Sweden 1991 Bank Support Authority (Bankstödsnämnden)

The government first announced its intention to create a separate bank support authority in a September 24, 1992, press release. In the same press release, the government announced a temporary guarantee of banks’ liabilities. The BSA became operational on May 1, 1993 (Ministry of Finance of Sweden 1995). The guarantee applied to all banks with a Swedish charter (and their subsidiaries), foreign-owned subsidiaries located in Sweden, and other credit institutions with a State affiliation (Drees and Pazarbasloglu 1995).

On December 18, 1992, the Riksdag passed legislation creating the Bank Support Authority (BSA) to manage bank support in light of the banking crisis (Ministry of Finance of Sweden 1995). On the same day, it also passed a bill formalizing the guarantee, assuring that all banks with a Swedish charter, foreign-owned subsidiaries located in Sweden, and other credit institutions with a State affiliation could meet their commitments in a timely manner (Drees and Pazarbasloglu 1995). This temporary guarantee, however, did not constitute a blanket deposit guarantee; it wasn’t until 1996—after the crisis—that Sweden introduced a deposit insurance system (Englund 2015).

The BSA became operational on May 1, 1993. Before May 1993, bank support was handled by the Ministry of Finance (Ministry of Finance of Sweden 1995).

The BSA drew its legal authority from a December 18, 1992, bill—1992/93: 135. The Riksdag approved an additional bill—1993:765—in the spring of 1993. The bill established a new authority, the Appeal Board for Bank Support Issues, to ensure that support agreements were consistent with the State’s interest, and to establish an appeals process in cases where the State and the institution in question could not reach an agreement, provided the institution would be insolvent without State support. The Act also established that the State could redeem shares of an institution if an agreement assessed by the Appeal Board was not accepted, an essential commitment of an agreement was ignored by an institution, or if the capital base of an institution fell below 2% of assets (Ministry of Finance of Sweden 1995).

As per a 1993 bill, the BSA was to regularly report to the government on its activities (Riksdag 1993). The BSA was also required to consult with the central bank (Riksbank), financial supervisory authority (Finansinspektionen), the Debt Office, and the Swedish Competition Authority on activities that concerned those institutions (Finansdepartementet 1993).

The BSA staff consisted of a Director General, a deputy Director General, and a board with seven members (including the Director General). The government appointed the Director General and filled appointments to the board, while the Director General appointed the deputy Director General, subject to government approval. BSA activities were partially funded through mandatory fees by the institutions who applied and were approved for support. According to the BSA’s draft constitution, the Bank Support Board had an internal audit function that reported to the board. As a government entity, the Board was also subject to audit by the National Audit Office (Finansdepartementet 1993).

The BSA staff consisted of a Director General, a deputy Director General, and a board with seven members (including the Director General). The government appointed the Director General and filled appointments to the board, while the Director General appointed the deputy Director General, subject to government approval. BSA activities were partially funded through mandatory fees by the institutions who applied and were approved for support. According to the BSA’s draft constitution, the Bank Support Board had an internal audit function that reported to the board. As a government entity, the Board was also subject to audit by the National Audit Office (Finansdepartementet 1993).

The BSA did not determine the amount of capital available through the facility at the outset: the support system was to remain in place “as long as necessary” (Finansdepartementet 1993). Ultimately, the capital injection totaled SEK 41.3 billion. Nordbanken and its bad bank, Securum, received SEK 17.3 billion from the Ministry of Finance in 1992. Securum also received SEK 23 billion through two guarantees from the Ministry of Finance in 1992. Gota Bank and its bad bank, Retriva, received SEK 24 billion from the BSA (Ministry of Finance of Sweden 1995).

The BSA could provide support to any bank with a Swedish charter, government-affiliated credit institutions, credit institutions owned by a bank with a Swedish charter, and companies set up as part of a reorganization by an eligible institution (Finansdepartementet 1993).

Any bank seeking support from the BSA was required to open its books to the Authority. The BSA, aided by international consultants, analyzed the bank’s credit portfolios and its future viability. All major Swedish banks, excluding Handelsbanken, entered into discussions with the BSA, but ultimately only State-owned banks^FThe State, through State-owned Nordbanken, took over Gota Bank on September 9, 1992, after its parent company, Gota AB, declared bankruptcy (Englund 2015). received BSA support; all others were supported sufficiently by capital markets. Föreningsbanken entered into a special agreement with the BSA; this agreement authorized a “capital requirement guarantee” where the BSA committed to purchasing new equity should the capital ratio of Föreningsbanken fall below 9%. This guarantee was never used (Englund 2015).^FRecapitalization for Föreningsbanken would have taken the form of nonvoting preference shares. If these had not been redeemed within a certain number of years, the shares would have been converted to normal shares with a high voting strength and a high capital-dilution factor (Ingves and Lind 1996).

The banks that ultimately received support from the BSA and the Ministry of Finance (prior to May 1993) were Nordbanken, Gota Bank, Första Sparbanken, and their affiliated asset management companies, Securum and Retriva (Drees and Pazarbasloglu 1995). Only Nordbanken, Securum, Gota Bank, and Retriva received direct capital injection; Första Sparbanken received an interest subsidy (Ministry of Finance of Sweden 1995).

Ministry of Finance Interventions in 1991-93

The Ministry of Finance first intervened to help State-owned Nordbanken through a subscription totaling SEK 4.2 billion of a SEK 5.2 billion new equity issue in 1991 (Drees and Pazarbasloglu 1995). Through the share subscription, the State’s ownership increased from 70% to 77% (International.se, n.d.). In 1992, Nordbanken had not recovered, and the Ministry purchased all outstanding shares of the bank for SEK 2 billion (Drees and Pazarbasloglu 1995).

