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The U.S. Financial Crisis: Lessons From Sweden, September 29, 2008 1 (September 29, 2008)

handle is hein.tera/crser0123 and id is 1 raw text is: Order Code RS22962 September 29, 2008 CRS Repo for Congress The U.S. Financial Crisis: Lessons From Sweden James K. Jackson Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division Summary In the early 1990s, Sweden faced a banking and exchange rate crisis that led it to rescue banks that had experienced large losses on their balance sheets and that threatened a collapse of the banking system. Some analysts and others argue that Sweden's experience could provide useful lessons for the execution and implementation of the Emergency Economic Stabilization Act of 2008.1 The banking crisis facing the United States is unique, so there are no exact parallels from which to draw templates. Sweden's experience, however, represents a case study in how a systemic banking crisis was resolved in a developed country with democratic institutions. The Swedish central bank separated out good assets, which it left to the banks to oversee from bad assets, which it placed in a separate agency with broad authority to work out debt problems or to liquidate assets. Four lessons that emerged from Sweden's experience are: 1) the process must be transparent; 2) the resolution agency must be politically and financially independent; 3) market discipline must be maintained; and 4) there must be a plan to jump-start credit flows in the financial system. This report provides an overview of the Swedish banking crisis and an explanation of the measures Sweden used to restore its banking system to health. This report will not be updated. Background Sweden's banking crisis grew slowly over time and was the result of a number of policy decisions.2 In particular, the crisis arose from a set of economic policies that attempted to: 1) support Sweden's fixed exchange rate policy, 2) deregulate the financial sector, 3) expand credit, and 4) provide low-cost loans for residential purchases and for 1 Dougherty, Carter, Stopping a Financial Crisis, The Swedish Way, The New York Times, September 23, 2008; Purvis, Andrew, Sweden's Model Approach to Financial Disaster, Time, September 24, 2008. 2 Englund, Peter, The Swedish Banking Crisis: Roots and Consequences, Oxford Review of Economic Policy, Autumn 1999. P. 80-97. Congressional Research Service The Library of Congress Prepared for Members and Committees of Congress

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