Bad Bank - Experiences From Swedish Bad Banking

Experiences From Swedish Bad Banking

Sweden went through a major banking crisis in the 1990s. Three out of the four major banks were insolvent. The Swedish government chose to establish two bad banks, Retriva and Securum. Retriva took over all the nonperforming loans from Gota Bank (sv) and Securum took over the non-performing loans from Nordbanken. Some major conclusions from the experiences in Sweden:

• By separating the non-performing loans from the banks, it was possible to start the process of focusing the banks back to lending. Trying to work out all the non-performing loans inside the bank only prolonged the healing process in the organisation and reduced the ability of the bank to lend more to the public and businesses.

• Repairing the balance sheet of the banks is only one important element to get the banks back to normal lending activities. The other major element is organisational processes.

• The organisational requirements are very different in a bad bank than in a normal bank. A good bank is a 'process' organisation while a bad bank is a 'project' organisation. The skill set and the emphasis on type of skills are different in a restructuring and winding up situation than in a lending situation.

• The first year of the bad bank determines its success. The challenge is the large number of non-performing loans in a wide variety of situations with regards to geographical location, type of industry, size and type of problem. If the bad bank does not quickly get control of the loans, a lot of value is lost and the capital requirements of the bad bank can change dramatically. To be successful, a well-defined process on how to handle the different loans has to be established. This process has to be followed and managed with force and speed in the organisation. If not, the bad bank will easily end up in chaos.

• When a bad bank has gone through its credit work-out process, the remains of the bad bank is often asset ownership. Therefore the bad bank in its life span changes dramatically from being at the outset basically a bank with a large number of loans to later in life a large asset-owning company. A common mistake is to think of this last phase of the bad bank as a kind of investment company. An investment company has very well defined objectives regarding what type of assets they want to acquire. They choose the assets they want to acquire. A bad bank gets all the assets that are left after the credit work-out process.

• A lifetime of 10–15 years is too long for planning purposes. The world changes substantially in such a long life span. Most banking crises are over in a 5–6 year period. A 5–6 year time span is the logical time to use for planning purposes and the time line to use for winding down a bad bank.