestic interest rates When the fix was abandoned they were severely affected At the peak of the crisis bank loans to real estate or collateralised by real estate, accounted for more than 60% of all loan losses. Trigger not a cause
  • Over the 5 year period 1986 to 1990 lending increased by 136%, 73% in real terms Finance companies suffered from competition (they were less regulated in the past).. Now pushed to more risky environnements Important to note that with this new policy also came the government’s commitment not to borrow abroad and to borrow domestically Loan to value ratio Still high interst rates!!! Also accompanied by high household lending.. And increased consumption (but that might have been expansionary policies as well) 2 arguments… some say this was a huge trigger.. Others say that it did not have such a large impact
  • Main bubble from commercial real estate… probabaly made possible by this unregulated market Look up price index for housing!!! What made it burst… the increase in indebtedness in the late 1980s made housing demand more sensitive to disturbances, thereby aggravating the downturn in 1990s… high leveraged investments allowed by deregulated credit market… Could be shocks to fundamentals that caused this bubble as well… tax system, high inflation…etc… started bubble but then it was aggravted by the deregualtion
  • Foreign credit lines: had to find currency to repay now! Repay early put pressure on lenders or loan conversion which was expensive Policy errors that increased the price of borrowing… decreased demand for asset…decrease price of assets… non performing loans
  • Needed leeway because they had to be more than banks Injected equity into troubled borrowers to maintain and restore their values and revive the real economy In many cases this meant that they had to take over defaulting companies Included hiring firing, changing operations… until liquidation Exempt from bank regulation on the timing of collateral liquidation Estimated that this would take them up to a decade if necessary
  • Needed leeway because they had to be more than banks Injected equity into troubled borrowers to maintain and restore their values and revive the real economy In many cases this meant that they had to take over defaulting companies Included hiring firing, changing operations… until liquidation Exempt from bank regulation on the timing of collateral liquidation Estimated that this would take them up to a decade if necessary
  • Présentation

    1. 1. The experiences , questions & lessons taken from Sweden.
    2. 2. <ul><li>The Swedish Economic Background (1970s-1980’s) </li></ul><ul><li>Role of Deregulation (1985) </li></ul><ul><ul><li>Credit expansion & the housing bubble </li></ul></ul><ul><li>The Crisis (1989 – 1992) </li></ul><ul><ul><li>Extent of the crisis </li></ul></ul><ul><li>Crisis Management </li></ul><ul><ul><li>Lessons and policy implications from the crisis </li></ul></ul><ul><li>Conclusion </li></ul>
    3. 3. <ul><li>What caused this crisis? Deregulation? Fixed exchange rate? Bad policies? </li></ul><ul><li>How was the Swedish Crisis resolved so quickly? Good policy or global economic growth? </li></ul><ul><li>What are the policies we can adopt and the lessons we can take from this crisis today? </li></ul>
    4. 4.
    5. 5. <ul><li>Sweden, 1970’s to 1980’s </li></ul>
    6. 6. <ul><li>Source: Englund, Peter (1999), &quot;The Swedish Banking Crisis: Roots and Consequences&quot;, Oxford Review vol 15 n°3, Swedish Statisitics pp 82 </li></ul>
    7. 7. Source: Steigum, E (2008). “ Monetary instability, financial deregulation and crisis: Some Nordic lessons.” Norweign School of Management.
    8. 8.
