CAN LOW RISK IN THE SWEDISH BANKING SECTOR PAY IN THE LONG RUN?

Abstract

Banks are normally heavily indebted with equity levels of 5-10 percent of total assets or even lower. The assets consist mainly of short-term and long-term loans, funded by deposits which can be withdrawn at short notice. In order to avoid excessive withdrawals, which is called a bank run, deposit insurance systems, guaranteed by the state, are generally in operation.
The financial sector is characterized by a high degree of interrelation, as the liabilities of one bank are the assets of other banks. To prevent uncontrollable domino effects when financial crises occur the central bank will have to step in as lender of last resort.
A financial crisis generally happens when the economy is out of balance and a financial bubble is created by a rapid increase of asset prices. The economic indicator which signals a bubble is normally credit expansion far in excess of the growth of the economy
The Swedish banking crisis of the early 1990s was caused by regulations which meant that credits were not directed to the most profitable investments. When the regulations were abolished in mid-1980s there was a major expansion of credits and a surge in property prices followed by a crash. The credit losses increased from 1 percent of total lending in 1990 to 8 percent in 1992. The state had to intervene to save the banking sector. The Bank support board was created to manage contingency loans and issuing guarantees. Nordbanken was temporarily taken over by the state and divided into a “good bank” and a “bad bank”. S-E-Banken applied for support but subsequently withdrew its application. Handelsbanken was the only major bank which did not apply for support.
The international financial crisis of the 2000s hit the Swedish banks relatively mildly but the authorities reacted quickly and guaranteed a total of some 3,500 billion SEK. However, S-E-Banken and Swedbank totally dominated the Baltic banking sector which experienced a classical bubble with a five-fold increase of property prices followed by a sharp fall. The two banks suffered heavy losses and had to issue new equity capital in 2008-2009.
The Swedish state was heavily involved in the crisis of the 1990s when the existence of both Nordbanken and Swedbank was threatened. The crisis of the 2000s required far-reaching guarantees but no direct involvement as the banks were strong enough to handle the situation.
My hypothesis is that low risk pays in the long run in Swedish the banking sector. In order to test the hypothesis a comparison has been made for the two banks which suffered least from the financial crisis of the 1990s and the 2000s, namely Handelsbanken and S-E-Banken.
Handelsbanken, which has a historically low risk tolerance, has a decentralized organization, has made relatively few large acquisitions, is expanding organically abroad, has a credit policy based on responsibility by the local branch office and basically accepts a risk position only for customer related business.
S-E-Banken has a centralized organization, has made several aggressive acquisitions followed by divestments, has a credit policy based on a scoring system and even evaluates its risk position based on the “risk appetite” of the board.
The statistics for the period 1982 – 2012 clearly speaks in favour of Handelsbanken both in regard of credit loss ratio, return on shareholders´equity, dividend in relation to equity and Basel II primary capital ratio. Also, Handelsbanken has issued far less new equity capital than S-E-Banken over the last thirty years. The hypothesis of this paper is thus verified.

• author: Bartholdi, Christer
• supervisor: Benny Carlson
• organization: Department of Economic History
• alternative title: A comparison between Svenska Handelsbanken and S-E-Banken during 1982-2012
• course: EKHK31 20131
• year: 2013
• type: M2 - Bachelor Degree
• subject: Business and Economics
• language: English
• id: 3809061
• date added to LUP: 2013-09-23 10:55:00
• date last changed: 2013-09-23 10:55:00