This Background Paper examines the medium-term economic outlook (1997–99) for Norway. The central feature of Norges Bank’s reference case projection for the medium term is that the expansion of mainland output will slow from 3.3 percent in 1995 and 2.8 percent in 1996 to an annual average of 2 percent in 1997–99. Overall GDP growth will also slow from about 4 percent in each of 1995 and 1996 to 2 percent in 1997–99. Inflation is forecast to remain low, at 2 percent in 1996 and on average 2.3 percent per year in 1997–99.

Abstract

This Background Paper examines the medium-term economic outlook (1997–99) for Norway. The central feature of Norges Bank’s reference case projection for the medium term is that the expansion of mainland output will slow from 3.3 percent in 1995 and 2.8 percent in 1996 to an annual average of 2 percent in 1997–99. Overall GDP growth will also slow from about 4 percent in each of 1995 and 1996 to 2 percent in 1997–99. Inflation is forecast to remain low, at 2 percent in 1996 and on average 2.3 percent per year in 1997–99.

III. Recent Developments in the Norwegian Financial System 1/

The Norwegian banking crisis of the early 1990s ensued from a period of sharp credit growth abetted by financial liberalization, accommodative macroeconomic policies, and a system of bank supervision that did not speedily adjust to the new, liberalized environment. Imprudent lending by banks anxious to expand market share and a surge in credit demand pent up during the period of administrative credit controls resulted in asset price inflation and, with the bursting of the bubble, a marked deterioration of the balance sheets of households and firms. The loan defaults which followed eroded bank profits and capital, depleted the resources of deposit guarantee funds, and culminated in state ownership of the largest commercial banks.

Although the resolution of the banking crisis is now more than one year old, the effects of the crisis have yet to be fully reversed: state ownership is still dominant, guarantee funds remain unreconstituted, bank profits are heavily influenced by the recovery of previously provisioned loans, and the banking system remains in flux as the response of its participants to competitive pressures continues. Government policy has focused on strengthening bank supervision and the partial privatization of the main commercial banks.

At the same time, other segments of the Norwegian financial markets have been reformed to conform to international practice. In the government bond market, for example, a primary dealer system was adopted in 1995 as the culmination of a series of reforms aimed at improving the market’s liquidity and efficiency, even as the government’s already modest appetite for debt financing is expected to be slackened further by growing surpluses over the medium term.

This paper reviews recent developments in Norway’s financial markets, focusing, in section 1, on the post-crisis evolution of the banking system and, in section 2, on the recent adoption of a primary dealer system for the government bond market. 2/

1. Norwegian banking system

a. Market structure and evolution

There are three types of deposit-taking institutions in Norway: savings banks, commercial banks, and the Post bank. The banking sector is dominated by two national commercial banks (Den Norske Bank and Christiania Bank & Kreditkassen (CBK)) one national savings bank, and the postal banking system. Savings banks are mutually-owned, independent foundations which typically have a regional focus and operations oriented toward households. Savings banks have maintained a stable share of deposits since 1987 (45 percent), while increasing their share of the loan market (from 23 percent in 1987 to 27 percent in mid-1995) (Table 3.1 and Chart 3.1). While still retaining its predominantly local or regional character, the savings bank sector has consolidated steadily in recent years, with the share of the ten largest savings banks in the sector’s total assets increasing from one quarter in 1970 to about 70 percent currently. Commercial banks--with lending operations oriented toward corporate borrowers and in particular small- and medium-scale enterprises--account for 42 percent of total deposits and 30 percent of all loans. Commercial banks have maintained a constant share of the loan market since 1987, 1/ while losing depositors to the postal banking system, which accounts for 12 percent of total deposits and 2 percent of all loans. The Post Bank’s increased share of bank deposits is attributable to the loss of confidence in commercial banks during the crisis.

Table 3.1.

Market Share of Main Financial Institutions

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Source: Central Bureau of Statistics.
CHART 3.1
CHART 3.1

NORWAY ARKET SHARE OF MAIN FINANCIAL INSTITUTIONS

(In percent of total)

Citation: IMF Staff Country Reports 1996, 015; 10.5089/9781451829624.002.A003

Source: Statistics Norway.

