THE BOTTOM LINE:ADDING TWO Swedes to the Irish regulatory stew should give the Central Bank a better flavour of how to spot the next credit bubble and how to burst it in time.

Lars Frisell, the Swedish economist who took over as director of economics and chief economist at the Central Bank in June, has joined fellow countryman Stefan Herlach who was appointed deputy governor last year. Prior to his move to Dublin, Frisell had been chief economist at Sweden’s Financial Supervisory Authority for three years and before that he was at the country’s central bank, the Riksbank, where his roles included deputy head of the financial stability department.

So he has all the credentials to give the Central Bank the “institutional memory” he spoke of last week in his first public speech in Ireland, when he referred to the effect of Sweden’s financial crisis in the early 1990s on the country’s bankers.

In his speech, Frisell gave his perspective on the “causes, culprits and cures” of the financial crisis in Ireland and drew interesting comparisons between Ireland’s current situation and how Sweden got into – and out of – its crisis.

He told the Institute of Certified Public Accountants that the “institutional memory” of the Swedish crisis 20 years ago tempered the boom in lending by Sweden’s banks into the Baltic countries in the decade before the most recent crisis. While bankers did almost the same thing as in Sweden in the 1990s, it was on a smaller scale in the Baltics, he said.

Frisell said that when the Burlington Hotel sold for €288 million in 2007, or €600,000 per hotel bedroom, someone should have said stop, but that even a small group of naysayers was not enough.

“Even if there are a few people – maybe a few academics, a few journalists who would be the beacons of sanity – they are usually not enough to stop it,” he said.

Frisell was also startled that nobody saw “something seriously wrong” in a country that was building almost 100,000 new homes at the peak of the boom when Sweden, which is twice the size of Ireland, was building 30,000 new homes a year.

He blamed the Irish crisis on four areas – the corporate culture at the banks, the corporate governance at the banks, the role of “trusted third parties” and the failure of the authorities and politicians.

The culture of the banks was affected by incentives such as bonuses based on loan volumes while the bank boards, who represented big shareholders, should have been aware of the risks being taken.

Catering to his audience last week, Frisell said that accountants were among the trusted third parties who should have been protecting the interests of small shareholders and the banks’ creditors.

Accountants play an important external role to protect outsiders, he said.

Frisell gave an example where the Swedish regulator withdrew the licence of a small bank, Hagstromer Qviberg, which had played the complex financial markets for high net-worth individuals and had been doubling up on bets to such an extent that the bank was left severely under-capitalised. It was the first time in 30 years that a Swedish bank had its licence pulled, he said.

After the licence was pulled, the Swedish regulator reported the bank’s auditor to his regulatory body but the accountant successfully defended himself.

Frisell argued that the incentives for accountants – the payment of hundreds of thousands of euro in audit fees every year – was “clearly stacked in the wrong way”.

Auditors will undoubtedly be wary of criticising the business models of a bank if there was a risk of losing the audit job.

Frisell said that the Swedish regulator previously had financial accountants within the banks reporting back to them but they were later withdrawn in favour of a more hands-off model because they could be blamed if something went wrong.

The regulator’s role was not to follow a bank’s business day-to-day but to ensure the rules of the game were being followed.

This raises interesting questions for the more hands-on role that the Central Bank has adopted at the Irish banks since the crisis, with supervisors from the regulator sitting in on meetings of bank boards.

The most striking difference between Sweden and Ireland was the ability of Stockholm to devalue to trigger a much quicker recovery from the crisis.

Sweden depreciated the value of the krona by about 20 per cent, which, at a time when the global economy was in relatively rude financial health, helped drive an export boom for the country.

“That is not a tool we have in Ireland,” says Frisell. Instead it is “austerity, austerity, austerity” – there is “no way around” budgetary cuts, he said.

The banks won’t have liked it but Frisell did say that debt forgiveness had a role to play in the new personal insolvency law to alleviate the heavy burden of household debt but it involved a “tricky balance”.

Sweden’s experience of debt forgiveness is different, however, given that the country’s over-indebtedness related mostly to commercial property, not residential or buy-to-let properties.

Frisell told me later that the conditions for debt forgiveness were “pretty tough” – you had to live on a minimum salary for five years before debts were cleared.

Still, without the escape valve of devaluation for the country, the prospect of debt forgiveness should offer some relief for people, particularly coming from the Central Bank’s new chief economist.