tailieunhanh - THE SWEDISH BANKING CRISIS: ROOTS AND CONSEQUENCES

Now suppose some upsetting event, such as a crash in home prices makes all mortgage related assets on bank balance sheets suspect. Then counter party risk becomes acute, and banks become less willing to lend to each other unsecured. Because the LIBOR market is unsecured, one very rough measure of counterparty risk from the . housing crash is the difference between the federal funds rate, which is fully secured by repo agreements based mainly on Treasury bonds as the collateral, and the unsecured LIBOR. Figure 1 shows that before mid 2007 (when the crisis began), the one-month LIBOR rate closely. | OXFORD REVIEW OF ECONOMIC POLICY VOL. 15 NO. 3 THE SWEDISH BANKING CRISIS ROOTS AND CONSEQUENCES PETER ENGLUND Stockholm School of Economics The article analyses the Swedish banking crisis in the early 1990s. Newly deregulated credit markets after 1985 stimulated a competitive process between financial institutions where expansion was given priority. Combined with an expansive macro policy this contributed to an asset price boom. The subsequent crisis resulted from a highly leveraged private sector being simultaneously hit by three major exogenous events a shift in monetary policy with an increase in pre-tax interest rates a tax reform that increased after tax interest rates and the ERM crisis. Combined with some overinvestment in commercial property high real interest rates contributed to breaking the boom in real estate prices and triggering a downward price spiral resulting in bankruptcies and massive credit losses. The government rescued the banking system by issuing a general guarantee of bank obligations. The total direct cost to the taxpayer of the salvage has been estimated at around 2 per cent of GDP. I. INTRODUCTION More than one hundred countries are reported to have had some form ofbanking crisis during the past quarter century. Some have been isolated events such as the failure ofthe Herstatt Bank in Germany or Barings Bank in UK. Others have been integral parts both cause and effect of more general macroeconomic crises. A recent paper by Demirgũẹ-Kunt and Detragiache 1998 identifies 30 major banking crises from the early 1980s and onwards. Most ofthese are in developing countries the main exceptions being three of the Nordic countries Norway Finland and Sweden in the late 1980s and early 2 The majority of these crises appear to have followed a common pattern. They have i been initiated by deregulatory measures which have ii led to overly rapid credit expansion. This has in turn been followed by iii a sustained increase in asset prices .