In addition to these depository institutions, loans are originated by state banks (which account for 22 percent of total lending), mortgage companies (8 percent), finance companies (3 percent) and insurance companies (9 percent). The state banks--for fishing and agriculture, industrial and regional development, municipalities, education, and housing--are specialized vehicles financed through the budget to provide loans at preferential rates and other subsidies to favored sectors. The share of state banks in total lending increased during 1987-92 (from 20 percent to 23 percent) but declined thereafter. Mortgage and finance companies--largely owned by commercial banks--finance their operations through direct borrowing and, in the case of mortgage companies, bond issuance. The sharp decline in the market share of mortgage companies is attributable to the reclassification of loans following the conversion of a mortgage company to a commercial bank and other acquisitions and restructurings that followed the banking crisis (see footnote 1 above). Insurance companies (mainly life) have, in contrast, maintained a constant share of the loan market.

The savings and commercial banks operate and fund independent deposit guarantee funds. These funds were effectively depleted during the banking crisis and supplemented directly and indirectly by various forms of government financing. 1/ All Norwegian financial institutions are supervised by the Banking, Insurance and Securities Commission (BISC), an independent regulatory body which reports administratively to the Ministry of Finance. 2/

b. State ownership

The government took full ownership of the three largest commercial banks--Den Norske Bank (DNB), Christiania Bank & Kreditkassen (CBK) and Fokus Bank--in the wake of the banking crisis. It has since reduced its holdings in the two largest commercial banks--DNB and CBK--to 72 percent and 51 percent, respectively. 3/ Fokus Bank was fully privatized in 1995. 4/

Nevertheless, the public sector continues to loom large over the banking system. State banks and the Post Bank--which are fully owned by the state--together account for about one quarter of total lending. In addition, the state maintains a majority stake in the two largest commercial banks which account, respectively, for 40 percent and 30 percent of total commercial bank lending. All told, the state has a majority interest in financial institutions that account for half of total lending.

With the exception of the state banks and the Post Bank, state ownership in the banking system sprang from rescue operations necessitated by the banking crisis. The state has encouraged measures to cut costs and boost earnings while strengthening bank supervision and eschewing interference in credit allocation decisions. Progress has been made in the sale of state interests in the banking system, although much remains to be done on this score and complete liquidation is not contemplated.

Continued state dominance of the commercial banking sector over the long term would raise a number of issues. First, state ownership might inhibit efficiency gains in the provision of financial services. Banks in which the state maintains a large ownership stake might be perceived as less risky and consequently face reduced funding costs and limited market pressure to boost efficiency and ensure the credit quality of their loan portfolio. In particular, state ownership might eventually impede further staff reductions, branch closures, and sector-wide consolidation. Privately owned banks, in contrast, could face higher funding costs notwithstanding their more efficient operations. Second, distortions might be introduced in the mobilization and allocation of resources. The lending decisions of banks in which the state maintains a controlling interest might be influenced by non-commercial considerations, exacerbating the distortions introduced through the maintenance of specialized state banks. Finally, continued state ownership poses potential conflicts of interest between the state’s roles as owner and supervisor of the main banking institutions.

While continued controlling state interest in formerly privately owned commercial banks poses the risk of the eventual loss of market (and regulatory) discipline, state banks were established as an alternative channel to market-based resource mobilization and allocation. The subsidized funding of state banks and their advantaged position in potentially lucrative markets adversely affects privately owned financial institutions, as well as those sectors of the economy not favored with financing at preferential rates. Moreover, the artificial segmentation of state bank operations into particular sectors limits the scope of these banks to reduce the risk of their operations through the diversification of their loan portfolios.

At present, there are no plans to privatize the state banks. However, the 1996 national budget proposes reforms to the sector including the introduction of means-testing for subsidized mortgage loans extended by the state housing bank, the merger of the state bank for fisheries with the industrial and regional development fund (SND), the reorganization of SND, and the restructuring or possible sale of the state bank for municipalities.

In the case of the commercial banks, the government has announced its intention to reduce its remaining holdings in the two largest commercial banks to 50 percent by the fall of 1997 and to maintain at least a one third stake thereafter, a level deemed sufficient to afford the government a controlling interest. The government’s stake in the commercial banking system is managed by two entities established at the peak of the crisis in 1991: the Government Bank Insurance Fund (GBINSF), established as a short-term facility to permit crisis management, and the Government Bank Investment Fund (GBINVF), oriented toward the management of a long-term state investment in the banking sector. The government plans to wind down the operations of the GBINSF within the next 5-7 years when the CBGF is expected to be fully reconstituted. To this end, procedures have been established for the eventual transfer of the GBINSF’s liquid assets to the Treasury and the sale of its commercial bank share holdings to the GBINVF. In contrast, the GBINVF has an indefinite mandate to “secure a substantial element of national ownership in Norwegian banks”. 1/ The government’s aim in maintaining indefinitely at least a one third interest in the two largest commercial banks is to ensure, first, that the focus of these banks is not shifted from the financing of Norwegian industry and, second, that the imprudent lending that contributed to the banking crisis is not repeated.