The Ministry set up Securum in October 1992 as a bad bank subsidiary of Nordbanken. It managed around a third of the balance sheet of Nordbanken. Loans and assets with a face value of SEK 67 billion were purchased by Securum for a price of SEK 50 billion, leaving Nordbanken with a portfolio of generally sound assets with a face value of SEK 120 billion. The Ministry capitalized Securum with SEK 24 billion in equity capital through two guarantees, and additionally provided SEK 10 billion to Nordbanken (Englund 2015; Drees and Pazarbasloglu 1995). In January 1993, the Ministry purchased all of Securum’s shares for SEK 1 billion making it independent of Nordbanken and entirely State-owned (Ministry of Finance of Sweden 1995).

The Ministry, through State-owned Nordbanken, took over Gota Bank on September 9, 1992, after its parent company, Gota AB, declared bankruptcy (Englund 2015).

In the case of Första Sparbanken, the Ministry initially guaranteed an interest-free loan in September 1991 from the savings bank business (Sparbanksgruppen AB) to the bank (Riksdag 1994). Sparbanksgruppen, under the agreement, invested SEK 300 million of equity into the bank and extended a SEK 3.8 billion interest-free loan, which the government guaranteed. In Spring 1992, the Ministry issued a new guarantee and transformed the earlier guarantee into a subsidized loan, ultimately costing the State SEK 1.3 billion (Englund 2015).

BSA Interventions post-May 1993

The BSA set up Retriva—another bad bank—in December 1993, to manage distressed loans from Gota Bank (Englund 2015). The State acquired all shares of Retriva from Gota Bank for 5 million SEK, concurrent with unconditional shareholder contributions of a maximum of SEK 20 billion to Gota Bank and SEK 3.7 billion to Retriva, as well as SEK 95 million to Retriva as payment for newly issued shares, and a guarantee for a debenture loan of up to SEK 3.5 billion (Riksdag 1994).

Figure 4: Bank Support Authority Activities (grey cells=capital injection programs)

Sources: Englund 2015; Ministry

In the case of Nordbanken, the capital injection took the form of share purchases, in 1991 and 1992 (Drees and Pazarbasloglu 1995).

Regulation concerning BSA capital injections allowed the BSA to subscribe for ordinary shares or shares with a limited voting right (preferred shares). In the case of voting shares, the BSA was to secure a right to a dividend before existing shareholders. The BSA had the right to convert nonvoting preference shares into ordinary shares, especially if the institution did not fulfill its obligations set under the capital injection or to facilitate a sale of government-owned shares on the market (Finansdepartementet 1993).

The BSA could limit dividends to existing shareholders and implement profit-sharing arrangements (Finansdepartementet 1993). Research did not show if this authority was used.

In December 1992, the Ministry of Finance commissioned Prime Minister Bengt Hamdahl to investigate compensation and severance package limits for senior management of the troubled banks, especially relating to three former Nordbanken CEOs. On February 3, 1994, the government adopted new guidelines requiring state-owned banks to include details on senior management’s future pensions, severance pay, remuneration, and other benefits in their annual reports. The investigation into the Nordbanken CEOs’ severance pay (so-called “parachute agreements”) ultimately concluded that the State and banks had little recourse for adjusting severance pay (Riksdag 1994).

The State actively replaced management of troubled banks, forcing the CEOs and chairmen of Nordbanken and Första Sparbanken to resign in 1990 and 1991 (Englund 2015).

According to BSA regulation, the BSA was to sell shares when it was “commercially appropriate” and not according to a specified timeline (Finansdepartementet 1993). A bill was introduced to the Riksdag in Spring 1996 to end the BSA guarantee as of July 1, 1996 (Ingves and Lind 1996).

The government decided to transfer the reconstructed portion of Gota Bank to Nordbanken in December 1993. As the State owned both banks, the BSA left the capitalization of Gota Bank to Nordbanken (Ministry of Finance of Sweden 1995). The BSA also merged Retriva, Gota’s bad bank, with Securum (Englund 2015).

Securum inherited 3,000 loans from over 700 corporations. Seventy percent of companies in Securum’s registry chose to file for bankruptcy. In many cases, the organizational structure of the companies was altered by replacing the CEO or changing the board composition. Securum sold assets in three ways: IPO, corporate transactions outside the stock exchange, and individual property sales. Most sales of properties and companies were completed in 1995 and 1996, when the real estate market had recovered (Englund 2015).

In October 1995, the BSA began to sell Nordbanken. The State offered 34.5 percent of Nordbanken, priced at SEK 92 per share. The government received SEK 6.4 billion from the sale after sales costs (Ministry of Finance of Sweden 1995). The State sold the last government-owned shares of Nordbanken (now called Nordea) in 2013 (Englund 2015).

Scholars’ estimations of the net cost of the BSA’s activities to taxpayers vary from 1.5% of 1991 GDP to 2.1% of 1997 GDP, or SEK 35 billion (Englund 2015).

On the BSA’s first attempt to nationalize Gota Bank, shareholders demanded compensation, claiming the bank had positive value. A court case concurred with the government’s view that the bank was insolvent. To avoid a similar occurrence, the government passed new legislation enabling the BSA to takeover any bank whose Basel capital ratio fell below 2% (Ingves et al. 2009).