Ramos

The Swedish financial crisis and its resolution

Emil Ems Guest lecture at University of Stockholm, 24 September 2009

The Swedish financial crisis

Fundamentals of financial crises Macroeconomic background for the asset bubble and its bursting The financial sector in its initial state Early crisis symptoms – state “fumbling” Main crisis- state more decisive “Comprehensive” and focused wrap-up Lessons to learn?

Fundamentals of financial crises

The main driver of financial crises is “hapless” increase in credit volume (C) C is created out of Central bank money (M), augmented by the Credit multiplier (CM) “Hapless” increase in C is caused, either,

•by over-extended monetary policy, or, •by uncontrolled increase in CM (usually through financial “innovation”)

Macro-economic background

Abolishing of exchange controls at fixed exchange rates emasculated monetary policy Fiscal policy was not used as substitute, quite the opposite (expansionary, and with low real interest rates after tax)

Monetary expansion in terms of bank borrowing in foreign currency

Macro-economic background

Macro-economic background

Deregulation of financial institutions did away with traditional control of CM

Demand for credit allowed to be satisfied Financial institutions induced to increase lending Supercharged increase in CM

Drastic increase in asset prices (commercial and private real estate, stocks) Speculative bubble!!

Macro-economic background

Macro-economic background

Macro-economic background

Bubble burst, through

Comprehensive tax reform Increased international interest rates (imported to Sweden), followed by international recession Drastic increase in real rates of interest Drastic increase in debt servicing cost ratio

The banking sector at the outset

Savings banking sector, with “Sparbankernas bank” as “Central Bank” Cooperative banking sector, already consolidated into “Föreningsbanken” Commercial banking sector, with four major banks,...