Wednesday, January 28, 2009

Scandinavian bank collapse - not all the same

Do not bother reading this post unless you are directly interested in a history of Norwegian versus Swedish bank collapses...

It seems that some central bankers read this blog. I got an email from a senior Scandinavian central banker following the exchanges on this blog (see this exchange for an example).

Anyway he points me to a note by P Honohanen of the World Bank (written several years ago) and which I reproduce here. I think this should close some of the debate. Either way it is useful if you wish to know what actually went on...

For several years it has been fashionable to look to Sweden as offering a policy model for recovering from a banking crisis. And your editors have to admit that, along with most other commentators, they had been inclined to assume that the Swedish case was mirrored by the roughly contemporaneous crises in the rest of Scandinavia. But the Norwegian crisis actually predated that in Sweden and, as we have discovered by reading the comprehensive volume on the Norwegian case which has just been published by Norges Bank (“The Norwegian Banking Crisis”), containment and resolution policy was quite different. Certainly the two countries both made a good recovery: on some reckonings the Norwegian government, like that of Sweden, may have ended up with a small cash profit after selling back into the market bank shares that it had acquired in the crash. Though sometimes thought of as a classic macro boom-and-bust, the Norwegian crisis may be better classified as the result of inexperienced bankers trading in a newly liberalized market with recently lowered capital requirements and a sharply reduced frequency of on-site supervisory inspection. The crisis was a big one: the three largest banks (DNB, Fokus and Christiania) all failed along with many smaller banks including sizable regional banks. The privately owned and managed deposit protection schemes were overwhelmed and had to be nationalized – illustrating a weakness inherent in what is otherwise a good idea: distancing deposit protection from the government. Government took ownership of the major banks – and retains, for strategic or political reasons, a major stake in DNB. But, and this is the first important contrast with the policy stance adopted in Sweden, in no case were shareholders bailed out. (Yes, the authorities were sued by disappointed shareholders, but unsuccessfully.) Two other key points to notice: government did not issue a blanket deposit guarantee and they did not set up Asset Management Companies. These striking contrasts certainly argue for avoiding knee-jerk application of the Swedish policy approach in these three dimensions.

2 comments:

Fergus O'Rourke said...

The author of that note is Patrick Honohan, now back in Dublin and blogging at http://www.irisheconomy.ie/

Anonymous said...

http://www.ft.com/cms/s/0/814c0ce6-f1ff-11dd-9678-0000779fd2ac.html
Assume you saw this today, a good addition, but the growing appeal for greater international co-op seems doomed to fail.
Cheers, JL

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