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Document Type

Case Study

Abstract

Sweden’s economic downturn and growing unemployment in the early 1990s led to increased uncertainty about banks’ risks. Turbulence in foreign exchange markets and speculation against the Swedish krona caused significant problems in the housing paper market. The ensuing banking crisis affected six of the seven largest Swedish banks. Loan losses peaked in 1992 at nearly SEK 80 billion while the banking sector recorded an operating loss of almost SEK 50 billion. In the fall of 1992, the government guaranteed all banks’ liabilities, took over two of the largest banks, and announced it would create the Bank Support Authority to manage further support measures. Between 1991 and 1993, the government provided SEK 65 billion in capital injections and loan guarantees, over 98% of which went to two banks. Capital injections totaled SEK 41.3 billion. The banking sector recovered, logging modest profits in 1994. Scholars’ estimations of the net cost to taxpayers of the BSA’s activities vary from 1.5% of 1991 GDP to 2.1% of 1997 GDP, or SEK 35 billion.

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