Strategies in Banking Crisis In 2008, the collapse of the Bear Stearns Companies, Inc. and the bankruptcy of the Lehman Brothers Holdings, Inc. triggered the so-called banking crisis of 2008-2009. Bear Stearns Companies, Inc. was an investment bank and securities trading and brokerage operating globally whose collapse was brought about by massive failed investment operations whilst the Lehman Brothers Holdings, Inc. was a financial services firm which primarily dealt with the US Treasury Securities Markets and collapsed mainly because of sustained losses in its subprime lending operations. These two incidents led to the subsequent meltdown of the world market and the bank crisis of 2008-2009.
There was a frantic response to the impending bank crisis throughout the banking world. In Iceland, the government took control of the country’s second largest bank Landsbanki. The finance ministers of the European Union decided to augment guarantees of the savings account of bank customers to 50,000 euros. At home, the impending banking crisis was met by a government proposal to aid banks through a £50 billion package that would, in effect, utilise taxpayers’ money to help banks stabilise.
This was called the Brown Plan, after Prime Minister Gordon Brown who conceived the plan although by 2009, the government realised that it would be impractical to use taxpayers’ money to foot the banking bailouts. Generally, varied rescue schemes were conceived and implemented throughout the global financial system to alleviate the recent banking crisis, which ranged from long term loans of capital, equity acquisition, bank borrowing guaranteeing, money market funds loans, and other forms of bank aids that were made subject to different conditions (Hutton 2009). Although some rescue schemes were successful when used in certain cases, they, however, failed when implemented in others.
The most successful banking rescue that was undertaken in recent years that served as a model to the 2008 banking crisis was the rescue by Sweden of its banking system back in the 1990s. The Swedish banking crisis was triggered by the rapid drop in the value of real estate in the country. Previous to this, there was a marked lending frenzy to the homebuyers sector as real estate values consistently went up as buying and selling of homes flourished.
The peak in prices halted these activities, causing the plummeting of real estate values by more than 60%. This affected the Swedish economy and its banking sector, whose assets consisting of real estate collaterals had lost their original value. The government had to step in as the inability of banks to lend began to have a ripple effect on its businesses that had to lay off many workers. The Swedish government intervened to save the day through three approaches: infusing new money into the banking sector; maneuvering the sale of banks with devalued assets to other banks, and; nationalising some banks.
In addition, the Swedish government decided to favor the depositors over the bank shareholders by guaranteeing deposits and credits but not the shares of the holders, which it allowed to be wiped out through nationalisation of these banks (Dougherty 2008). Sweden’s move to protect its citizens but not shareholders gained it the support of taxpayers to utilise taxpayers’ money to aid the ailing banking sector. In addition, the Swedish was cautious and discriminatory in extending its help to banks.
First, it undertook an extensive review of bank records to find out which banks were still solvent and which were not. For still solvent banks, the Swedish government extended financial aid through recapitalisation but in exchange for government equity with the banks. On the other hand, non-solvent banks were nationalised. For the nationalised banks to gain investor confidence, the government sold their undervalued assets to other banks. Finally, Swedish intervention in the banking system especially in nationalising two banks compelled other banks to find ways to regain their stock so as to prevent their being subjected to the same since nationalisation implied wiping out shareholders’ interests.
This was the case of SEB, the largest bank in Sweden, the majority shares of which was owned by the Wallenbergs. The Wallenbergs entered into recapitalisation activities on their own in fear of government intervention resulting in the bank’s turning a profit the year after. When the Swedish banking sector finally stabilised, the government which had by then already owned a large equity in banks moved to make the banks public again retaining only a meager 19.9 of one of the banks it nationalised – the Nordea, now viewed as one of the biggest banks in the Baltic region (Dougherty 2008).
