The general bankruptcy procedure is not considered credible, because it is not designed to handle systemic risk.1 The proposal envisages that a bank is to be put under public administration if it is unable, or is expected to become unable, to meet its commitments over a longer period. A bank under public administration is also to be able to obtain a government guarantee that covers all its commitments. All this is intended to enable the bank to continue operations during a transitional period without a capital contribution from the government. A guiding principle behind the proposed public administration is that, in the event of a crisis, there is no universal protection of creditors. Better risk management and decreased risk exposure are likely to result ex ante if shareholders are liable to be hit by a crisis and creditors may suffer losses. The government guarantee is accordingly proposed to apply only to commitments that are made after the guarantee has been issued. In this way, a bank’s losses are to be carried in the first place by its shareholders and after them by the creditors whose claims pre-date the decision to impose public administration. A basic principle in the management of the Swedish banking crisis was just that no compensation would be provided for shareholders if government funds were needed to cope with a bank’s problems. This was important, of course, with a view to future moral hazard problems but it was also crucial politically.
If we can succeed in implementing the reforms that are still outstanding, there is a chance that economic growth can be propelled to a level beyond the current economic upswing. BIS Review 100/2006  1