    9. 9. <ul><li>1980’s </li></ul><ul><ul><li>High regulation of banks and insurance companies. </li></ul></ul><ul><ul><ul><li>Lending ceilings & placement requirements. </li></ul></ul></ul><ul><li>1983-1985 </li></ul><ul><ul><li>Theses regulations were progressively lifted . </li></ul></ul><ul><li>1989 </li></ul><ul><ul><li>Regulation on international transactions were finally lifted. </li></ul></ul>
    10. 10. <ul><li>1. Financial sector weaknesses </li></ul><ul><li>Lack of expertise </li></ul><ul><li>Difficulty adapting to the change from a sheltered environment to a much more open & competitive situation. </li></ul><ul><li>Increased risk-taking </li></ul><ul><li>High leveraging </li></ul><ul><li>High-risk concentration in certain economic sectors </li></ul><ul><ul><li>Primarily real estate (60% of all loan losses) </li></ul></ul><ul><li>Presumed no exchange rate risk </li></ul><ul><ul><li>Banks as borrowers themselves insisted on loans denominated in foreign currency </li></ul></ul><ul><ul><li>Believed not to have hedged against this risk. </li></ul></ul><ul><li>Government no longer borrowing in foreign currency </li></ul><ul><li>Borrow from banks that borrow abroad </li></ul><ul><ul><li>Government transferred the exchange rate risk to domestic banks. </li></ul></ul><ul><li>2. Fixed exchange rate with free capital movements </li></ul><ul><li>Capital inflows </li></ul><ul><li>Upward pressures on the exchange rate </li></ul><ul><li>Contributed to the overheating of the economy. </li></ul>
    11. 11. Source: Englund, Peter (1999), &quot;The Swedish Banking Crisis: Roots and Consequences&quot;, Oxford Review vol 15 n°3, Wallendar(1994) pp 84
    12. 12. Source: Steigum, E (2008). “ Monetary instability, financial deregulation and crisis: Some Nordic lessons.” Norweign School of Management.
    13. 13. Source: Englund, Peter (1999), &quot;The Swedish Banking Crisis: Roots and Consequences&quot;, Oxford Review vol 15 n°3, Wallendar(1994) pp 87
    14. 14.
    15. 15. <ul><li>1989… triggers the crisis! </li></ul><ul><li>1. Internal factors . </li></ul><ul><li>Bad timing on new saving policies </li></ul><ul><li>Tax reform on interest payments </li></ul><ul><li>Inflation focused macroeconomic policy </li></ul><ul><li>2. External factors . </li></ul><ul><li>German unification </li></ul><ul><li>Global Economic slowdown </li></ul><ul><li>ERM break down- float of the krona </li></ul><ul><li>3. Commercial property reached it’s peak . </li></ul><ul><li>Instant reaction by the stock market </li></ul><ul><li>52% fall in the real estate index </li></ul><ul><li>Foreign credit lines withdrawn </li></ul>
    16. 16. <ul><li>1990 bubble burst and the residential real estate prices dropped 25 % . </li></ul><ul><li>From the late 1980’s to 1992 non performing bank loans mushroomed from 0.2% to 5%. </li></ul><ul><li>From 1991 to 1993 Sweden’s GDP fell by a total of around 6%. </li></ul><ul><li>Unemployment shot up from 3% to 12%. </li></ul><ul><li>Public sector deficit worsened to as much as 12% of GDP. </li></ul>
    17. 17. Source: Englund, Peter (1999), &quot;The Swedish Banking Crisis: Roots and Consequences&quot;, Oxford Review vol 15 n°3, Wallendar(1994) pp 87
    18. 18. Source: Englund, Peter (1999), &quot;The Swedish Banking Crisis: Roots and Consequences&quot;, Oxford Review vol 15 n°3, Wallendar(1994) pp 90
    19. 19.