In the light of the banking crisis that struck the world as a consequence of the collapse of the Bears Stearns Companies, Inc. and the bankruptcy of the Lehman Brothers Holdings, Inc in 2008, the Swedish intervention in its banking sector became a model in many countries experiencing the crisis. At home, the government immediately announced a plan in October 2008 to use taxpayers’ money to bailout banks who were reeling from the banking crisis.
Conceived by PM Gordon Brown, the plan involved the use of £50 billion rescue package doled out to banks in exchange for government equity, in effect nationalising them (Government to Unveil Bank Rescue). As a matter of fact, the first UK rescue plan looked similar to the Swedish model as it used banking strategies like nationalisation, increased deposit insurance, guaranteeing or buying back bad debts, injecting capital and ring fencing bad assets (Bank Failures and Rescues).
In February 2009, however, it was reported that the initial Brown Plan failed to turn around the banking system together with the country’s economy and the government was poised to launch another bank rescue plan to the tune of £14 billion. The failure of the initial banking strategy is encapsulated by Royal Bank of Scotland’s announcement of loss of about £28billion, possible retrenchment and sale of assets worth billions to ease its condition. Northern Rock, another British bank, which had undergone nationalisation last year much like the way Sweden nationalised two of its banks, including Nordea, in the 1990s, has not met much success either.
The previous year had seen it reducing its mortgage book as it largely engaged much of its assets in repaying debts it owed to its depositors. Incidentally, the nationalisation of the bank likewise involved non-reimbursement of shares of its stockholders (Porter 2009). Last October 2009, records revealed that the economy has shrunk even more by 0.4pc for the months of July, August and September which led some authorities to declare that the Brown Plan was a failure, making it the sixth time in a row that the economy has contracted.
This, despite the earlier mentioned infusion of capital into the banking sector like the £47 billion into the RBS and the Lloyds Banking Group in October of last year (Britain Still in Recession: Gordon Browns Rescue Plan Accused of Failure). The Swedish experience in intervening with its banking sector in the 1990s and the present experience of UK in extending a series of rescue package to its ailing banking sector show that there is no one banking strategy that could work for all kinds of banking conditions.
The success of the Swedish model was not shared by the UK model for whilst the Swedish banks responded positively to the firm intervention of the government through recapitalisation and nationalisation, the UK banks failed to show that they are taking the same direction that the former took after the government implemented, more or less, the same strategies as the Swedish government during their own banking crisis. The clear implication in these two cases is that perhaps, in approaching banking crisis, financial managers must also take into consideration other factors that are inherent in their own system but are not present in the others.
References: Bank Failures and Rescues. Citizendium. http: //en. citizendium. org/wiki/Bank_failures_and_rescues/Addendum Britain Still in Recession: Gordon Browns Rescue Plan Accused of Failure. Telegraph. uk. 23 October 2009. http: //www. telegraph. co. uk/finance/financetopics/recession/6415120/Britain-still-in-recession-Gordon-Browns-rescue-plan-accused-of-failure. html Dougherty, Carter. Stopping a Financial Crisis, the Swedish Way. 22 September 2008. World Business. The New York Times. http: //www. nytimes. com/2008/09/23/business/worldbusiness/23krona. html? _r=1 Government to Unveil Bank Rescue. BBC News. 7 October 2008. http: //news. bbc. co. uk/2/hi/7657422.stm Hutton, Will. Gordon Brown Backs Radical Plan to Transform Global Banking System.
The Observer. Guardian. co. uk. 8 November 2009. http: //www. guardian. co. uk/politics/2009/nov/08/gordon-brown-tobin-tax-plan Morris, Nigel. Brown Launches Another Bank Rescue Plan. The Independent. 23 February 2009. http: //www. independent. co. uk/news/uk/politics/brown-launches-another-bank-rescue-plan-1629330.html Porter, Andrew. Desperate Gordon Brown plans £500billion bank gamble. Telegraph. uk. 22 February 2009. http: //www. telegraph. co. uk/finance/newsbysector/banksandfinance/4782828/Desperate-Gordon-Brown-plans-500billion-bank-gamble. html