Swedish banking rescue

During 1991 and 1992, a housing bubble in Sweden deflated, resulting in a severe credit crunch and widespread bank insolvency. The causes were similar to those of the subprime mortgage crisis of 2007–2008. In response, the government took the following actions:^[1]

Sign calling for the "Swedish Solution", Occupy Oakland, 2011

• The government announced the state would guarantee all bank deposits and creditors of the nation’s 114 banks.
• Sweden's government assumed bad bank debts, but banks had to write down losses and issue an ownership interest (common stock) to the government. Shareholders at the remaining large banks were diluted by private recapitalizations (meaning that they sold equity to new investors). Bondholders at all banks were protected.
• Nordbanken and Götabanken were granted financial support and nationalized at a cost of 64 billion kronor.^[2] The firms' bad debts were transferred to the asset-management companies Securum and Retriva which sold off the assets, mainly real estate, that the banks held as collateral for these debts.
• When distressed assets were later sold, the proceeds flowed to the state, and the government was able to recoup more money later by selling its shares in the nationalized banks in public offerings.
• Sweden formed the Bank Support Authority^[3] to supervise institutions that needed recapitalization.

This bailout initially cost about 4% of Sweden's GDP, later lowered to between 0-2% of GDP depending on various assumptions due to the value of stock later sold when the nationalized banks were privatized.

In September 2008, economists Brad DeLong and Paul Krugman have proposed the Swedish experiment as a model for what should be done to solve the economic crisis currently affecting the United States.^[4] Swedish leaders who played a role in devising the Swedish solution and have spoken about the implications for other countries include Urban Bäckström and Bo Lundgren.

References