Banks everywhere should study Scandinavia’s response to its 1990s crisis to see how a near collapse was used to create one of the world’s best-functioning financial industries, according to John Rogers, chief executive officer at the Chartered Financial Analyst Institute.
“The world potentially has got some things to learn from the experience from the Nordic financial crisis of the early 1990s,” Rogers said in an interview. “We’re not paying enough attention to those lessons.”
As banks across the globe navigate their way through rules they say make it harder to recover from the worst crisis since the Great Depression, Rogers is urging the industry to look to a region that has imposed some of the world’s strictest bank standards. Sweden two decades ago responded to a real estate bust and ensuing bank turmoil with swift nationalization and instant separation of good assets from bad. Rogers says the approach should serve as a model for the future of banking.
Nordic banks “have had the opportunity to prepare and think differently about finance and about their role,” Rogers said in the Nov. 6 interview, as the CFA Society in Sweden marked its 10th anniversary at the National Museum in Stockholm. “We get a little bit of a preview of the future of finance here.”
Stockholm-based Nordea Bank AB (NDA), Scandinavia’s biggest lender, Norway’s DNB ASA and Sweden’s Svenska Handelsbanken AB (SHBA) all avoided the worst of the fallout from Europe’s debt crisis and the U.S. subprime collapse. Nordic banks didn’t go near the toxic securities that led to the 2008 failure of Lehman Brothers Holding Inc. Sweden’s banks have also steered clear of the interbank rate rigging that’s tainted their peers elsewhere. That’s no coincidence, according to Rogers.
The Nordic region “went through a pretty significant crisis back in the early 1990s -- it was a terrible, almost existential crisis,” he said.
After exploring numerous options for how to rebuild a financial industry, including “was it going to be fully nationalized, was it going to be turned into some kind of utility like a water or electricity company, was it going to be just a hick-up and then return to normal,” the region settled on a model that helped it withstand the biggest disruption to financial markets in 70 years, Rogers said.
Nordea shares have gained 30 percent this year, while DNB and Danske Bank have advanced 49 percent and 32 percent, respectively. Swedbank has risen 32 percent while SEB has gained 41 percent. The Bloomberg Banks and Financial Services Index has advanced 17 percent.
“It would be helpful to talk about some of those examples and some of those new approaches to financial services that have come out of that experience,” he said.
Today, Nordic banks’ “compensation structure, approach to client services and focus on basic banking services -- consumer and industrial lending -- as well as knowing your markets very well and using your capital market function as a value-enhancer to your basic banking business” are approaches that other nations and their financial industries should study, Rogers said.
The Swedish banking market crashed in the early 1990s after a spate of deregulation caused a sudden credit expansion which subsequently triggered a collapse in real estate prices. The government stepped in with bailouts and took over failing banks. Two bankrupt lenders, Nordbanken and Gota, were merged by the state and had their bad loans dumped in so-called bad banks. The merged company later combined with banks in Finland, Denmark and Norway to form today’s Nordea.
Not everything Nordic banks have done since 1990 has been immune to crisis. Swedbank AB (SWEDA) and SEB AB suffered soaring loan losses in the Baltic countries in 2009 after the region sank into the European Union’s deepest recession on record. Denmark’s Danske Bank A/S (DANSKE) was dragged through housing bubbles at home and in and Ireland. Both DNB and Nordea have seen credit losses at their shipping units amid the worst slump in that industry since the 1970s. Record household debt burdens in Sweden and Norway now pose a risk to financial stability, central bank policy makers warn.
Swedish regulators, drawing on lessons from the 1990s, have been quick to respond and have pushed through tighter capital standards than those set elsewhere. Its four biggest banks must hold a core Tier 1 ratio of at least 12 percent of risk-weighted assets by 2015, a ratio they all already exceed.
Finland’s Pohjola Bank Oyj, Nordea, Handelsbanken and DNB rank highest in Europe according to risk-adjusted returns over the past decade, with SEB AB (SEBA) and Swedbank AB also in the Top 10 of the 38 banks in the Bloomberg Banks and Financial Services Index. Pohjola had a risk-adjusted return of 10.6 percent in the past 10 years, while Nordea and Handelsbanken had returns of 7.9 percent and 7.3 percent, respectively, in the same period.
The CFA Institute, which seeks to promote ethical and professional standards within the investment community and restore faith in the financial industry, has representations in Sweden and Denmark and wants to expand in the rest of the Nordic region, Rogers said. The institute also plans to open offices in China and India, he said.
“This lack of investor trust, which may not be felt so acutely in the Nordic region, is felt very acutely in other major markets such as the U.K., the U.S. and China,” Rogers said. “Where there is this lack of trust, not only do we have an industry that doesn’t attract the same level of talent as it has in the past, more importantly, we end up with investors behaving fearfully and defensively and don’t invest properly for their retirement needs, so it becomes a social problem.”