Banking on the new Swedish model

Banking on the new Swedish model
Olle Wästberg, Director General of the Swedish Institute reveals some insights garnered from his inside track in the early 1990s to the bone-shaking Swedish banking crisis and its eventual resolution.

“The Swedish Model” was an expression coined during the 1930s, especially through the book Sweden: The Middle Way, a best seller by journalist Marquis Childs 1936 in which Sweden was portrayed as a lucky combination of two political systems and a country in a state of balance. This was particularly true of relations on the labour market.

Times change. Nowadays when international newspapers and magazines write about “the Swedish model,” it alludes to the way Sweden managed the financial crisis in the beginning of the 1990s.

Back then, the banking crisis was handled by the then Minister of Fiscal and Financial Affairs Bo Lundgren (now Director General of the Swedish National Debt Office), his State Secretary Urban Bäckström (now Director General of the Confederation of Swedish Enterprise) and the leading civil servant in the field Stefan Ingves (now Chairman of the Riksbank). As State Secretary of Finance in the early 1990s, I had quite a good view of the process.

In the current situation, with many financial systems on the edge of an abyss, what happened in Sweden is often described as a model for other countries. When banks – and other financial institutions – don’t dare to finance businesses and private citizens in need of loans, the economy stops. The result is: no investments, free-falling real estate, less consumption and growing unemployment. The banking system is the key to economic recovery.

In 1992 Sweden did basically two things:

– The government guaranteed the deposits that brought about a renewed confidence.

– Non-performing bank debts were transferred to “bad banks.” That made the ordinary banks clean and sound, and they could start to perform. The bad banks sold off their depreciated assets in a couple of years and most of the money was regained over time.

The bad banks system is sometimes described as a Swedish invention. It isn’t. Sweden had learned from the US savings-and-loans debacle in the 1980s, and adapted the idea of bad banks from Texas. In a way, this was part of a tradition that includes modern political parties, mail-order business and curved harrows – there are many examples of inventions from the United States that have been brought to Sweden to be refined and then re-exported.

The problems now facing the international financial system is much bigger in both scale and structure than the Swedish crisis in 1992. In Sweden, the government had to take over the worst two banks. That implied that the government was on both sides – the bank and the bad bank – in estimating the value of the failed assets. The process could be smooth and fast. My guess is that American lawyers on both sides will make it a bit more complicated.

Anyhow, Sweden avoided a meltdown of the banking system, which was terrifyingly close. The orderly way in which this was done might be a “Swedish model”. For other countries where banking paralysis is now preventing the economy from starting up again, this may be something to long for.

Olle Wästberg, Director General of the Swedish Institute