c. Post-crisis performance

The authorities responded vigorously to the crisis: assets were written down sharply; boards, owners, and managements replaced; bank supervision strengthened; and substantial funding provided in various forms. As a result, bank balance sheets have been strengthened and profitability restored. The return to profitability has been assisted by a steady decline in personnel costs as commercial and savings banks have shed staff and closed branches. 2/ Moreover, with the upturn in the economy, loan losses experienced by commercial and savings banks have fallen to well below normal pre-crisis levels. As a result, the average capital adequacy ratio of the commercial banking sector improved from 7.2 percent in 1991 to 10.9 percent at end-June 1995, while the ratio for the savings bank sector strengthened from 6.2 percent to 11.6 percent over the same period.

In 1994, both commercial and savings banks experienced a decline in pre-loss operating results from 1993, owing to the elimination of subsidized Norges Bank deposits, a compression of interest margins reflecting strong competition for market share, and a deterioration in proprietary trading income attributable to an unanticipated decline in bond prices (Table 3.2 and Chart 3.2). However, the post-loss operating results for commercial banks rose sharply over their 1993 levels, reflecting an unusually low level of loan losses. 1/ Savings banks, in contrast, experienced a decline in post-loss operating profits from 1993 as abnormally low loan losses were insufficient to compensate for a compression of interest margins and unusually low proprietary trading income. 2/

Table 3.2.

Profit/Loss and Capital Adequacy of Commercial and Savings Banks, 1987-June 1995

(In percent of average total assets)

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Source: Norges Bank.

BIS rules applicable since 1991.

CHART 3.2
CHART 3.2

NORWAY ANK PROFITABILITY

(In percent of average total assets)

Citation: IMF Staff Country Reports 1996, 015; 10.5089/9781451829624.002.A003

Source: Norges Bank.

In the first half of 1995, intense competition for market share continued to be reflected in compressed interest margins and lower net interest income for both groups of banks. However, the recovery of proprietary trading income and loan losses even lower than those experienced in 1994 helped boost the post-loss results of commercial and savings banks in the first half of 1995 above the levels achieved in the first six months of 1994. Indeed, in the case of commercial banks, profits were increased by the reversal of previous loan-loss provisions, which in many cases represented the single largest contributor to income. This structure of earnings is not sustainable, and raises the question of whether loans are being priced appropriately.

d. Regulatory initiatives

The regulatory writ of the Banking, Insurance and Securities Commission (B1SC) extends to all segments of the financial sector, including banks, finance companies, credit institutions, mortgage companies, insurance companies, brokerage houses, real estate agents, and accounting and auditing firms. The authorities consider the broad scope of the BISC’s supervisory activities to be an efficient approach to risk control, particularly in view of the tendency of banks, and insurance, mortgage, finance and investment companies to merge and otherwise encroach on each others’ traditional activities. The main functions of the BISC are to supervise financial institutions and markets, develop and improve administrative regulations, advise the Ministry of Finance on regulatory issues, and develop procedures to respond to emergencies. Since the banking crisis, the BISC has been enlarged and strengthened; onsite inspections intensified; financial disclosure rules and statistical standards tightened; internal risk management systems of financial institutions assessed; early warning indicators of potential liquidity and solvency difficulties developed; and a system of macroeconomic surveillance adopted. The introduction of a system of macroeconomic surveillance was considered to be particularly important as a means of providing an early warning of the factors--high asset price and consumer price inflation, rapid credit growth, the increased gearing of households and firms, and declining savings ratios--that contributed to the last banking crisis.

In addition, the Banking Law Commission (BLC) is currently considering a number of proposals for reforming deposit insurance and the regulation of financial institutions. On the issue of deposit insurance, the BLC is considering such issues as the appropriate ceiling for guaranteed deposits, the appropriate basis for the assessment of deposit insurance premiums, and whether or not the separate guarantee funds operated for savings and commercial banks should be merged. The current system of separate deposit insurance institutions reflects the different ownership structure of each type of bank, 1/ and the relative financial health of each fund. 2/ Merging the two guarantee funds would yield diversification benefits and efficiency gains.

