Banking System Bailout‐Scandinavian Style

During the Scandinavian banking crisis in the early 1990s, Norway and Sweden chose somewhat different routes to crisis resolution, though both involved government intervention and both proved effective. The Norwegian government injected a hybrid debt‐equity form of capital into the largest commercial bank, though only after first extinguishing old equity claims. The Swedish government issued a system‐wide debt guarantee and allowed shareholders to maintain their equity stakes, provided they also contributed new equity capital to the banks. In the (single) case where equityholders refused to participate, the government took over the bank and divided it into a “good” and “bad” part, with the latter holding the non‐performing loans. The resolution of banking system problems in Scandinavia provides a useful precedent for the recent “bailout” of the U.S. banking system, which, after some initial trial and errors, also involved government ownership of shares in financial institutions. As the author notes in closing, the Scandinavian experience is also relevant for addressing the question of how the U.S. government, having effectively become “owner of last resort” in key financial institutions, should handle its controlling equity stakes.