Abstract
This paper is a first attempt to make a comparative analysis of Swedish banking crises over time—focusing on how the crises were handled. The empirical material is also compared to economic theories on crises management, i.e. lender of last resort and bank bailouts. The main questions are: How do the crises management relate to economic theories, i.e. to what extent did the crises management follow any economic rationale? To what extent were the crises management seen as necessary by authorities and market agents, and to what extent were the designs of the crises management made by market agents and/or by authorities? Were there any common features of the crises management over time that can explain why crises were handled in a certain fashion? I also make an estimation of the relative costs for the state to manage each crisis.
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Notes
- 1.
Reinhart and Rogoff (2009).
- 2.
Bordo (1989, p. 220).
- 3.
Goodhart argued that the possibility of incurring credit losses, together with the right of the public to make quick withdrawals or to redeem notes, obviously makes banks vulnerable to a lack of short term capital. The banking system therefore requires the special services of a central bank or, more specifically, of a lender of last resort that can support them in case of difficulties (Goodhart 1987, pp. 3–4). Kindleberger also argued that central banks arrived to impose control over the instability of credit (Kindleberger and Aliber 2005).
- 4.
For an analysis of the historical development of the concept of lender of last resort, see Wood (2000, pp. 204–209).
- 5.
Bagehot’s original aim was to create awareness of how the Bank of England, on the basis of experience from 1848 and 1857, could limit the banking crisis of 1866. He did this first as editor of The Economist during the 1860's, and later in his classic book Lombard Street (1873). It is therefore somewhat unfair to criticize Bagehot’s views from a more general perspective. Regarding Bagehot and central banking see Rockoff (1986).
- 6.
- 7.
Capie and Wood (1995, pp. 215, 223).
- 8.
Bignon et al. (2009).
- 9.
- 10.
Sayers (1976, p. 28).
- 11.
McKinnon (1993, p. 4).
- 12.
Following the implementation of the gold standard in 1871 and the establishment of the Reichsbank as a central bank in 1876, Germany constructed a system of lending of last resort that operated outside the requirements of the specie standards. The Reichsbank operated a type of giro, or checking, system for the transfer of funds. Since these checks were non-note liabilities, the Reichsbank was not required to back them with reserves, the gold cover rules only being applicable to the issuance of bank notes. This giro system guaranteed the liquidity of the credit banks. The Reichsbank provided liquidity by discounting the credit banks’ holdings of bills of exchange, thus allowing these to functions as substitutes for Reichsbank notes. The discount rate was volatile, reaching high levels during periods of capital shortage. Nonetheless, this policy allowed the Reichsbank to function as a lender of last resort for the private banking system (McGouldrick 1984, p. 313; Tilly 1986, pp. 195–196).
- 13.
Wood (2000, pp. 222–223). Or in Wood’s words: “Reconsideration of the role of lender of last resort shows revision of it to be unnecessary”.
- 14.
- 15.
- 16.
Goodhart (1999, pp. 352–356).
- 17.
Bordo (1989, pp. 22–23).
- 18.
Beck et al. (2010).
- 19.
Bank of England (N/A) “Quantitative easing explained” Pamphlet on-line and printed, p. 9.
- 20.
Ögren (2007) RbFP No 151 December 10, 17 1857. The Bank of Sweden included in its reserves silver and gold it held as collateral. This was officially motivated by the borrowers having sold them to the Bank of Sweden, subject to the right of repurchase by repaying their loans. Only one member of the Board opted for the solution of allowing the note issuance to temporary exceed its legal limits.
- 21.
- 22.
Ögren (2007) RbFP No 152 January 7, 28 1858. Some Bank of Sweden board members questioned the idea of supporting the Enskilda banks whom they blamed for the problems of the credit market.
- 23.
- 24.
Ögren (2007) RbDA No 4352, Pag. 1810 1858, RbFP No 152 February 4, 8, 11, 1858, RbSLF No 4812 Pag.306 1858, Pag. 306 1859, RbSLFH No 4817 1858.
- 25.
Ögren (2007) RbFP No 152 February 11, 24 1858, RGKLKT No 9061 1858 §1.
- 26.
Ögren (2012).
- 27.
Ögren (2007) RbFP No 169 January 20 1875, RbFSP No 252 January 14, February 18, April 22 1875. According to the Board of the Riksbank, the decision to open an office in Copenhagen was motivated by a desire to protect the Riksbank’s credit worthiness (RbFSP No 252 February 18 1875).
- 28.
- 29.
Ögen (2007) RbFP No 170–172 July 1, November 25 1876, March 22, July 12, November 29 1877, January 15, 24 1878, RbFSP No 252–253 June 17, July 9, December 16 1875, June 15 1876 July 5, September 24, November 15 1877, RbR No 429 December 11 1876.
- 30.
Ögren (2007) In 1879, the National Debt Office cancelled its credits due to a shortage of funds and expected future receipts. The effect on Stockholm Enskilda bank was especially severe because, in addition to the loans of the Bank, its founder and principal owner, A.O. Wallenberg, had a personal debt of 250,000 SEK, collateralized by railroad bonds, to the Office. Having repaid 50,000 SEK, Wallenberg was allowed to extend the rest of his loan and with only half of the collateral originally pledged. This after Wallenberg makes reference to this Riksbank credit of 200,000 SEK secured by bonds in the same (Gefle-Dala) railroad company (RGKLP No 4462 January 16, 23 1879).