2. Norwegian government bond market

During the past decade, the Norwegian credit market has been progressively liberalized; direct controls on credit allocation and bond issuance and investment dismantled; and regulation reoriented toward risk containment and investor protection. At the same time, Norway has attempted to structure its bond issuance practices to conform with international norms as a means of increasing the market’s liquidity, transparency, and attractiveness to investors. To these ends, government borrowing has been concentrated on a few large issues with standard maturity and interest rate profiles, and initial sales have been made through auctions on a preannounced calendar. An important element of this reform--the introduction of a primary dealer system for government bonds--was achieved in 1995.

a. Market liberalization

Prior to 1984, the Norwegian bond market was tightly regulated. Administrative ceilings on interest rates were not raised with inflation, necessitating credit rationing by regulation rather than price. Eligible issuers and the size and coupon of borrowings were all controlled. A pool of captive investors was created as banks, life insurance companies, and other financial institutions were required to invest a portion of the growth of their total assets in bonds. The authorities created a market for government bonds and influenced the cost of government borrowing by ensuring that the authorized level of new private sector issues fell short of the growth of obligatory bond investments by financial institutions. Exchange controls precluded nonresidents from either borrowing or lending in the Norwegian bond market. While this approach contained borrowing costs and facilitated bond placement, it poorly served the interests of investors and precluded any influence of market forces on funding trends, security design, and market structure. As already discussed, the dismantling of this system and the ensuing release of pent-up demand for credit and asset price inflation played a key role in precipitating the crisis from which the Norwegian banking system has so recently recovered.

The direct control of the size and terms of new debt issuance and compulsory investment regulations were eliminated in 1984. While the relaxation of controls on international capital flows was also initiated in that year, exchange controls were not completely lifted until July 1990. Nonresidents were then given full access to domestic bond and money markets and permitted to issue krone-denominated paper.

b. Benchmark bonds

To complement the efficiency gains of liberalization, the authorities sought to increase market liquidity through changes in the method of government bond issuance. Beginning in 1991, a regular schedule of preannounced auctions was established and the authorities concentrated new borrowing in benchmark bonds with standardized terms, innovations that have contributed significantly to the increased turnover of the Norwegian bond market. The standardized features for the benchmark bonds--fixed annual coupon payments and bullet repayment at par upon maturity with no embedded options--were aimed at enhancing their appeal to investors. Additional tranches of these benchmark bonds have been opened with the result that they account for about three quarters of total outstanding government bonds and the bulk of the sharp increase in market turnover since 1991.

The benchmark bonds were issued with a gap of 2-3 years between the final maturity of each bond which originally ranged between 5-13 years. 1/ With the passage of time, however, the bond’s residual maturity has declined, and the government has not had a sufficiently high borrowing requirement both to maintain liquidity in these issues and develop a series of benchmark bonds at stable maturities.

c. Borrowers, lenders, and trading

Small, and with a narrow investor base, the Norwegian bond market is dominated by large institutional participants. 1/ Gross issuance on the Norwegian bond market peaked in 1989 at Nkr 77 billion in the wake of a real estate bubble during which debt issuance by mortgage companies soared (by a factor of six during 1984-89) to represent about 60 percent of total issues. The Norwegian government bond market is unusual in the low level and sporadic nature of new government bond issuance: the small fiscal deficits during 1986-90 virtually eliminated the need for government borrowing (new issues took place only in 1989) as the government’s cash holdings in the Norges Bank were sufficient to satisfy its funding requirements.

At end-September 1995, the nominal value of outstanding krone-denominated bonds totaled Nkr 329.3 billion, with the central government representing 38 percent of the total, compared with 18 percent for commercial and savings banks and 16 percent for mortgage companies (Table 3.3). Investors are dominated by insurance companies (representing 38 percent of all outstanding krone-denominated bonds) and commercial and savings banks (21 percent) (Table 3.4). Foreign sector holdings, which have declined steadily since 1991, represent 2.2 percent of outstanding krone -denominated debt.

Table 3.3.

Issuers of Krone-Denominated Bonds 1/

(In millions of NKr)

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Source: Norges Bank.

Nominal value.

Postbanken and banks’ guarantee funds are included.

Table 3.4.

Holders of Krone-Denominated Bonds 1/

(In millions of NKr)

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Source: Norges Bank.

Market value.

Central government and social security administration and public finance institutions.

Postbanken and banks’ guarantee funds are included.

Unit trusts, bond and money market funds.

