Banking System Bailout - Scandinavian Style
Journal of Applied Corporate Finance, Vol. 22, pp. 85-93, Summer 2010
27 Pages Posted: 11 Sep 2010
Date Written: August 1, 2010
This article reflects on some of the banking crisis resolution measures taken by the Swedish and Norwegian governments during the Scandinavian banking crisis of the early 1990s. Much as in the U.S. in 2008, the Scandinavian crisis two decades ago was preceded by a broad relaxation of bank lending standards, followed by a dramatic increase bank lending, decline in household savings, and a rise in housing prices. A decline in oil prices caused a macroeconomic contraction in (oil-exporting) Norway, which shook an already fragile banking system. Norway and Sweden chose two somewhat different routes to crisis resolution, both involving government intervention and both quite successful: The Norwegian government injected a hybrid debt-equity capital in the largest commercial bank but only after extinguishing old equity claims. The Swedish government issued a system-wide debt guarantee and allowed shareholders to maintain their equity stakes provided they also added new bank equity capital. In one bank, where equity-holders refused to participate, the government took over the bank and split it into a “good” and a “bad” part – the latter holding the non-performing loans. Lessons from Scandinavia are interesting today also because the recent U.S. banking system bailout, after some initial trial and errors, also ended up with government ownership of shares in financial institutions. I comment on the question of how the U.S. government, having effectively become “owner of last resort” in key financial institutions today, should handle its controlling equity stakes.
Keywords: Banking Crisis, Bailout, Bankruptcy, Government Shareownership, Governance
JEL Classification: D72, D78, E58, E63, E65, G21, G28, G33, P52
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