The Swedish banking crisis: Roots and consequences

The article analyses the Swedish banking crisis in the early 1990s. Newly d eregulated credit markets after 1985 stimulated a competitive process betwe en financial institutions where expansion was given priority. Combined with an expansive macro policy, this contributed to an asset price boom. The su bsequent crisis resulted from a highly leveraged private sector being simul taneously hit by three major exogenous events: a shift in monetary policy w ith an increase in pre-tax interest rates, a tax reform that increased afte r tax interest rates, and the ERM crisis. Combined with some overinvestment in commercial property: high real interest rates contributed to breaking t he boom in real estate prices and triggering a downward price spiral result ing in bankruptcies and massive credit losses. The government rescued the b anking system by issuing a general guarantee of bank obligations. The total direct cost to the taxpayer of the salvage has been estimated at around 2 per cent of GDP.