Olle Wästberg, Director General of the Swedish Institute reveals how the Swedish Banking Crisis of 1992 was resolved

Olle Wästberg, Director General of the Swedish Institute reveals some insights -garnered from his inside track in the early 1990s- into the bone-shaking Swedish banking crisis and its eventual resolution. This article appeared in the Swedish English Language Newspaper-The Local . Here is a brief excerpt.

“....Nowadays when international newspapers and magazines write about “the Swedish model,” they allude to the way Sweden managed the financial crisis in the beginning of the 1990s.Back then, the banking crisis was handled by the then Minister of Fiscal and Financial Affairs Bo Lundgren (now Director General of the Swedish National Debt Office), his State Secretary Urban Bäckström (now Director General of the Confederation of Swedish Enterprise) and the leading civil servant in the field Stefan Ingves (now Chairman of the Riksbank)........

Hopefully Irish policy makers will learn from the Swedish experience. The full article may be accessed here

Irish Government decision to guarantee Irish banks' deposits and debts for two years stabilises banking system

Yesterday Irish banking shares imploded. It was not unreasonable to expect a large run on the banks today if the Government had failed to act. The Financial Regulator and Governor of the Central Bank warned the Government that immediate action was necessary to safeguard the Irish financial system.Hence the Governments decision. The decision has the broad support of the opposition.

The Government decision to offer a guarantee of 400 billion euros will last for two years and covers liabilities at AIB, Bank of Ireland , Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and EBS. The guarantee covers retail, commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt. The Irish approach contrasts strongly with that adopted in Belgium and the U.K., where governments have injected capital into individual banks, or seized them.

Assets of Irish banks are estimated at 500 billion euro whilst liabilities amount to 400 billion euro. If the guarantee were called in, in full-unlikely ever to happen- 37 years income tax receipts would be required to pay it off. Naturally enough there is concern among tax payers that those who may have behaved irresponsibly have been insulated. Money was doled out often irrationally by banks to elements in the Irish property sector. Whilst Irish banks have sizeable exposure to the property market,the problems in the Irish banking sector appear to be relatively minor. Subprime lending is not a major problem. Banks are highly profitable.

Naturally enough with this announcement bank shares rebounded today.

FG has posed the following questions:
1. What is the total exposure of the Irish taxpayer for providing this guarantee and how will the taxpayers' interest be protected?
2. What new regulations are being implemented immediately that will ensure that Irish banks will not be using the new guarantee to continue engaging in risky lending or derivative trading? The onus is now on the Regulator to ensure that the banks lending capacity is used to provide credit to sound Irish enterprises.
3. What return will the taxpayer get for providing this guarantee? What charge will the banks pay for this new facility?
4. What new oversight powers will the Government have on behalf of the Taxpayer to monitor the activities of Irish banks and is there any requirement for new legislation?
5. Has the Government satisfied itself that the banks have come clean about bad debts on their books and that banks are adequately capitalised?
6. What limits have been put on the pay and bonuses of senior executive of the banks who will avail of this facility?