Turnover of krone-denominated bonds has increased considerably, reflecting a sharp rise since 1990 in central government bond issues and an attempt to structure government bond characteristics to enhance their liquidity. The benchmark bonds introduced in 1991 have underpinned the rise in trading volume, a development that has helped narrow spreads. 2/

d. Primary market regulation

New government bond issues are sold through Dutch auction with Norges Bank, acting as the government’s agent, reserving the right to reject any or all tenders. 3/ Institutional investors are the sole auction participants as arrangements for noncompetitive bids by individuals were discontinued for lack of investor interest. Unlike other market-making arrangements, which typically give primary dealers privileged access to government bond auctions and oblige them to participate meaningfully in such auctions, the system adopted by Norway entails no such right or obligation. Norges Bank rejected exclusive access for primary dealers, arguing that since the largest 15 investors accounted for 90 percent of the market, these investors should not be excluded from participating in the primary market. Even without compulsion or sole access privileges, the primary dealers selected are expected to continue to participate meaningfully in the primary market.

e. Secondary market regulation

Secondary bond trading takes place on the Oslo Stock Exchange, which establishes listing and membership requirements. The Norges Bank regulates secondary market activity, acts as the settlement bank, and, prior to the establishment of the primary dealer system, acted as a market maker in the benchmark government bonds. Physical securities were replaced by a book-entry system in 1985 with the establishment of the Norwegian Registry of Securities.

Prior to the introduction of the primary dealer system, private brokers introduced an informal market-making system to facilitate secondary market trading. Although these private market-making agreements were considered useful in enhancing market liquidity, they were found deficient on a number of counts. First, since Norges Bank was not a party to the agreements and could not enforce compliance with their terms, there was concern that the agreements might break down in the face of market turbulence, an eventuality that would leave Norges Bank exposed as the market maker of last resort. Second, third parties did not benefit from the provisions of the private market-making agreements, a factor that artificially segmented the market. Third, Norges Bank expressed concern that a private market-making system might deprive it of market information needed to contain risk and conduct monetary policy. Finally, the private market-making agreements only covered secondary market activities; no broker was obliged to participate in bids for new issues. To counter these inadequacies, the authorities introduced a market-making system in August 1995.

f. Primary dealer system

A market-making system typically involves the selection of a limited number of primary dealers obligated to take up a significant amount of new government issues and to quote firm, continuous, two-way prices in all or some government securities on the secondary market. In exchange for this obligation, primary dealers are generally accorded privileged access to new issues of government debt, or facilities to fund their positions in such securities. Primary dealers are selected on the basis of their ability to place new issues, managerial competence, and capital adequacy. In the secondary market, primary dealers facilitate immediate execution and provide market depth by standing ready to act as a principal in trades and bear the risk of adverse price movements on their bond inventory. Imbalances in the market will typically be reflected by widening spreads. 1/ During periods of relative calm, spreads across market makers can be expected to be fine, but differ to reflect varying perceptions of the market and the composition of primary dealer inventories. Spreads are also a function of the cost to primary dealers of hedging their exposures, financing their inventories, and the amount of capital required to underwrite trading activities. As a result, the existence of a liquid derivatives market, an active repo market, and access to securities lending facilities can reduce broker costs and narrow spreads. Primary dealers generate revenues on the bid ask spread, their inventory, and through proprietary trading, whose profitability may be enhanced through access to information on order flow.

Norges Bank considered that the introduction of a primary dealer system would address a number of deficiencies. First, as a party to the arrangements underlying a market-making system, Norges Bank would be better able to enforce the fulfillment by primary dealers of their market-making obligations. The likelihood of the need for Norges Bank intervention to dampen market turbulence would be reduced accordingly. Second, in monitoring the compliance of primary dealers with their obligations, Norges Bank would have access to order flow and other market information. Finally, the market-making system would benefit a broader group of market participants than private agreements.

The initiative to introduce a primary dealer system for Norwegian government bonds began in 1995 with the invitation of 16 banks and brokerage firms to submit applications to become primary dealers. The main prerequisites for application include minimum capitalization of Nkr 50 million and membership of the Oslo Stock Exchange. In addition, the firms invited to apply were selected for their market placement and risk management capabilities. Particular weight was given to past participation in the secondary market and the nature of the spreads quoted. Although foreign investment houses were not invited to apply, there are no restrictions on foreign firms acting as primary dealers. Foreign entities with head offices in EEA countries may become primary dealers; firms from other countries may also be eligible once the GATS provisions are concluded. The government aimed to attract at least 5 and at most 10 suitable primary dealers.

