I thank the committee for the invitation. I left public service, as a member of Parliament, in 2004 but it is always nice for an older member of the Swedish Parliament to visit former colleagues here. I shall try to be as brief as possible but it is easier to give some introduction as well. I first point to the differences between what happened in Sweden at the beginning of the 1990s and what is happening today not only in Ireland but in the world. The crisis was much smaller. This is a global crisis with the US being the epicentre but the size of the crisis in Ireland is not that different.
The complexity of the components is a problem since there are securitised instruments as toxic assets instead of the plain vanilla loans. We had plain vanilla loans, commercial real estate as collateral and some business problems but I think that is similar to the situation here. It was a regional crisis, with the financial sectors in Finland and Norway also in crisis, but not in many other countries. However, we had the currency crisis in the European context.
When it came to the turnaround of the crisis we had the advantage of being an exporting country. We had a peg to the European currency unit but we had to let that go in November 1992 which meant that we could profit, even if we had a cost disadvantage, by a devaluation of between 5% to 10% which helped us when the global economy arrived. Obviously the turnaround was quicker and much helped by this devaluation. These are the main differences.
The cause of the crisis was deregulation in 1985 — too late in a way. Deregulation in an overheated environment with high inflation meant that speculative forces came into play and we had a great deal of speculation, mainly in commercial real estate. Households borrowed a great deal of money but when the bubble burst in 1989 and 1990, it was mainly the speculative forces that were responsible for bank losses as households tried to keep their houses and repay their loans. That was the cause of the downturn in the real economy which was accentuated by what happened in the financial sector. With household income going to paying off debt, the loss of domestic demand lead to three consecutive years of negative growth in the Swedish economy of minus 2% each year in the years 1991 to 1993. I know that my presentation was circulated to members but the third diagram shows the structure of the Swedish banking system. We had seven large and medium-sized banks and 100 much smaller savings banks at the start of the crisis. The seven banks controlled 90% of the market. The four banks at the top of the diagram Nordbanken, SEB, Swedbank and Handelsbankern are still in existence and managed. The Nordbanken was partly owned by Government which held 77%. The three other banks, Gota bank private, Första Sparbanken, First Savings and Loans bank, and a small farmers' bank have been assimilated into other banks.
In my presentation I set out the course of events, but I will not go into the cause of the events. When the bubble burst we did not know the extent of the crisis and we handled it case by case — the government majority owned bank and of the First Savings and Loans bank. In spring 1992 we realised the systemic crisis emerging when we saw the credit losses in the Nordbanken and understood we had the same problem in the other banks. In spring 1992 we prepared for the total loss of confidence that tends to come with a systemic crisis and trust is totally lost. We handled the crisis between September 1992 and September 1993, and made most of the decisions on capitalising the banks and the bad banks. By 1994 the system as a whole was profitable again and we abolished the crisis legislation in 1996.
Even if that situation is different from the situation today, there are always common challenges. We studied what happened in the Savings and Loan crisis in the US and what happened in 1932 and 1933 in the US as well before making our decision on our package of measures. We found that there are some common challenges that have to be met to handle the situation. For a Government it is mainly a question of being able to avoid or minimise a credit crunch that is always the result of a banking crisis or a crisis in the financial sector. To do that one needs to do three things. It sounds easy but it is difficult. One has to maintain liquidity in the system, that is taken well care of by the Central Banks all around the world today. One has to restore confidence, which is a matter for Government, because Government intervention is unavoidable if one has a systemic crisis. One has to restore confidence in one way or another, especially the confidence of the investors. Those that fund banks need to understand that they cannot lose money on funding banks. I am not talking about shareholders but creditors and bond holders and so on. Lehman Brothers is an example of what happens if confidence is lost. We had the same situation in September 1992 in Sweden. One has to restore the confidence of the management of banks so that they will be able to manage the situation and will resume lending. The third thing is to restore the capital base. Obviously if one had excess lending the former capital base might not be required in the future but one has to figure out what kind of base for lending is needed to get the economy going because all stimulant packages and other things will not work well if one does not restore the financial sector to working order. One needs to restore the capital base to what is needed. It might not be the same as the base before the crisis.
When we came to the point where we needed to apply a comprehensive package, we had already done a case by case study of some of the banks and we changed some rules to get a grip and to be transparent. We wanted to have rules that banks when reporting their position had to use Mark-to-market valuation on collateral for loans. We strengthened the rules even before we had the comprehensive package. We abolished the property tax on commercial real estate to try to stop prices falling. Since we had a tax, we had the option of using that measure. We also tried to get political consensus. We were a four party minority government with the populist party on the right. Populist parties are not always on one side as they tend to go all around depending on what the electorate wants. For us it was a necessity to have political consensus and we formed a kind of coalition on these issues with the social democratic party. It worked quite well both personally and otherwise. That affected the way we built the organisation later on. We did the work in the ministry of finance but we informed and had discussions with the social democrats all along. That is something that is needed. Leadership in the American Congress is rather weak and that hinders the American administration from doing things that it should do. That is my view anyway.
