Sweden: Bank Support Authority, Blanket Guarantee, 1992

Abstract

Following a period of rapid financial liberalization and a record credit boom in the 1980s, Sweden’s financial system suffered its worst shock in the post–World War II period. Swedish banks were heavily dependent on foreign credit, which dried up amid signs of instability. The Swedish government announced a blanket guarantee on September 24, 1992, for all banks’ obligations except share capital and perpetual subordinated loans. According to a 1995 IMF Working Paper by Drees and Pazarbasioglu, the purpose of the blanket guarantee was 'to guarantee the stability of the payments system and to safeguard the general supply of credit." The blanket guarantee gave the Riksbank the option to lend to any commercial bank operating in Sweden, even to those that were on the brink of insolvency, and to extend emergency liquidity assistance to troubled banks without imposing collateral requirements. The government created the Bank Support Authority to administer the guarantee and other measures. The balance sheets of Sweden’s banks totaled 1.5 trillion Swedish krona (SEK; USD 270 billion) in 1991, approximately 100% of GDP. The blanket guarantee was never exercised and was replaced by standing deposit insurance on July 1, 1996, with a coverage limit of SEK 250,000. The government guaranteed only depositors, and no other bank creditors, after the blanket guarantee was replaced.

Keywords: banking crisis, bank resolution, blanket guarantee, Nordic Financial Crisis, Sweden

JEL Classification: G01, G28