    20. 20. <ul><li>Financial Measures </li></ul><ul><li>Restore confidence </li></ul><ul><ul><li>Government issued an unlimited guarantee to all depositors. </li></ul></ul><ul><li>The banking liquidation or reconstruction strategy was explained to the public. </li></ul><ul><ul><li>A new agency, Bank Support Authority </li></ul></ul><ul><ul><li>Losses were announced </li></ul></ul><ul><ul><li>Method establish to decide exactly which banks need to be liquidated. </li></ul></ul><ul><li>Strict Valuation Rules </li></ul><ul><ul><li>Banks were marked-to-market </li></ul></ul><ul><li>Bleed the Shareholders & bankers </li></ul>
    21. 21. <ul><li>Financial Measures (cont.): AMCs </li></ul><ul><li>How do they work? </li></ul><ul><li>Splitting the ailing bank into a ‘good bank’ and ‘bad bank’ </li></ul><ul><ul><li>‘ bad’ assets go to the AMC at carefully assessed market values </li></ul></ul><ul><li>Regrouping and improvement of assets </li></ul><ul><li>Wait for a reasonable price </li></ul><ul><ul><li>Time consuming but better than a fire sale </li></ul></ul><ul><li>Allowed bank to get back to more important strategies </li></ul>
    22. 22. <ul><li>AMC’s (cont.): </li></ul><ul><li>High degree of independence from political and regulatory constraints. </li></ul><ul><li>They were deliberately over capitalised (SEK 24 billion, an amount equal to the Swedish defence budget) </li></ul><ul><li>Enabled the AMCs to carry out their salvage operations autonomously and did not have to request funding from legislature which might have tried to influence their decisions </li></ul><ul><li>Exempt from regulation on the timing of collateral liquidation (estimated it would take a decade) </li></ul>
    23. 23. <ul><li>Fiscal Policy </li></ul><ul><ul><li>Not much it could do as it was already extremely deficitary. </li></ul></ul><ul><li>Monetary Policy </li></ul><ul><ul><li>Dual role: </li></ul></ul><ul><ul><ul><li>Stimulating the economy and ease burden on borrowers. </li></ul></ul></ul><ul><ul><ul><li>Ensure capital flows need to rebuild depleted foreign currency reserves. </li></ul></ul></ul>
    24. 24. <ul><li>Growth of the Swedish economy paralleled the global economic boom of the 1990s. </li></ul><ul><ul><ul><li>Foreign demand for Swedish goods and services rose from 0.89 % of GDP in 1990 to 1.2% of GDP in 1995. </li></ul></ul></ul><ul><li>Liquidations were completed by 1997 at a smaller cost than tax payers had anticipated </li></ul><ul><ul><ul><li>AMC return 1.8 billion dollars in 1997 of its 4.5 billion (in depreciated kronas) </li></ul></ul></ul><ul><li>“ Did sensible policies pay off or did the rising tide lift all boats?” ( Ergungor, 2007) </li></ul>
    25. 25. <ul><li>No proof to answer this question directly. </li></ul><ul><li>Can only evaluate the resolution strategy from previous crises (Ergungor et al, 2006) </li></ul><ul><ul><li>confidence needs to be restored quickly </li></ul></ul><ul><ul><li>The process must be transparent </li></ul></ul><ul><ul><li>Maintenance of market discipline </li></ul></ul><ul><ul><li>A plan to jump start credit flows in the financial system by repairing the damaged </li></ul></ul><ul><ul><li>political consensus and independence </li></ul></ul>
    26. 26. <ul><li>What caused this crisis? Deregulation? Fixed exchange rate? Bad policies? </li></ul><ul><li>How was the Swedish Crisis resolved so quickly? Good policy or global economic growth? </li></ul><ul><li>What are the policies we can adopt and the lessons we can take from this crisis today? </li></ul>
    27. 27. <ul><li>Articles: </li></ul><ul><li>Calomiris, Klingebiel,& Laeven. (2004) Taxonomy of the financial crisis resolution mechanisms cross country experience. World Bank policy research papers. </li></ul><ul><li>Ergungor E. (2007) On the Resolution of the Financial Crises: The Swedish Experience . Policy Discussion Papers. Federal Reserve Bank of Cleveland. </li></ul><ul><li>Englund, Peter (1999), &quot;The Swedish Banking Crisis: Roots and Consequences&quot;, Oxford Review on Economic Policy vol 15 n°3, pp 80-97 </li></ul><ul><li>Heikensten, Lars (1998), Financial Crisis, experiences from Swe den , mimeo </li></ul><ul><li>Jackson J. (2008) The US Financial Crisis: lessons from Sweden. Congressional Research Service Library of Congress. CRS report for Congress. </li></ul><ul><li>Steigum, E (2008). “ Monetary instability, financial deregulation and crisis: Some Nordic lessons.” Norweign School of Management </li></ul><ul><li>The New York Times. ”How Sweden Solved it’s Banking Crisis” September, 2008. </li></ul><ul><li>Data: </li></ul><ul><li>Swedish central bank: http://www.riksbank.com/ </li></ul>

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