- 31.
- 32.
Ögren (2007, RdSkr No 53, pp. 2–3). The state was to be fully repaid for this commitment and any eventual profit was to be used to repay the loans used to build the state railways or other state debts. The Railroad Mortgage Fund eventually generated a surplus of just over 155,000 SEK (RGKJHFH No 7907 1894, pp. 3–4, 7). The Fund’s upper limit had been reduced from thirty to twenty three million SEK at the prompting of those groups in the Parliament who blamed the commercial banks for creating the crisis and who wished to devote the saved amounts to alternative, noncredit market approaches to providing lender of last resort services. Thus, through the Sågverksegarnas Garantiförening (Saw Mill Owners’ Guarantee Association), the saw mill industry was provided with a fund of three million SEK to be lent on the security of stored timber. The remaining four million SEK were allocated to the purchase of the private Hallsberg-Motala-Mjölby railway by the state (StU No 53, pp. 3–5). RGKJHFM No 8514, pp. 23–27.
- 33.
Ögren (2007) RGKLP No 4462 May 26, June 5 1879. All this was done to prevent misuse of the Fund. Nonetheless, the railway bonds were valued at close to their nominal value, that is at approximately twice their current market value. A special collateral valuation board was also used by the toxic asset fund Securum AB that was established to assist the banks during the crisis of 1992.
- 34.
Ögren (2007), RGKLP No 4462 May 30, June 3 1879, RGKJHFH No 7893 1879, pp. 40–41, RGKJHFM No 8514 p. 23. In order to lend such a large amount so quickly, the National Debt Office had to violate the regulations. For a time it even accepted the Bank’s own promissory notes as collateral. Two of the Office’s board members noted their reservations in the loan protocol.
- 35.
Ögren (2007), RGKJHFM No 8514, pp. 23–24, RGKLP No 4462 May 30, July 24, 31 1879. Once the Fund came into being, Wallenberg switched the railroad bonds he had provided as collateral for his personal loans from the National Debt Office and the Bank of Sweden over to his own bank, Stockholms Enskilda Bank. The certificate of deposit he received from Stockholms Enskilda Bank was then used to back those loans, while the bonds were offered as collateral when Stockholms Enskilda Bank applied for a loan from the Railroad Mortgage Fund (RGKLP No 4462 June 12 1879).
- 36.
Ögren (2007), RGKLP No 4462 August 24 1879. In late July, the National Debt Office lowered the rate of interest on its loans to the Railroad Mortgage Fund to five percent, since loans at that rate were readily available to the Fund from other sources.
- 37.
Ögren (2007), RGKJHFH No 7903–7906, 1890, pp. 18–19, 1891, pp. 18–19, 1892, pp. 18–19, 1893, pp. 20–21.
- 38.
Ögren (2007), RGKJHFL No 4851, pp. 22–23, 26–27. These payments were one million SEK on June 4 and 400,000 on October 1 on 1879. They were originally registered as a special entry labeled “The Riksbank”, but this was later changed. Since the bank of Sweden in fact lent to the National Debt Office which, in turn, lent to the Fund, it is possible that the total credit provided by the Bank of Sweden exceeded these amounts. RGKLHFM No 8514 p. 23. In addition to the Bank of Sweden, two other principal actors were instrumental in providing funds for the Railroad Mortgage Fund, the banking firm of Ehrlanger & Söhne, Frankfurt am Main and C.J. Hambro & Son, London.
- 39.
Ögren (2007) RbFP No 172 January 15, 24 1878. RbR No 430 February 26 1880. In response to Wallenberg’s Parliamentary proposal (No. 37) concerning a guaranteed right to borrow from the Riksbank against certain specified types of bonds. RbFSP No 252 June 15, 29 1876, RbR No 429 April 15 1875, June 26 1876, December 11 1877, Schön (2000, pp. 262–263), Simonsson (1931, pp. 40–41).
- 40.
See Ögren (2012) for details.
- 41.
Lönnborg et al. (2011).
- 42.
- 43.
See Larsson (1998) There is a concept to define this strong relationship between one bank and one industrial company that arose and was cemented as a result of the crisis—“Husbankförbindelse” [~House-bank relationship].
- 44.
Lönnborg et al. (2011, pp. 239–242).
- 45.
- 46.
Kprop (1932: 248 p. 6).
- 47.
Englund (1999).
- 48.
Prop (1991/92: 21).
- 49.
Prop (1991/92: 153).
- 50.
Prop (1991/92: 63).
- 51.
Prop (1991/92: 168, p. 4).
- 52.
- 53.
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Ögren, A. (2018). Banking Crises and Lender of Last Resort in Theory and Practice in Swedish History, 1850–2010. In: Rockoff, H., Suto, I. (eds) Coping with Financial Crises. Studies in Economic History. Springer, Singapore. https://doi.org/10.1007/978-981-10-6196-7_3
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