Over at Credit Writedowns, Edward Harrison has been having email discussions with Lars Jonung, the chief economic adviser to Prime Minister Carl Bildt in 1992-94 when the Swedish solution was implemented.

Jonung has disagreed with Alan Blinder and others who seem more focused on shoring up confidence than repairing the financial sector.

Here’s an excerpt:

“When Sweden was hit by a financial crisis in 1991-93, its response comprised a unique combination of seven distinctive features: 1) swift policy action, 2) political unity, 3) a blanket government guarantee of all bank liabilities (including deposits but excluding shareholder capital), 4) an appropriate legal framework based on open-ended government funding, 5) complete information disclosure by banks asking for government support, 6) a differentiated resolution policy by which banks were classified according to their financial strength and treated accordingly, and 7) an overall monetary and fiscal policy that facilitated the bank resolution policy.

Two major banks were taken over by the government. Their assets were split into a good bank and a bad bank, the “toxic” assets of the latter being dealt with by asset-management companies (AMCs) which focused solely on the task of disposing of them. When transferring assets from the banks to the AMCs, cautious market values were applied, thus putting a floor under the valuation of such assets, mostly real estate. This restored demand and liquidity, and thus put a break on falling asset prices.

The Swedish model proved successful. The banking system was kept intact. It continued to function, swiftly emerged from the crisis and remained mainly in private hands. Taxpayers did not lose out in the long run. The net fiscal cost of the bank resolution 15 years after the crisis is close to zero. The policy priority of saving the banks, not the owners of the banks, kept moral hazard at bay.”

Go read the full piece . . .


Lessons from Swedish bank resolution policy
Posted by on 11 March 2009 at 11:12 am


Category: Bailouts, Credit

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

26 Responses to “Lessons from Sweden”

  1. deanscamaro says:

    Almost all of those things they did have proven to be impossible impossible hurdles in the U.S. -
    - swift policy action (a joke in the U.S.)
    - political unity (are you kidding me?)
    - complete information disclosure by banks asking for government support (we’ve really proven we can do that, huh?)
    - an overall monetary and fiscal policy that facilitated the bank resolution policy (the final nail in our coffin)

    Nirvana, but will never happen here!

  2. benesposito says:

    Without question this is the best choice, but often things that work in a small subset of a large system can not be applied to large scale similar situations (like a big mutual fund trying to move around blocks of 25% of their assets). Furthermore, the public can’t answer the question, “what will be the consequences due to a major derivatives counterparty disappearing?”


    Instead of being “unable” to come up with a banking solution, it is far more likely that, with much better and more detailed information than the public has, the administration is trying to find a way to avoid systemic collapse while screwing the taxpayer as little as possible. It may very well be no such solution exists, and they are merrely stretching out time as much as possible because there is no other choice….

  3. DL says:

    Greenspan has an editorial in today’s WSJ saying that he had nothing to do with the housing bubble:


  4. gaddijg says:

    Barry, there is something I don’t quite understand. In this piece it seems as if you are supporting the Swedish way (where only stock holders were punished). However in the post “Haircuts for bondholders” you seem to agree with the idea of punishing bondholders.
    I believe many people invested directly or through mutual funds, in fixed income instruments trying to avoid volatility and trusting the Rating agencies. Do these people deserve a punishment? Bill Gross won’t go to jail nor the people running the credit agencies who rated these bonds AAA/AA/A. If these people deserve the punishment I believe all AIG’s insurance beneficiaries should be punished too as they bought (and keep buying) insurance products from a bad run company. All bond holders of Fannie and Freddie should get hammered too. Moreover, people who are placing deposits in Citi, BofA or the like should also get punished as they are also lending money to lousy banks. If that is the case, let the greatest of all depressions come along and then everyone pays for what happened in the previous decades.

  5. leftback says:

    My enthusiasm for Swedish models knows no bounds, Barry.

    “Bill Gross won’t go to jail nor the people running the credit agencies who rated these bonds AAA/AA/A. ”

    I would not be so sure about the ratings agencies, given the amount of interest that the FBI has shown in all aspects of the mortgage initiation/distribution/securitization business. RICO statutes anyone?

    “If that is the case, let the greatest of all depressions come along and then everyone pays for what happened in the previous decades.”

    Not likely. PIMPCO and the Chinese are going to get bailed out. The printing presses are whirring…..

  6. DL says:

    Yes, nearly all of us (except maybe Karen) have an appreciation for Swedish models.

  7. Machiavelli999 says:

    The difference between Sweden and the US is that Sweden didn’t have an opaque and massive derivatives market ready to explode and cause another “Lehman” type event at first sign of nationalization.

  8. Mannwich says:

    Jamie Dimon on Bloomberg talking his book. Making me nauseous listening to him.

  9. greg says:

    Anybody catch Jamie Dimons’ speech? Shouldn’t he have made this about 2 0r 3 years ago? He does confirm though, that no one saw this coming. Gives me great faith for the future that our “best and brightest” will once again recognize what went wrong, long after it goes wrong. He also doesn’t care for Wall Street being vilified. Here’s a thought Jamie…quit fucking up, and the vilification will in all likelyhood, cease. Enjoy the Hamptons this weekend.

  10. karen says:

    Not true, DL! I have a keen appreciation for beauty as a matter of fact. But, from what my sons tell, it’s not just the models, it’s every female in Stockholm… and they are nice, too.

  11. AJS says:

    Re: Jamie Dimon – I think we’ll start getting somewhere, when people realize the “best and brightest” was really a “bright shining lie”.

  12. leftback says:

    BR – all future posts on the Swedish model should be illustrated. CNBC sucks can help, I am sure.

