By Ajai Chopra
Resolving any financial crisis is no easy matter. Resolving the ongoing international crisis—with many institutions, countries, and regulators involved—is unusually challenging, both intellectually and in terms of practical policymaking.
Progress has been made thanks to the slew of measures adopted by global policymakers. But a stabilized patient is not a cured patient, particularly when stabilization largely reflects significant shifts of risk from the private financial sector to the public sector. And the early reappearance of practices thought to have played a part in fueling the crisis—sizeable bonuses, for example—is troubling.
Lessons on where to go from here can be drawn from past crises. Sweden’s approach to its banking crisis of the early 1990s is typically held up as a “model”—quick, transparent, nationalization-cum-bad bank, low cost—and is contrasted with Japan’s actions during the same decade.
But a closer look tells us it may not have been that simple after all.
IMF staff work for the 2009 Sweden Article IV consultation suggests that the lessons are richer and more subtle than often thought (see Attachment II of the report, prepared by Kotaro Ishi). For a start, Sweden did not act as promptly as some have suggested—comprehensive banking intervention occurred only two years after the crisis broke, a lag that closely mirrors the time that has elapsed since the current crisis began. Only one bank was nationalized and bad banks were more often than not simply bookkeeping and bad debt collection exercises within private banks.
Nor is it clear that the measures taken to stabilize the banks were responsible for the relatively speedy recovery of Sweden’s financial sector and economy—a complete revamp of macroeconomic policies, including a switch from a fix to a float and buoyant external market growth, may have played the critical role.
Although the usual “headline” lessons may be questioned, other richer lessons emerge.
- Speedy action is not everything—a balance has to be struck between time for diagnosis and development of necessary political backing on the one hand, and not allowing the problems to fester on the other. The fact that Sweden avoided “multiple bites at the cherry” suggests it might have got this tricky balance about right.
- Sweden applied an explicit public guarantee on all bank deposits at the outset—to calm matters while diagnosis and policy preparations proceeded. Among the benefits was a clear exit strategy, because the crisis could be formally declared over once the guarantee was withdrawn. In contrast, the use of implicit guarantees in the current crisis raises complex issues, as the clearest exit from implicit guarantees is to allow institutions to fail. Since Lehman, the dangers of going down that particular route are acutely apparent.
- Subsequent to the crisis, Sweden thoroughly reviewed its pre-crisis bank regulatory practices and found them wanting. But little action was taken as political opportunity evaporated along with easing of the crisis. Less than two decades later, another crisis struck. So even though global efforts to identify regulatory corrections are taking place right now, Sweden’s experience warns of the danger of delay. Timeliness is a central component of the right reforms.
So let’s learn from Sweden’s experience, but let’s also make sure we learn the right lesssons.