The Scandinavian Banking Crisis Of 1990

1847 Words Apr 9th, 2015 8 Pages
The Scandinavian Banking Crisis of 1990 – Focus Sweden
This essay was done by William Segrave, and Muhidul Hussain only.

The majority of banking crises in last 30 years have been caused be deregulation of the banking industry followed by rapid unstable credit expansion leading to a unsustainable asset pricing bubbles. Scandinavian Banking Crisis was not exception. When the bubble bursts, the effects can ripple through the entire economy, and can cause massive disruption and loss in confidence.

By 1985 Sweden was experiencing higher inflation rates that many other similar countries, caused by high interest rates and volatile currency. Due to high inflation and a real after tax interest rates were low or even negative. It is only following the banking crash that Swedish households faced positive borrowing costs for the first time in 30 years. The Swedish economy managed to have negative interest rates for so long due to the banking regulations, which were soon the be lifted.

Sweden had a regulated banking sector. Banks, insurance companies, and other institutions were subjected to lending ceilings, and placement requirements (liquidity ratios) required them to invest in bonds issued by the government and by mortgage institutions. Large budget deficits and an ambitious programme for residential investment led to a situation where banks were required to hold more than 50 per cent of their assets in such bonds, typically with long maturities and with interest rates being…
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