The following lessons of Sweden’s experience seem relevant today: A bad bank can be an effective instrument in the recovery of losses and the revival of banks.
Although Sweden’s experience concerned shares in companies used as collateral for credit rather than bonds or similar financial instruments, this situation will likely arise in many countries today as the crisis continues, more companies go bankrupt and banks recall their collateral and take possession of shares in indebted companies.
Government subsidies for private bad banks, or public bad banks to clean up private banks’ toxic assets, are a bad way for taxpayers to transfer money to troubled banks compared with normal capital injections. All subsidies should be transparent; public/private bad banks are not.
It is vital to staff bad banks with professional and experienced managers who are untainted by previous scandals. Here, Sweden’s experience is encouraging. It was easier than we expected to recruit good people for Securum because working in the public interest for this pioneering state-owned bad bank was perceived as a unique challenge.
Maximizing taxpayers’ economic interests, not ideology or political considerations, must be the guiding principle. The public should be in no doubt about this, for their trust is essential.
Leif Pagrotsky, a Social Democratic member of the Swedish parliament, was minister for industry and trade and minister for education under former prime minister Goran Persson. In 1994, he was state secretary for financial affairs.COPYRIGHT: PROJECT SYNDICATE
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