© 1998 International Monetary Fund
Cover design, charts, and composition:
Theodore F. Peters Jr., Julio R. Prego, and IMF Graphics Section
Library of Congress Cataloging-in-Publication Data
Drees, Burkhard.
The Nordic banking crises: pitfalls in financial liberalization?
Burkhard Drees and Ceyla Pazarbaşioğlu.
p. cm.—(Occasional paper; 161)
Includes bibliographical references.
ISBN 1-55775-700-3
1. Banks and banking—Deregulation—Norway. 2. Banks and banking—Deregulation—Sweden. 3. Banks and banking—Deregulation—Finland. I. Pazarbaşioğlu, Ceyla. II. Title. III. Series: Occasional paper (International Monetary Fund); no. 161.
HG3168.N63D74 1998
332.1'0948—dc21 98-14799
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Contents
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Preface
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I Introduction
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II Banking Regulation and Its Impact on the Structure of the Financial System
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Interest Rate Regulations
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Quantitative Lending Restrictions
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Impact of Regulations on Financial System Structure
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III Deregulation
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Shortcomings of the Regulated System
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Reform Measures
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The Norwegian Experience
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The Swedish Experience
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The Finnish Experience
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IV Response to Deregulation
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Borrowers’ Response
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Household Sector
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Corporate Sector
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Lenders’ Response
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Changes in Market Shares of Different Financial Institutions
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Changes in Loan Portfolios
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Funding of Credit Expansion
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Pricing Policies
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Incentives for Increased Risk Taking
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Policymakers’ Response
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V Boom-and-Bust Cycles and the Banking Crises
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Boom-and-Bust Cycles
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Banking Crises
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VI Bank Restructuring Operations and the Performance of the Banking Systems
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The Norwegian Experience
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Bank Support Measures
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The Swedish Experience
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Bank Support Measures
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The Finnish Experience
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Bank Support Measures
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Banking Sector Performance Following the Banking Crises
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Lessons from the Bank Restructuring Operations
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VII Conclusions
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References
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Tables
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1. Banking Regulations and Their Impact on the Financial System
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2. Structure and Market Share of the Banking Institutions
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3. Bank Profitability: International Comparisons, 1980–84
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4. Norway: Chronology of Selected Liberalization Measures
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5. Sweden: Chronology of Selected Liberalization Measures
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6. Finland: Chronology of Selected Liberalization Measures
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7. Finland: Bank Profitability
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8. Norway: Bank Profitability
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9. Sweden: Bank Profitability
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10. Bank Profitability: International Comparisons, 1985–89
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11. Nonperforming Loans
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12. Selected Financial Ratios for Commercial Banks
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13. Norway: Funds Used in Rescue Operations
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14. Sweden: Funds Used in Rescue Operations
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15. Finland: Funds Used in Rescue Operations
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16. Bank Profitability: International Comparisons, 1990–94
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Figures
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1. Ratio of Bank Loans to GDP
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2. GDP, Gross Fixed Capital Formation, and Private Consumption
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3. Ratio of the Current Account Balance to GDP
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4. Household Savings and Real After-Tax Lending Rates
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5. Deposits and Loans
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6. Lending Rates
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7. Price Indicators
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8. Norway: Loan Losses and Bankruptcies
The following symbols have been used throughout this paper:
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…to indicate that data are not available;
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n.a.to indicate not applicable;
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—to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
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–between years or months (e.g., 1994–95 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
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/ between years (e.g., 1994/95) to indicate a crop or fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
Preface
For many industrial countries, the 1980s were a period marked by economic deregulation, the removal of cross-border restrictions on capital flows, financial innovation, and increased competition in financial services. These changes were accompanied in most countries by a sharp credit boom, followed by a period of financial fragility, as lower asset quality and interest margins weakened banks’ balance sheets. In a number of countries, the financial performance of banks deteriorated to the point where governments had to support some of the largest banks to preserve financial stability.
This study examines the banking crises in Finland, Norway, and Sweden, which took place in the early 1990s, and draws some policy conclusions from their experiences. One key conclusion is that factors in addition to business cycle effects explain the Nordic countries’ financial problems. Although the timing of the deregulation in all three countries coincided with a strongly expansionary macroeconomic momentum, the main reasons for the banking crises were the delayed policy responses, the structural characteristics of the financial systems, and banks’ inadequate internal risk-management controls.
The Nordic countries took very different approaches to bank restructuring. Although it is difficult to evaluate the outcome of these operations, several considerations seem to suggest that Sweden’s approach has been the most successful. An important lesson is that the decision to adopt a comprehensive strategy enabled Sweden to weather a severe crisis, maintain the country’s credit rating, and minimize the costs of the restructuring program.
The authors are indebted to Carlo Cottarelli and Liam Ebrill for their comments and support and to Francesco Caramazza and Steven Fries for their contributions to an earlier version of this project. The authors would also like to thank Eva Srejber and officials at the central banks of Finland, Norway, and Sweden for providing information and data. Comments from William E. Alexander, Manuel Guitián, Lars Jonung, Mats Josefsson, Arto Kovanen, Göran Lind, Peter Nyberg, and participants at the seminars in the IMF’s European I and Monetary and Exchange Affairs Departments are gratefully acknowledged. The authors would also like to thank Sepideh Khazai and especially Kiran Sastry for excellent research assistance and Evelyn Almacen for secretarial support. Elisa Diehl edited the paper and J.R. Morrison coordinated its production; both are from the External Relations Department. The opinions expressed in the paper are those of the authors and do not necessarily reflect the views of the IMF or of its Executive Directors.