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Sweden’s Banking Crisis: A Tale of Risk Management
Stockholm, March 15, 1920 - The risks associated with large lending to a single client were a topic of discussion in Denmark and Norway during the 1920s. In both countries, single borrower limits of 25% of bank equity and reserves were introduced. However, Sweden took a different approach.
The Pre-Crisis Era
A Swedish analysis from 1927 showed that credit to a single client had been a problem in only 11 cases over two decades, leading the committee to conclude that restrictions on banks’ lending would not be effective. The committee believed that restricting lending would only drive clients to seek credit from other banks, making it more difficult to assess their creditworthiness.
The Crisis
Fast forward to 1929, when the global economy was hit by a major crisis triggered by the New York stock market crash. Sweden’s banking sector was also affected, with Skandinaviska Kreditaktiebolaget (later Skandinaviska banken) struggling due to its large exposure to the Ivar Kreuger business group. The collapse of the group led to a banking crisis in Sweden.
Regulatory Reforms
The experience served as a wake-up call for Swedish policymakers, who realized that they needed to strengthen their regulatory framework to prevent similar crises in the future. In the 1950s and 1960s, Sweden introduced measures aimed at controlling bank lending, including:
- Liquidity quotas
- Moral suasion
However, these measures were not focused on risk management but rather on guiding capital to areas of governmental priority. The emphasis was on sustained high economic growth, rather than prudential regulation.
International Convergence
In the 1970s, Sweden participated in international efforts to converge banking regulation and supervision, leading to the introduction of risk-based capital adequacy requirements in 1968.
Modernization
In the 1980s, Sweden’s regulatory framework underwent significant changes, shifting towards a more market-oriented approach. The Single European Act of 1987 marked the beginning of a new era of financial integration, and Sweden began to converge with international standards.
Today
Sweden’s banking sector is considered one of the most stable in Europe, thanks to its robust regulatory framework and strong supervisory authorities. However, the country still faces challenges in managing risks associated with lending, particularly in the face of global economic uncertainty.
Timeline
- 1920s: Denmark and Norway introduce single borrower limits of 25% of bank equity and reserves
- 1927: Swedish analysis concludes that restrictions on banks’ lending would not be effective
- 1929: Global financial crisis triggered by New York stock market crash affects Sweden’s banking sector
- 1950s-1960s: Sweden introduces measures aimed at controlling bank lending, including liquidity quotas and moral suasion
- 1968: Risk-based capital adequacy requirements introduced
- 1970s: International convergence of banking regulation and supervision begins
- 1987: Single European Act marks the beginning of a new era of financial integration
- 1988: Basel Accord introduced
Sources
- Bank for International Settlements Archive, Meeting of Experts (1959/1977), File ref. 1.3a (3)
- SOU (1927): Swedish analysis on credit to single clients
- SOU (1967): Bank Committee’s report on risk-based capital adequacy
- Larsson and Lilja (2021): “The Institutional Memory of Handling Banking Crises”
Photos
- Ivar Kreuger, founder of the Kreuger Group
- Skandinaviska Kreditaktiebolaget building in Stockholm
- Swedish Prime Minister Tage Erlander addressing the press