Banking Union or Solve It Yourself? the Swedish-Baltic Experience of Cross-Border Crisis Management

This paper investigates how the experience of cross-border crisis management has influenced EU member state positions on the European Banking Union, focusing on Sweden and the Baltic states. During the 2000s, Swedish banks secured a large market share of banking assets in Estonia, Latvia and Lithuania. However, with the onset of the global financial crisis and growing housing market bubbles in the Baltics, the branches and subsidiaries of Swedish banks were near collapse. In turn, the Swedish parent banks intervened swiftly to recapitalize their branches and subsidiaries in Estonia, Latvia and Lithuania. We argue that Sweden’s crisis management experience in the Baltic region since 2008 helps explain the country’s position on the Banking Union. Swedish decision-makers were reluctant to assume liabilities for failing non-Swedish banks in other EU countries and perceived their domestic banking system to be, essentially, safe. Furthermore, they were concerned about preserving national regulatory autonomy within the harmonized European banking governance framework. One of the rationales for setting up the European Banking Union was to reduce uncertainty in cross-border crisis management and make the burden-sharing agreements for bank bail-outs more streamlined and transparent. Furthermore, Estonia and Latvia have already joined the euro area and are part of the European Banking Union, while Lithuania aspires to adopt the common currency in 2015-2016. Sweden, by contrast, has been reluctant to join the European Banking Union and has expressed concerns about being outvoted in the decision-making framework and preserving the ability to set tougher regulatory measures.