FI analysis 1: The Too-Big-To-Fail Guarantee for Swedish Systematically Important Banks

FI's mission is to safeguard the stability of the Swedish financial system and to ensure that consumers have adequate protection. Our financial stability responsibility was also recently widened to include the stability of credit markets as well. This added responsibility means that additional emphasis has to be placed upon in-depth analysis and that our views are both more thoroughly communicated and motivated.

For this reason FI has decided to launch a new report series, FI-analysis. This is our first report in this series where FI presents studies and analysis of questions that is of particular importance to FI.

If a major bank defaults or is severely disrupted in its operations, this has major implications for the financial system and economy. Market participants therefore expect that the government is unlikely to allow this to happen. The government is expected to guarantee the bank's survival and hence implicitly guarantee the value of creditors' capital. This implicit guarantee has a value for the banks that gain access to cheaper financing.

The purpose of this study is to estimate the value of the implicit government guarantee for the four major Swedish banks. This study shows that the value of the implicit guarantee is substantial. However, the implicit guarantee varies considerably depending on the calculation method, and particularly over time.

In 2009, the value of the guarantee equalled at most SEK 203 billion annually, while the average during the period 1998 – 2014 was SEK 26 billion annually. FI estimates that the total annual value of the implicit government guarantee for the four major banks in the summer of 2014 was between SEK 6 billion and SEK 14 billion.