  13. Mannwich says:

    Dimon claims JPM Chase “full of entreprenuers”. Sure, if the definition of “entreprenuer” means taking OTHER peoples’ money, losing it, then getting bailed out/rewarded by taxpayers for not only losing that money but putting our entire markets, economy and world in peril. Sure thing, Jamie. Sure thing. Maybe my definition of “entrepreneur” is off. JPM’s full of entrepreneurs all right. Hoffer, help me out with a link, will ya?

  14. DL says:

    karen @ 1:58


    (I was just poking a little fun).

  15. pvd says:

    It is becoming more and more apparent that our “Ownership Society” is more an Owned Society, with policy giving priority to the owners over the people

  16. The Swede says:

    Hi, I´m from Sweden and there is something thats often forgotten about the Swedish model. At the time we had a fixed currency. After the financial crisis hit we floated the SEK. It stabilized around 25% weaker. This naturally boosted our exports and helped us through it all. I personally think that currency played a big part…

  17. karen says:

    Read Adults Wanted in the BP Cafe… everyone needs to remember to check the side bar! good stuff over there : )

  18. karen says:

    Dear Swede, agree with you and thanks for commenting. There are other apples to oranges comparisons I have read. A lot of ideas are tossed about at this site; some more realistic than others. Best,

  19. pvd says:


    In my experience the often ethical and responsible behavior of the best and the brightest can act as a handicap allowing the most psychopathic to rise to the top. Actually the current corporate structure encourages psychopathic behavior of executives.

    The twenty traits assessed by the Hare PCL-R score are:

    * glib and superficial charm
    * grandiose (exaggeratedly high) estimation of self
    * need for stimulation
    * pathological lying
    * cunning and manipulativeness
    * lack of remorse or guilt
    * shallow affect(superficial emotional responsiveness)
    * callousness and lack of empathy
    * parasitic lifestyle
    * poor behavioral controls
    * sexual promiscuity
    * early behavior problems
    * lack of realistic long-term goals
    * impulsivity
    * irresponsibility
    * failure to accept responsibility for own actions
    * many short-term marital relationships
    * juvenile delinquency
    * revocation of conditional release
    * criminal versatility

  20. M.G. in Progress says:

    The Swedish model is too Swedish to be good. I think it’s an “isolated” country case not actually replicable for the following reasons: the systemic risk at that time and for the country in question is not comparable with the present situation. So inherent risk and the control environment is totally different particularly because of financial innovation since 1991. Thus there is no way to have the combination of seven distinctive features underlining the Swedish model. In this respect Obama was right saying that the model is not applicable but not just for the number of banks involved and size of the country but just for different systemic risk, counterparties, activities and products involved. Yet some of the concepts of the Swedish model are applicable although I am, since October 2008, more in favor of a parallel new good bank solution, without forcing nationalization.

  21. constantnormal says:

    @ pvd — wow. I concur completely. And our political leaders fit that suit equally well.

  22. aitrader says:

    I live in Sweden and watched the “Swedish Solution” unfold. Lars Jonung is extending the already growing urban myth of the “Swedish Solution” to an extreme. This myth is growing beyond the ridiculous to an extreme of egregious fabrications by the Swedish state propaganda machine.

    First off Sweden’s economy catered due to a currency peg of its Krona currency. The policy makers at the time tried to defend an extremely ill-conceived peg designed to keep the crown at an unrealistic level vis-a-vis the dollar and pound. When speculators took on the Swedish government’s peg they policy makers sat stubbornly fast to their peg and adjusted interest rates in order to defend it.

    Their incompetence led to 500% overnight interest rates and a collapse of the banking sector. Of the four major banks in Sweden at the time, Nordbanken (which had been combined with the smaller Göta bank), SEB bank, Föreningspar bank, and Handelsbanken. Of these banks only Nordbanken was nationalized.

    And the nationalization, far from being a well-thought-out action stemming from the wisdom of policy makers at the time, was a knee-jerk raction that emerged only after the Swedish government tried to peddle the bank to any takes, foreign and domestic, and found that no one was even slightly interested in investing in it.

    So the claim of Swedish “swift policy action” is simply backward looking whitewashing by politicians trying to spit-shine a boondoggle of epic proportion in retrospect.

    Leif Pagrotsky, a politician who participated in the bank nationalization “plan”, wrote a piece that reflects the actual events of the time – http://www.eurointelligence.com/article.581+M5b55b38d58a.0.html .

    I would also refer folks to the post at the CreditWritedowns blog that delves into the claims of the Swedes in, “Did Sweden really nationalize its banks?”, http://www.creditwritedowns.com/2009/02/did-sweden-really-nationalize-its-banks.html

  23. pvd,

    nice post. good entre`..

    further, with this: http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Hare+PCL-R+score+Today%27s+Executives

    one can see that this has been applied, in many articles, to Today’s “Corporate Leaders”.

    here, is a singular link that should provide intro enough:

  24. aitrader ,

    letting the Facts stand in the way of a good story are you?

    how’s that going to look on your “Works & Plays well w/others” Report Card?

  25. aitrader says:

    Facts are what they are, no matter how your buddy Jonung tries to reshape them. Getting a little too close to the story, eh Mark?

    I’m shooting for the “Honest/helpful, buddy good citizen” award.

  26. aitrader,

    If only more were interested in ‘good citizenship’ awards…

    this: “So the claim of Swedish “swift policy action” is simply backward looking whitewashing by politicians trying to spit-shine a boondoggle of epic proportion in retrospect.” might, correctly, pass as the ‘conventional wisdom’

    instead of the pro-State agitprop we, typically, sup on..