Learning the hard way: lessons from Sweden

Sweden has learned the hard way that high-risk lending strategies lead to over-inflated asset prices and economic growth that is not sustainable. According to Arne Liljedahl (Chairman of the Board, Carnegie Investment Bank and Senior Advisor, Advisory Services, Ernst & Young), the financial crisis Sweden experienced in the 1990s had similar characteristics to the recent global financial crisis: a man-made crisis, created by high-risk property lending that resulted in huge losses by banks and other financial institutions, pushing the sector to a near collapse. This crisis taught the Swedish banking sector to develop a more balanced approach to their lending and enabled them to position themselves well to survive the inevitable correction that would occur when the global economic bubble burst.

While there is less uncertainty within the Swedish bank sector than in the early 1990s, the uncertainty that still exists is a consequence of this global connectivity.

Today, globalization is so advanced that everything is interlinked, which makes every market or industry vulnerable to the impact of any global financial turbulence. Drawing comparisons from both of these crises, Liljedahl explains that once the market begins to stabilize, the financial sector must steer away from the problems that caused today's crisis to focus on current priorities: Which customers are profitable over time? What operations should be protected? Is the strategy the right one for the bank? Liljedahl says relying on governments to take ownership of 'toxic' debt is not an ideal long-term solution for the crisis. Instead, banks should systematically go through the whole customer base, segmenting clients, based on their long-term profitability and growth potential. He warns that the Swedish banking sector has very low capital ratios and needs to improve its risk awareness and risk competence levels in the future.

In the Nordic financial sector, Ragnar Gustavii (Sector Head, Financial Services at Ernst & Young, Sweden), is of the opinion that more work needs to be done on risk awareness. According to Gustavii, risk management should be a senior management priority, uniformly addressed and rolled out throughout the organization. He asserts that financial companies should take a top-down approach to risk management, but this does not mean that banks should remain under-exposed to risks in the face of the challenging market situation.

The question here is how to strengthen understanding about the risks banks normally confront in their day-to-day operations. By tracking comprehensive, regular and relevant risk reports, and improving internal communication, banks can gain a better understanding of the risks they face. This will help them to create an objective foundation for optimizing their capital and improving their profitability in the medium to long term.

The article reflects the views and comments taken as interviews of two industry stalwarts:

  • Arne Liljedahl
    Chairman of the Board, Carnegie Investment Bank, Senior Advisor, Advisory Services, Ernst & Young and former Executive Vice President, Chief Financial Officer, Nordea Bank
  • Ragnar Gustavii
    Sector Head, Financial Services, Ernst & Young, Sweden

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