The recent turbulent events are clearly set to have long-lasting consequences on the global economy. But is there something we can all learn from past financial crises to determine if there is a tried and tested path for recovery?
Norway, Finland and Sweden all experienced serious economic downturns in the late 1980s and early 1990s followed by a subsequent swift intervention from the State. If we look at Sweden in particular, the response was arguably swifter than that of the UK
or US governments in recent months and seems to have set the country up for a more focussed recovery. Most notably, the state intervened to rescue three of the largest financial institutions in the region, Forsta Sparbanken, Nordbanken and Gota Bank.
If we compare this to the financial crisis in Japan almost 20 years ago, it's clear that speed of response plays a major role in the whole recovery process. Similarly to what the UK has experienced in the past 12 months, a number of the largest global banks
were nationalised in Japan. However, as The Sunday Times reported last week, ‘their restructuring and consolidation was a nerve-wracking, messy business that lasted years and cost at least two generations of them their jobs and reputations'. The slow
response to nationalise local banks and introduce deposit guarantees in Japan seemed to have more wide-reaching consequences as the banks also lost their credibility and customer confidence. In contrast, by swiftly moving to protect all deposits and creditors
while taking responsibility for bad loans, the Swedish government arguably averted a complete economic meltdown.
Aside from a swift response, there appears to be two other common factors to managing a crisis. The first is bipartisanship, with the Conservatives and the Social Democrats working closely in Sweden in the early 1990s to resolve the situation. The second
is transparency. Sweden chose to be open and honest to the citizens and the market which made the government able to communicate more efficiently and get constructive feedback.
With European and US governments having injected large sums of money into the financial system as well as nationalising some of their oldest financial institutions, we could ask if a swifter response would have had a greater impact?
One of the key causes in the lead up to a financial crisis in the Nordic countries was deregulation. This is also a key cause for the present crisis. We can expect a new attitude that regulations are necessary to ensure a more robust financial system. I
would not be surprised if we will see stricter regulations around transparency on risk profiles, more transparency on the trade of derivates to hinder domino effects if one financial institution goes bankrupt, increase in required equity ratios and stricter
rules for bonus schemes.
Mikael Krohn, VP, EDB Business Partner