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Swedish banks’ Regulations and Risk Management

Is it a stricter process of granting credit?

Written by Therese Bellfors

Paper category

Bachelor Thesis

Subject

Business Administration>Banking & Insurance

Year

2015

Abstract

Bachelor Thesis 2.2 Sweden’s views on the global financial crisis As shown in Figure 1 in the background section, Sweden’s real estate prices were relatively unchanged from 2007 to 2009. This period is known as the most intense period during the global financial crisis (Kowalski & Shachmurove). , 2014). The sharp fall in real estate prices during the crisis of the 1990s and the small number of homes owned can answer why Swedish real estate prices did not fall this time (Holmqvist & Turner, 2014). Sweden’s “success” in the global financial crisis meant that both the Swedish housing market and the Swedish economy were overheated at the time. Although most countries in the world were overheated, Sweden is the country most likely to carry out price adjustments in the future (International Monetary Fund ,2012). This is further confirmed by a report by the Financial Commission (Finansmarknadskommittén, 2012), which stated that according to the definition of a financial crisis, Sweden did not fall into a financial crisis in 2008 because only two banks were on the verge of failure. However, according to the report issued by the Riksbank in 2010, the central bank provided a large amount of liquidity to support several larger banks after the crisis. In addition, former Finance Minister Andersberg stated in an interview with the Swedish economic magazine Svenska Dagbladet that, in particular, two banks were on the verge of bankruptcy in 2008 due to their ties with the Baltic States (Neurath & Borg, 2015), but He did not further mention which banks were involved. After the global financial crisis, the Swedish market had to make some adjustments to keep the market floating. Some adjustments have been made to reduce the value-added tax rate of restaurants and catering services, and to provide additional funds for infrastructure investment and the labor market (International Monetary Fund, 2012). 2.3 Family Behavior Sweden experienced a good credit expansion last year. However, looking back at history, we can see that after credit expansion, there may be a period of financial depression, as evidenced by the results of the Swedish financial crisis in the 1990s (Dell'Ariccia & Marquez, 2006). In the 1990s, Sweden was hit by the financial crisis due to the bursting of the real estate bubble. Many households in the market believed that they could profit from their houses, but what was shocking was that the price of real estate dropped sharply, and many households had to sell them at a loss instead. Some people are still struggling with the economy as a result (Zaar, 2014). Since the global financial crisis, Sweden’s household debt has grown faster than almost anywhere else in the world (BIS, 2015a). Before the US recession, almost anyone could get a loan (Boumans, 2008), so consumption continued to grow and debt continued to rise. 2.4 Banking risk management Lehman Brothers collapsed because they held a large number of subprime mortgages that fluctuated in the US market. The surprising fact is that at the time subprime mortgages accounted for only a small part of the bank's total exposure (Agur, 2014). “How can a financial system look so stable, with low default rates and financing costs, and at the same time so vulnerable to shocks?” (Agur, 2014, p. 322). The statement did not initially describe the Lehman Brothers case, but it may be the case. They went from a healthy investment bank to a company that had to file for bankruptcy. The banking industry is one of the most important players in the financial market (Bessler & Kurmann, 2014). Although the market seems stable at the moment, the case of Lehman Brothers also highlights the importance of bank risk management in a stable period. Companies should manage risk to minimize the impact on company value, and the main way to manage risk is to try to prevent it. Banks can reduce risk by raising safety standards, prudent investment decisions, and conducting appropriate due diligence when establishing new relationships (Berk & DeMarzo, 2014). The operation of an economy depends on financial stability. If financial instability causes banks to be unable to pay each other. If they are unable to pay wages in time, the consequence will be that private households will have difficulty paying bills, which may lead to huge social costs (Swedbank, 2015a). The risk management of the banking sector is endorsed by a team that ensures that the bank strives to achieve financial stability and maintains capital in proportion to its risks, and reports these to the country's supervisory authority (Apatachioae, 2014). After the last crisis, banks’ risk management has generally become more stringent. However, Apatachioae (2014) believes that there is still a lack of international regulations on financial crises. The statements of Bessler and Kurmann (2014) argue the opposite and imply that due to different risk exposures, One regulation cannot be applied to all banks, which indicates that the best practice is to implement one regulation for small banks and another regulation for large banks. 2.5 Regulations Sweden is a member of the European Union and therefore must comply with the rules and restrictions set by the European Central Bank (European Central Bank) (Finansmarknadskommittén, 2012). The Swedish Financial Supervisory Authority (SFSA) is a Swedish financial institution responsible for overseeing the business of the financial market. SFSA influences banks in this way, they make loan regulations, and banks adjust according to their standards (FI, 2015b). Read Less