Friday, January 30, 2009

Sweden offers lessons for US toxic clean up

Lars Thunell, head of the World Bank’s International Finance Corporation, is one of the few people in the world who has actually run a so-called “bad bank” – Securum – formed by Sweden to absorb toxic assets during its banking crisis in the 1990s.

He says the US can learn general lessons from Sweden but differences in the nature of the two financial sectors and the assets involved mean the US cannot import it wholesale.

“To get the system running again you have to get uncertainty out of the system, and the way to do that is, one way or another, to ringfence the bad assets,” Mr Thunell says. “At the same time you have to recapitalise the remaining good bank.”

He says: “The mindset of people involved in the good bank and bad bank should be very different . . . One is in run-off, the other should be extending credit to the economy.”

Mr Thunell says banks need to be dealt with “on a case-by-case basis” but with “clear rules of the game”. Sweden categorised its banks according to their capital ratios.

He says the whole process is much easier if – as with Sweden’s Nordbanken – the restructuring takes place in temporary government ownership. “This way, you don’t have to worry about the price at which assets are transferred to the bad bank.”

Securum simply bought all the assets from Nordbanken at face value and then wrote everything down, Mr Thunell says. “We then got capital in an amount equivalent to the writedown, plus operating expenses from the government.”

But since most US banks remain above regulatory capital minimums, he says, the US government will have to deal with private shareholders.

“It was easier for us because we were dealing with industrial loans, or real estate loans, for which we could actually identify each piece of real estate. We could estimate a fair value based on its yield in a normal market.”

The problem now, he says, is that “it is very hard to identify the underlying assets and know what the final losses are likely to be. In some ways it is more like an insurance crisis.”

Because Securum understood the assets well, he says, it could accelerate the run-off by selling assets quickly. A US bad bank, he says, may have to hold assets longer.

Moreover, at the time when Sweden did its banking sector clean-up it had only five banks, plus savings unions.

“You can scale up this model. But it needs to be adapted,” he says.
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