## Resolving Cross-Border Banks: Lessons from the Nordic and European Banking Crises

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**Canonical URL:** [Resolving Cross-Border Banks: Lessons from the Nordic and European Banking Crises](https://www.imf.org/-/media/files/news/seminars/stefan_ingves_keynote.pdf)

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### Background: Swedish experience and banking globalization
- Early 1990s: Sweden experienced a massive banking crisis, accompanied by a combined currency, macroeconomic and fiscal crisis.
- Mid-1990s: Restructured Swedish banks expanded aggressively outside Sweden, primarily in other Nordic and Baltic countries.
- 2008 (Global Financial Crisis): Swedish banks had "roughly half of their combined assets abroad" and "nearly half of their total profits came from business outside Sweden."
- Size expansion: In little more than a decade, the Swedish banking system "roughly quadrupled in size compared to the early nineties, to somewhere in the region of four times the Swedish Gross Domestic Product" when the global financial crisis broke out.
- Cross-border integration benefits: enhances competition, lowers financing costs, increases supply of financial services, and tends to favor economic growth and welfare.

### Cross-border crisis-management challenges
- Multiplication of authorities: central banks, supervisors, resolution agencies, deposit insurance agencies and finance ministries — coordination becomes more difficult as the number of involved countries increases.
- Legal and practical impediments: confidentiality legislation restricting information-sharing; differences in language, culture, and views on who/what deserves protection.
- Political economy risk: conflicts of national interests can lead to political bargaining, hijacking resolution processes, or destructive ring-fencing that undermines beneficial outcomes.
- Examples of heated cross-border disputes during crises:
  - Iceland (October 2008): failure of large Icelandic banks; Icelandic deposit insurance fund unable to make good on guarantees to "over 300 000 primarily British and Dutch depositors" in IceSave; UK attempts to freeze Landsbanki’s assets using anti-terrorist legislation led to massive demonstrations in Reykjavik.
  - Fortis (2008 period): Belgium-based conglomerate broken up and divided nationally among Benelux countries after financing difficulties in ABN AMRO acquisition; caused frosty Dutch-Belgian relations.
- Bilateral tensions during the global financial crisis also occurred between Sweden and some Nordic/Baltic neighbors over swap agreements and contagion concerns; reciprocal concerns later emerged from Baltic authorities about Swedish banks’ domestic rapid mortgage expansion.

### Nordic-Baltic cooperation efforts and preparedness
- Early 2000s onward: Swedish authorities initiated cross-border MoUs and working groups to enhance cooperation in the Nordic-Baltic region.
- Fall of 2007: an extensive Nordic-Baltic crisis exercise carried out with participants from central banks, supervisory authorities and finance ministries in the five Nordic countries and central banks in the Baltic countries — "all-in-all eighteen authorities."
- 2010: a new MoU between authorities in the Nordic and Baltic countries was set up and is being revised.
- December 2016: an MoU between the Central Banks in the Nordic and Baltic countries was signed.
- 2011: formation of the Nordic-Baltic Stability Group to address crisis management and financial stability concerns with representatives from all relevant authorities.
- Under this group: a relatively detailed formula for sharing the financial burdens of a cross-border crisis was developed.
- Limitations: Many ex ante arrangements (MoUs) have been "notoriously fuzzy" and often easily ignored; no burden-sharing discussions among Ministries of Finance have yet produced real ex ante commitments.
- Value nonetheless: improved mutual awareness of cross-border risks, shared terminology, established networks and faster communication; advantage gained from prior crisis-management discussions and a pre-crisis comprehensive exercise.

### Role of the IMF
- The IMF provides expertise, financing capacity, and plays an important role as a neutral third party in sensitive bilateral talks.
- Neutral conditionality: the Fund can impose conditionality more impartially than individual countries, helping deflect patriotic indignation away from bilateral partners.

### New resolution frameworks and bail-in uncertainty
- New resolution framework: implementation around the world, in Europe via the Bank Recovery and Resolution Directive; premised on ex ante agreement between home and host countries on resolving failing cross-border banks.
- Resolution colleges: development of detailed resolution plans within resolution colleges to enable orderly resolution, protect financial stability, and allocate losses to shareholders and unprotected creditors rather than taxpayers.
- Bail-in tool: intended to write down and/or convert unprotected creditors’ claims into shares after shareholders are wiped out.
- Remaining uncertainty:
  - Ongoing wavering regarding "exactly what and whose instruments should be bailed-in."
  - Preparations for a bail-out of Monte dei Paschi and possibly other banks in Italy add uncertainty about the policy choice between bail-in and precautionary capital support by the state.
  - Until bail-in stages are more thoroughly prepared, "the jury is still out on how it will be applied in practice, especially on a larger scale."

### Branchification of cross-border banking groups — the Nordea example and implications
- Nordea (on the Financial Stability Board’s list of Global Systemically Important Banks) "has recently (2 January) carried out a transformation from a subsidiary structure to a branch structure."
- Effect of branchification:
  - Decision power and responsibility become more concentrated in the Home country, reducing some coordination problems.
  - Increases the Home country’s undertakings for supervision and crisis management, including possible liquidity support and public crisis measures such as precautionary capital injections.
  - Central Bank liquidity support may be needed in foreign currencies, which can be challenging if swap markets are dysfunctional.
- Recommended policy responses to branchification:
  - Stricter requirements on the bank to maintain liquidity buffers "in all relevant currencies."
  - Discussion about the relevant size and composition of the Central Bank’s foreign exchange reserves.
  - Discussion about possible swap agreements among central banks.
  - Ensure the Home country’s supervisor is granted proper resources to fulfil the greater supervisory task.

### Key lessons (numbered as in the speech)
- Lesson 1: "A hole in the balance sheet never goes away just because you choose to ignore it. Someone always has to fill it, whether it be bailed-in creditors or someone else."
- Lesson 2: "Restoring confidence is key. Eliminating suspicions about any remaining losses lurking under the surface is crucial in this respect. It takes a great deal of determination to provide credible valuations, and above all, transparency about what you are doing. Valuation efforts that do not seem serious or simply too optimistic are counterproductive. They send the signal that you are either in denial or trying to hide something. Markets hate this kind of uncertainty, and will only postpone the recovery."
- Lesson 3: "Act quickly. It is typically better to just rip off the band-aid than to let problems drag on, allowing them to accumulate."
- Lesson 4: "Functions, not stakeholders, are the important thing. Upholding critical functions is the main goal, not protecting the wealth of bankers or others."
- Lesson 5: "If state support is still necessary in the end, make sure taxpayers get an upside. Don’t just socialize the losses."
- Lesson 6 (summary): "Go out and get the lemons, squeeze them, and start to plant new ones!"

*Keynote speech by Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, Mauritius, February 2, 2017.*

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_Source: https://www.imf.org/-/media/files/news/seminars/stefan_ingves_keynote.pdf_