Sweden: Bank Support Authority, Blanket Guarantee, 1992

On September 24, 1992, the Swedish government, in cooperation with the opposition, issued a press release outlining measures it expected to formalize later that year to address the financial crisis. The press release stated that the government would honor the obligations of Swedish banks and their subsidiaries, and credit institutions outside the banking sector that had a government affiliation. It noted that the purpose of the blanket guarantee was to ensure that households, enterprises, and other holders of claims felt safe (MoF 1992). The Riksdag approved a bill in December 1992 that authorized the guaranteed (Measures to Support 1992).

The blanket guarantee enabled the Riksbank to lend to commercial banks operating in Sweden, regardless of solvency, and to extend emergency liquidity assistance (ELA) to troubled banks without imposing collateral requirements (Borio, Vale, and von Peter 2010; Lundgren 2009).

Additionally, Jonung (2009a) notes that short-term foreign borrowing represented about 40% of total bank borrowing, and the krona was under heavy speculative pressure. The combination of Swedish banks’ significant dependence on foreign financing and currency pressures prompted policy makers to issue a blanket guarantee to alleviate fears abroad that Swedish commercial banks would not be able to meet their foreign obligations (Lundgren 2009). The guarantee was successful in the sense that foreigners’ confidence in the solvency of Swedish commercial banks remained intact (Jonung 2009b). The krona was left free to float on November 19, 1992, following which the Swedish economy recovered rapidly and bank losses were limited; thus, banks did not require much further support once the guarantee was in place (Englund 2015).

Before the blanket guarantee announcement, the government supported three banks on an ad hoc basis. In October 1991, Första Sparbanken and Nordbanken were supported through a specific guarantee, subsidized loans, and capital injections (Borio, Vale, and von Peter 2010). On September 9, 1992, the government announced a guarantee for all of Gota Bank’s obligations, excluding only equity. Two weeks later, it became clear that the crisis was systemic and all banks were facing a funding problem, so the government expanded the Gota guarantee to a blanket guarantee for all creditors in Swedish banks (Englund 2015).

Along with the announcement of the blanket guarantee on September 24, 1992, the government stated that it might undertake other support measures including, “guarantees, loans and supply of capital, or to take other measures to increase or strengthen the capital base of banks and of credit institutions with Government affiliation” (MoF 1995).

Bo Lundgren, the minister for fiscal and financial affairs during the crisis, later said that the blanket guarantee was the “cornerstone” of the package of measures the government implemented in 1992 to address the banking crisis (2009, 2). He said that the government’s guarantee enabled the Riksbank to take other measures to further assist Swedish banks. For example, the Riksbank was able to make deposits in domestic and foreign currencies and extend ELA to troubled banks without imposing collateral requirements, since the government had already assumed responsibility for the banks’ obligations through the blanket guarantee. To assist Swedish banks whose foreign lenders had pulled out of Sweden, the Riksbank deposited SEK 56 billion of its foreign reserves in Swedish banks (Borio, Vale, and von Peter 2010). Lundgren (2009) finds that the blanket guarantee also allowed banks to resume funding in interbank markets.

The government injected capital into Nordbanken and Gota Bank, which nationalized the two banks; provided funding for the bad bank asset management companies Securum and Retriva; provided a capital adequacy guarantee to Föreningsbanken in 1994; and provided loans to Sparbanksstiftelsen between 1991 and 1992(Borio, Vale, and von Peter 2010). Of the seven major banks, all but Handelsbanken entered discussions with the BSA to receive some support apart from the blanket guarantee (Englund 2015). Figure 1 in the Appendix provides a table detailing all bank support measures undertaken by the state during the crisis.

The Riksdag passed a bill on December 18, 1992, that announced measures to strengthen the financial system, approved the blanket guarantee, and established a Bank Support Authority to oversee the crisis resolution (Riksdag 1994). On June 10, 1993, the Riksdag passed an additional bill that established an Appeal Board for Bank Support Issues (State Aid to Banks 1993).

The day of the announcement of the guarantee in September 1992, the fiscal and financial affairs minister, Bo Lundgren, told the press that the guarantee had the support of the opposition Social Democrats, ensuring its approval in the Riksdag (Mikkelsen 1992). Markets found that commitment sufficient in the ensuing months before the Riksdag made its formal decision.

Along with the authorization of the blanket guarantee on December 18, 1992, the government created the BSA to administer all support to banks and other credit institutions.^FBefore the issuance of the blanket guarantee, the MoF handled bank support.

