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by Lalin Fernandopulle

Financial crises in countries have similar cause and effects though conditions differ. It is not healthy to use regulations to limit competition in the banking sector, said Deputy Governor, Sveriges Riksbank Sweden Dr. Lars Nyberg.

He was addressing a seminar on Financial Reforms and Financial crisis - the Swedish experience at the Centre for Banking Studies in Colombo on Tuesday.

Banks should assess credit risks and allocate credit where it can have positive effects on economic development, Nyberg said.

Nyberg said the financial crisis in Sweden at the beginning of 1990 had a negative impact on the country's economic growth.

The crisis not only affected the banks but society as well. The economy reported a negative growth for three years with unemployment rising to 8 per cent from 2 per cent between 1990 to 1993.

From the Second World War up to the 1980s the Swedish financial system was subjected to regulations. The lack of indepth thinking in making financial decisions by bank managers and politicians aggravated the situation, Nyberg said.

He said financial markets being regulated for half a century affected the thinking of policymakers. The government with a 17 per cent stake over the banks exercised authority in the appointment of the board of directors.

Excessive credit boom, insufficient credit assessment and overheating in the economy resulted in loan losses and insolvency of banks.

Nyberg said Swedish banks' lending was directed to the government at a low interest rate and long duration to finance housing construction and budget deficit.

The rate at which lending could increase was determined by the Riksbank to keep credit expansion in line with economic development.

There were domestic regulations regarding cross-border capital flows. Companies and individuals were permitted to invest if they could prove the financial necessity of the investment. Swedes were not permitted to purchase shares from companies outside Sweden. Private persons were not allowed to take unlimited currencies out of the country and hold accounts abroad.

Banks should assess credit risks and allocate credit where it can have positive effects on the economic development, he said.

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