The Capital Structure of Swedish banks -Development after a financial crisis

University essay from Göteborgs universitet/Företagsekonomiska institutionen

Abstract: Background and problem: This study investigates the effects of the financial crisis of 2007- 2008, a crisis partly caused by mortgage backed securities. Banks had a large part in the developments taking place in the years after the outbreak of the crisis in 2007, as many banks had an excessively low capital base, involving too much risk in its businesses. The bankruptcy of Lehman Brothers and other crises of American banks caused the ripples of the crisis to spread throughout the market, and in 2009 difficulties hit the international banking sector. Changes can be seen in the management of banks; however there are still questions regarding the stability of the banking sector. This study will investigate the changes in capital structure and liquidity that can be found throughout and after the financial crisis. Aim of study: The aim of the study is to understand what the changes made in capital structure and liquidity of banks would mean for the stability and trust. This is seen through the perspective of the financial crisis of 2007-2008, investigating the changes that have been made and the motivation behind them. Methodology: The study was done with a qualitative method, using two techniques; interviews and source analysis. In this study, the largest four banks in Sweden have been investigated, Handelsbanken, Nordea, SEB and Swedbank. From each of these banks, a representative have been selected from the Investor Relation section, as an individual in this position have the appropriate overview and knowledge of the bank to provide the information needed for this study. In the source analysis financial reports from 2007-2008 have been utilised. Analysis and conclusion: The financial crisis affected the banks differently, depending on the markets of expansion. Excessive risk-taking has been found, where one bank expanded aggressively into new markets and did not appreciate the risks on these new markets. CEO compensation and risk seeking boards are factors that might have caused such behaviour. All of the banks have made noticeable changes to their capital structure, increasing it annually, accompanied by a risk-reduction movement in their assets to improve the stability in most of the banks. The new regulation’s focus on both quality and quantity is in accordance with the views that are expressed in the framework. The banks have altered their goals to levels several per cent above the regulations, in contrast to before the crisis when they were often as close as possible. The impact of the new liquidity regulations has been limited, as the banks continue to work with their internal measures. The banks have all changed their view of capital ratio and liquidity, where many of the banks have doubled the amount of these posts and now find these measures to be both beneficial and a way to gain trust and stability.

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