by Aksel Bratvedt
Sweden was through a major bank crisis in the 90s. 3 out of the 4 major banks were insolvent. The Swedish government chose to establish two bad banks Retriva and Securum. Retriva took over all the nonperforming loans from Gotabank and Securum took over the non-performing loans from Nordbanken. From the experiences that the Swedes had in the nineties there are a lot to learn and use for the bad banks being established and for the restructuring in the banking industry that presently is going on in a number of countries around the world. Here are some major conclusions: – By separating the non-performing loans from the banks makes it possible to start the process of focusing the banks back to lending. To try to work-out all the non-performing loans inside the bank will only prolong substantially the healing process in the organisation and reduce the ability of the bank to lend more to the public and business.
- To repair 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 the organisational processes.
- The organisational requirements are very different in a bad bank than in a normal “good 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. The type of “animal” created after the credit –work out process does not normally exist. The asset composition of the bank would have been a “mad man’s work” as there is no logic in the composition of the assets that the bad bank ends up owning. A common mistake is to think of this last phase of the bad bank as a kind of investment company logic. 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.
- Is it logical to think that a bad bank should have a life time of 10-15 years. That time horizon is too long for planning purposes. The world changes substantially in such a long life span. Most banking crisis has been over in a 5-6 year period. A 5-6 year time span is the logical time to use for planning purposes and the timeline to use for winding down a bad bank.
Aksel Bratvedt is a management consultant in London. He spent 3 years working as advisor to the CEO and the deputy CEO in Retriva which was one of the 2 bad banks set up by the Swedish government in the mid nineties to solve the banking crisis there.