Wednesday, February 11, 2009

How Swedish Bank Rescue Affects Current Behavior

Swedish banks have so far suffered less than banks in many other countries. All of the 4 big banks (Swedbank, SEB, Nordea and Handelsbanken) are still making profits, and Handelsbanken even saw its profit rise.

Yet if you look at their actions you instead get the impression that they are losing a lot of money as all of them except Handelsbanken have decided to issue new shares to increase their capital. And all of them have decided to either cancel dividends altogether or reducing them. Even Handelsbanken is cutting its dividend (though not by muc, only from SEK 8.5O per share to SEK 7 per share.) despite the fact that it is experiencing rising profits.

Assuming their profits aren't a result of them having hired some real life Dogbert to cook their books (which seems far-fetched), this behavior can only be explained as a pre-emptive move from the banks to increase their equity so much that there is no way that they'll need a government bailout. Why is it then so important for them to avoid that?

Well, because they learned from the Swedish bank bailouts of the early 1990s (that I've described in detail here) that the Swedish government will only bail out creditors. Shareholders by contrast will be wiped out instead of bailed out. It wasn't just a matter of taking an equity position (something which would still constitute a bailout of existing owners) but ensuring that existing owners would meet the same fate as if the bank went bankrupt. And the current Swedish government has made it clear that they would be no more generous. And so, this has clearly had the effect of inducing current owners to invest enough in the banks so that their previous investments won't be lost. This is a clear illustration of the absence of bailouts promotes good behavior.

By contrast, there are no indications that creditors have been more prudent in Sweden than anywhere else, as creditors were bailed out.

6 Comments:

Anonymous Anonymous said...

"By contrast, there are no indications that creditors have been more prudent in Sweden than anywhere else, as creditors were bailed out."

Were there any other moral hazards created (besides this one)?

10:00 AM  
Blogger stefankarlsson said...

No, not anything else that I can see (note however that I've included depositors in the creditor category).

4:35 PM  
Blogger investmentgardener said...

Would you think it likely that their pumping up their own capital at this point in time will make them potential buyers of less capitalised banks in the next few years? Or is it just a preemptive strike against a potential nationalisation?

8:43 PM  
Blogger stefankarlsson said...

Well, since it comes now when fear of large losses has increased, pre-empting nationalization clearly looks like the main motive, and I see no signs yet of any take-over plans, though of course we can't know if they plan to do that later.

8:57 PM  
Anonymous Anonymous said...

Private capital generally comes with less strings attached than government money. Swedish banks are bracing for losses from their Baltic affiliates.

Do you think September interest rate hike was a mistake?

5:18 AM  
Blogger johngleason said...

Should I be worried? Recently, I purchased an ETN (exchange-traded note) that is designed to track the performance of a commodities index. The notes were issued by the Swedish Export Credit Corporation. Is there a danger of insolvency, default, etc.? Thanks for your blog.

12:51 PM  

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