The BSA designed support programs, and banks applied to the BSA for government support. The BSA evaluated and disbursed funds to institutions seeking support based on a thorough analysis of a bank’s nonperforming loans and long-term earning potential (Drees and Pazarbasioglu 1995). Those institutions that received funds were required to report their financial statements, including incurred and expected credit losses, collateral values, and other significant balance sheet information, to the BSA (Ingves and Lind 1998). The BSA monitored support recipients and collected repayments.^FFurther, the BSA was responsible for managing shares acquired as a result of share capital contribution support or restructuring and for liquidating these shares when it was commercially appropriate. Only the Riksdag, with the passing of a new bill, could end the blanket guarantee (Measures to Support 1992).

The BSA also hired consultants from Arthur Andersen, McKinsey, and Credit Suisse First Boston to analyze banks’ internal control systems, strategies, efficiency, and finances (Ingves and Lind 1998).

The BSA formally began its operations in May 1993, with a staff consisting of a government-appointed board of seven members, including a director general and deputy director general. In implementing and managing support programs, the BSA was responsible for consulting with and providing information on support measures to the Riksbank, FSA, the National Debt Office, and the Swedish Competition Authority on matters that concerned those institutions, with the MoF arbitrating rare disagreements between these agencies (Ingves and Lind 2008).

As a government entity, the BSA was subject to audit by the National Audit Office (MoF 1993). The BSA was required to submit decisions of principal importance to the government for approval (Measures to Support 1992). The BSA was also required to report measures taken frequently and provide an annual report on the budgetary consequences of support measures to the Riksdag (Riksdag 1994).^FThese reports were submitted in May 1993, September 1993, and in the 1993–1994 budget bill.

In 1993, the Riksdag established an 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 that created the Appeal Board for Bank Support Issues 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 the capital base of an institution fell below 2% of assets (State Aid to Banks 1993).

When the blanket guarantee was announced on September 24, 1992, no details were given about support measures or the BSA. Regardless, the guarantee succeeded in securing continued international funding because it had broad political support and provided broad coverage (Englund 2015).

To increase government credibility, the activities of the BSA were made as transparent as possible, with exceptions for trade secrets of aid recipients (Measures to Support 1992). Further, the main political opposition, the Social Democratic party, was given complete insight into the BSA’s activities and was also represented on the BSA’s board (Ingves and Lind 1996).

The blanket guarantee covered the balance sheets of Sweden’s banks, which were approximately 100% of GDP in 1991, representing SEK 1.5 trillion (Riksbank 2011).

The Riksdag provided the BSA with open-ended funding and did not set a predetermined budget, to avoid the risk of the BSA being forced to go back to the Riksdag to ask for additional funding at a later stage (Jonung 2009b).^FThe Finnish experience of setting a limit to bank support and subsequently revising the limit at considerable political cost served as a warning for the Swedish Parliament.

All banks with a Swedish charter (including their subsidiaries) and foreign-owned subsidiaries located in Sweden were eligible for the blanket guarantee (Measures to Support 1992). In addition to these banks, the legislation authorizing the blanket guarantee identified eight specific credit institutions^FThe credit institutions covered by the guarantee were the Kingdom of Sweden’s City Mortgage Fund, Sveriges Allmänna Hypoteksbank, Svenska skeppshypotekskassan, Statens Bostadsfinansieringsaktiebolag, SBAB, AB Svensk Exportkredit, AB Industrikredit, and Lantbrukskredit AB. with a state affiliation that were deemed eligible to receive support because they were integral to the stability of the payment system (Drees and Pazarbasioglu 1995). The central bank considered these credit institutions to have systemic importance since several were important in specialized fields, such as providing export credits to farmers.

All obligations were covered except share capital and perpetual subordinated loans (Riksdag 1992).

The BSA provided the blanket guarantee free of charge (Edmonds 2015).

Research did not reveal the process for exercising the guarantee.

It does not appear that the blanket guarantee had specific restrictions related to it. Restrictions associated with other forms of bank support included: restrictions on dividend payments, management replacement, setting recapitalization targets, implementation of cost-cutting measures, and forced write-downs of shareholder equity (Borio, Vale, and von Peter 2010).

The bill establishing the blanket guarantee did not identify an end date and stated that the support system must remain in place as long as needed to ensure the interests of creditors were not jeopardized (Measures to Support 1992). An MoF memorandum in November 1995 proposed that the state terminate the blanket guarantee from July 1, 1996 (MoF 1995). This recommendation was based on a FSA assessment of the 114 banks covered by the guarantee that found that the banking system had recovered, and the program was terminated as proposed in the MoF memorandum (Ingves and Lind 1996). The blanket guarantee was replaced by standing deposit insurance on July 1, 1996, with a coverage limit of SEK 250,000 (Demirgüç-Kunt et al. 2008; Garcia 2000).