2  BIS Review 111/2006  First, the earlier strict regulations on lending meant that banks did not really acquire the skills to evaluate the creditworthiness of customers and loan projects – only those with very high creditworthiness had had access to the limited amounts available for bank lending to non-prioritised purposes. The restrictions on lending to other purposes led to a large unsatisfied demand from potential borrowers. After deregulation, bank lending increased extremely rapidly without banks’ credit managers really having much experience on how to evaluate borrowers’ creditworthiness. A similar weakness applied to the supervisory authority – they had supervisors with good skills to check the banks’ formal compliance with laws and regulations but not to evaluate credit decisions. At the outset, the central bank took the erroneous view that the loan expansion in the banks could to a large degree be explained by old loans moving out of the former “grey sector” and into the banks. Since this had different implications than an extension of new loans, the central bank found that there was no need for the authorities to worry. Second, a large share of bank lending went into the real estate and commercial property business. There was a building boom in Sweden during the 1980s and prices rose rapidly – paving the way for additional lending. When real estate prices collapsed in the early 1990s the value of the collateral for many bank loans fell sharply and banks suffered huge credit losses from non-payments.
Such events might mean that the bank would have to suffer a loss although it thought it had protected itself. The conclusion is that the authorities must force the banks to assess whether the risk buyers have adequate financial and organisational capabilities and whether the legal arrangements are robust. As in many other countries, there is a strong tendency in the Swedish financial sector to move from “bricks and mortar”, such as having many branch offices, to providing their services through the Internet and telephone. About half of all payments of companies and physical persons in Sweden are made through the Internet and by phone. This has made it possible to increase bank efficiency in  6  BIS Review 111/2006  terms of staff numbers and branches. Each Swedish bank branch now services an average of 4,700 persons in the population compared to, for instance, only 1,900 being serviced by the German banks’ branches in Germany. Of course, each country is free to choose its own service level and may prefer a higher level, although it brings higher costs. Modern regulation In my view, Sweden abolished its old-fashioned regulations for good reasons. Using the banks for directed lending and for other non-commercial purposes may seem handy for the government, but entails large risks and costs.