The Swedish Experience - Banking Resolution and Budget Consolidation

1. The Swedish Experience - Banking Resolution and Budget Consolidation April 23, 2009 Minister of Finance Anders Borg Sweden

2. Background to the banking crisis in the 1990’s • Credit market deregulation, high inflation and a tax system stimulating borrowing set the stage for speculation and soaring real estate prices. • A real estate bubble burst, a currency crisis including soaring interests rates turned the economy into a deep recession. • Increasing budget deficits and sharply rising bank losses and financing problems – an extraordinary vulnerable situation.

3. Experiences from the Swedish crisis in the 1990s • Restore confidence to the market • State guarantee scheme for banks • Openness and transparency regarding both measures taken and depth of the problems • The importance of swift decision-making • Ad hoc solutions usually not enough • A financial crisis demands a general solution • Today, the financial system is linked together closer • Requires international coordination

4. Present financial stability management structure

5. Ensure liquidity and financing to the banking system including to promote credit to the public • The Riksbank to add liquidity to the system in appropriate ways. • Extended mandate to the National Debt Office to increase: • volume of state bonds • guarantees to export credit authorities • automotive industry borrowing • A state guarantee scheme to support banks’ medium term financing. • Additional measures to enhance state lending authorities loans and guarantees to enterprises.

6. Guarantee scheme for medium-term bank debt • State guarantees of funding for banks and mortgage institutions. • Guarantees available for a fee for non-complex, “plain vanilla” debt instruments with terms between three months and five years. • Maximum of 1500 billion SEK of debt instruments, to date approximately 270 billion SEK have been guaranteed. • Restrictions on management compensation. • Based on common EU principles.

7. Recapitalization scheme • Fundamentally sound banks and mortgage institutions may apply for state capital contributions to support lending. • State participates through: • Market transaction for Tier 1 capital (shares or hybrid loans) on market terms together with private investors (min 30% private). • Directed issue of Tier 1 capital (convertibles or shares) on terms determined by the state. • Maximum limit 50 billion SEK, open six months. • Restrictions on management compensation for two years.

8. Framework for state support to banks based on experiences from the 1990’s • Government Support to Credit Institutions Act gives the Government a broad mandate to take action. • Measures depend on status of the institution and the market: • Guarantee scheme and recapitalization scheme for fundamentally sound institutions to support lending. • State capital provided through preferred shares with strong voting rights if a financial institution should get into serious difficulties. • Possibility to take over ownership of institution with less than ¼ of regulatory capital. • The measures designed to safeguard taxpayers’ interests and secure financial stability.

9. Long term measures to finance banking crisis • International experiences show that ultimate costs for the state are difficult to avoid. • Tax payers interests should be protected in the long term. • Banks should contribute to costs according to principles of the financing of deposit guarantees. • All institutions take advantage of state support measures as a public good. • An annual fee to be charged of Swedish banks with the objective to build up a long term “stability fund” corresponding to 2.5% of GDP.

10. Operational scheme of financial stability management • The Riksbank subordinated to the Parliament to support liquidity and guard payment system stability. • The Financial Supervisory Authority subordinated to the Government to supervise individual institutions. • The National Debt Office subordinated to the Government acting as “support authority” to negotiate state support agreements with individual banks. • The Government to decide on individual support agreements as proposed by the National Dept Office.

11. State ownership a central resolution issue • Brings efficiency in management and state control of restructuring. • Ensures confidence in state intervention and support measures. • Gives political advantages – safeguards taxpayers interests and public finance. • The systemic stability to be saved, not individual banks.