Top-down restructuring of markets and institutions: the Nordic banking crises

Abstract

This paper explores the lessons that can be learned for the future resolvability and successful reorganization of problem banks from the experience of successful resolutions in Denmark, Finland, Iceland, Norway and Sweden over the last 25 years. The Nordic countries used all of the new tools that will be available following the passing of the Bank Recovery and Resolution Directive. There were difficulties with them, which will provide valuable experience, but it is likely that they will work well in the future. Experience with bailing in is limited but suggested problems of valuation in writing down and larger writedowns than might be anticipated. While the current drive to ensure that only private sector money is used, the predilection for the continuation operation of most banks other than smallest and the extent to which public funds were committed, suggest that the taxpayer is likely to be involved in strategic cases in the future. In particular, the guarantee funds available were insufficient and had to be topped up by the state. Hence, the new resolution funds in the EU may similarly need augmenting in a crisis. However, almost all the main banks involved in the Nordic resolutions were primarily national and retail. Where they involved cross-border operations, as in Iceland, the results were very messy. While many were national SIFIs they only became regional SIFIs as a result of the reorganization after the resolutions. Whether the resolutions could be performed so smoothly for these new larger international banks is not readily verifiable from the Nordic experience.