The Swedish model for resolving the banking crisis of 1991 - 93. Seven reasons why it was successful

Abstract

This study presents the main features of the Swedish approach for resolving the banking crisis of 1991-93 by condensing them into seven policy lessons. These concern (1) the importance of political unity behind the resolution policy, (2) a government blanket guarantee of the financial obligations of the banking system, (3) swift policy action where acting early was more important than acting in exactly the right manner, (4) an adequate legal and institutional framework for the resolution procedures including open-ended public funding, (5) full disclosure of information by the parties involved, (6) a differentiated resolution policy minimizing moral hazard by forcing private sector participants to absorb losses before government financial intervention, and (7) the proper design of macroeconomic policies to simultaneously end the crisis in both the real economy and the financial sector.The exportability of the Swedish model of the 1990s to countries suffering from financial turmoil today requires a detailed knowledge of the institutions, legislation and political conditions in the country involved. The application of these lessons outside Sweden is not a simple task, given the major differences between the initial conditions of the Swedish crisis of the early 1990s and the present global financial crisis. Nevertheless, the Swedish experience of bank resolution does provide important lessons for today.

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