We presented a comprehensive package in September 1992 when we had a total collapse in confidence like Lehman Brothers in the US suffered last September. It was due to the currency turbulence in the medium-sized Gota Bank going bust. We had to guarantee the creditors of the bank and then suddenly one saw the spreads widening immensely and markets stopped working and we had to put the package into effect. The main ingredient to restore confidence was a blanket guarantee for all creditors, not for shareholders, not for perpetuals but for all creditors and all depositors. That gave immediate confidence, even if we had to explain the situation. That can be achieved in other ways. In 1933, President Roosevelt with the help of the former administration closed down all US banks for one week and then reopened the banks that were solvent. That gave back confidence to the banks and the banking system even if they had more problems in the US economy at that time. We also said that under the umbrella of the blanket guarantee we needed to be able to support banks since most of the big Swedish banks needed some kind of support. We got parliament to give us unlimited economic frames to go in with capital injections, mainly equity in that respect, provide guarantees or whatever measures were needed to handle the situation in different banks.
The unlimited economic frame was there but we did not want to go back to parliament and ask for too much money to be safe — we got all we needed — because that could have given the impression that the crisis was even greater than people thought at that time. We did not take too little because that would have meant we would have had to go back to parliament to ask for more and then there would have been another crisis feeling. That was possible since we had the support of the opposition and it could see what was happening at that time.
We also implemented rather tough legislation, not immediately, when we found out that banks like soft money, with little or no conditions. We implemented a rule that provided that the Minister for Finance and, later on, the Bank Support Authority, could go to a special court with three judges and ask for a decision regarding a proposal even if the bank with whom we made the agreement would not accept that. Therefore, we could decide if the bank needed support and if the bank said "No" we could go to this court which could decide. This instrument gave us a good negotiating power with the banks. One could always argue the democratic views on that but if there is a crisis there is a crisis.
Transparency was vital. At least every six months I appeared before the parliament and had an open debate on what was happening in regard to bank support and so on. We tried to be very transparent in regard to what was happening.
The title on the next slide is organisation. Under parliament, there is the Government and the Central Bank. As we saw it, the Central Bank should not play any active part in handling the individual bank problems. Its task was to ensure the macro-economic financial stability and to be a lender of last resort to solvent banks. If banks were insolvent it was a Government problem to handle. We had the National Debt Office to which to furnish the money and at that time it did not play any other role. The Financial Supervisory Authority, the FSA, had been involved before we took office, in handling some of the prelude to the crisis. That meant it lost some of its credibility as a supervisor which meant I had to change leadership. Also we did not want the FSA to be involved in handling the acute crisis in banks so we started doing it in the Ministry of Finance. The present governor of the Swedish Central Bank, Mr. Stefan Ingves, was at that time a head civil servant and head of the financial market department. He headed this task force within the Ministry of Finance where most of the decisions were taken. We also started preparing for this task force being a new authority, the Bank Support Authority, outside of the Ministry. One of the reasons for this was that I could have a board on that authority which comprised two Social Democrats, whose position was represented within that authority. Even before its establishment it was possible for people to look at what was happening within the Ministry of Finance and in the task force. The Bank Support Authority was quite helpful.
Decisions on capitalising banks, bad banks and so on were still taken by the Minister for Finance but proposals were coming from the Bank Support Authority which worked closely with the Central Bank and the Financial Supervisory Authority. That was the organisation of it.
With regard to bad banks, asset management corporations, we only used that concept with the banks that were nationalised since valuation was not a problem because we owned both the good and the bad entity. It is always a problem if one buys assets from private banks. The down side is for the taxpayers where there are problems with valuation and so forth. Banks could apply for support and where they did we went in with consultants and conducted an evaluation of the situation in the bank with a valuation board that helped us to check the valuations made by the consultants and so on. Even if the private banks managed to get out of our grip, due to tough legislation and the turnaround in the economy, that was what was needed, they repaid all consultant fees.
The bad banks arose mainly because management should concentrate on either good banking or bad banking. We did not want all the bad assets coming on to the market at the same time which would depress prices even more. We thought that a longer time period would allow us to recover more of the values, which was true. We had a total outlay of a little more than 4% of GDP in 1993. Five years later we got back from these bad banks approximately half of that amount and from the nationalised Nordbanken (Nordea), due to dividends and the selling of some shares, in absolute terms we have recovered everything. On the other hand there was an alternative scheme under which the bank would have performed better and we would have had a profit from that. Obviously there was a cost to the real economy.
This is a broad introduction to what was happening.