Seven primary dealers were selected on the basis of their share in market turnover, tightness of quoted spreads, research capacity, reputation, and credit standing. The primary dealer agreement entered into by each dealer with Norges Bank establishes the primary dealer’s obligations. First, primary dealers must quote continuous two-way prices at prescribed maximum spreads for the benchmark bonds included under the agreement during all trading days on the Oslo Stock Exchange (OSE). 1/ In the event of market turbulence, either the primary dealers or Norges Bank may double these spreads. Primary dealers must post their prices on the OSE and respond promptly to telephone orders on lines dedicated to that purpose. They are also obliged to report their financial condition and market developments to the BISC, the OSE, and Norges Bank.

Norges Bank, in turn, will promote the dissemination of the price and other information on the benchmark bonds outside the OSE, maintain at least five primary dealers, ensure that all primary dealers have equal access to sensitive information and that such information is made available to the market, use primary dealers exclusively in its transactions in government bonds on the secondary market (with the exception of repurchase agreements in connection with monetary policy operations), and establish a securities lending facility (in the form of repurchase agreements) for primary dealers. This facility will provide up to Nkr 50 million in credit for each benchmark issue for up to five days at a rate of 200 basis points less than Norges Bank’s official deposit rate.

The recent adoption of a primary dealer system appears to have proceeded smoothly. Indeed, the transition is in some respects artificial since an informal system of market-making antedated its formal adoption in August 1995. Despite the attempts to improve its liquidity and efficiency, the Norwegian bond market is unlikely to grow significantly given the fiscal surpluses expected to be sustained over the medium term. Maintaining a balance between the need for competition among primary dealers and the limited ability of a small market to sustain many market makers could represent a future challenge. Moreover, the limited availability of hedging vehicles, reflecting an undeveloped market for interest rate futures, might pose problems for risk management by primary dealers.

References

  • Broker, Gunther, Government Securities and Debt Management in the 1990’s. (Paris: OECD 1993).

  • Drees, Burkhard and Ceyla Pazarbasioglu, “The Nordic Banking Crises: Pitfalls in Financial Liberalization?”, (Washington: IMF WP/95/61, June 1995).

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  • Gronvik, Gunnvald, “Structural Changes in Norwegian Financial Markets 1989-94”, Norges Bank Economic Bulletin 3/95 pp. 309-319.

  • Naes, Randi and Pal Winje “The Norwegian Bond Market”, Norges Bank Economic Bulletin 2/93 pp. 132-138.

  • Nordal, Inger Ann and Morten, Noerland, “Financial Institutions in 1994” Norges Bank Economic Bulletin, 1/95 pp. 69-97.

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  • Prosch, Terje, “Four Norwegian government Benchmark Bonds”, Norges Bank Economic Bulletin, 3/94 pp. 210-215.

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  • Wilse, Hans Petter, “Management of the Banking Crisis and State Ownership of Commercial Banks”, Norges Bank Economic Bulletin, 2/95 pp. 217-229.

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  • Winje, Pal, “The Primary Dealer System for Norwegian Government Bonds”, Norges Bank Economic Bulletin 2/95, pp. 230-235.

1/

Prepared by David J. Ordoobadi.

2/

For detailed discussions of the causes of the banking crisis in Norway and its resolution, see, respectively, Appendix III of SM/93/118 and Appendix V of SM/95/17. A comparison of the banking crises in the Nordic countries is provided in Drees and Pazarbasioglu (WP/95/61, 1995).

1/

The market share data mask a reclassification of loans arising from the conversion of a mortgage company to a commercial bank in 1992 and other restructuring and consolidation.

1/

During 1989-93 the Savings Banks Guarantee Fund (SBGF) injected Nkr 3.2 billion of its own funds into its member banks, while the Commercial Banks Guarantee Fund (CBGF) injected Nkr 4.7 billion. The Government Bank Insurance Fund and the Government Bank Investment Fund established to shore up bank finances in the wake of the crisis provided Nkr 13.8 billion and Nkr 2.9 billion, respectively. In addition, Norges Bank made subsidized deposits and wrote down Norwegian bank borrowing. Other measures to relieve the pressure on the banking system included reduced premium payments to the SBGF and the CBGF and lower liquidity requirements. Total government and Norges Bank support to the Norwegian banking system during the period represented Nkr 24.1 billion, or 2.9 percent of 1993 GDP. Including the injections of resources held by the SBGF and the CBGF raises the total gross cost of the bailout to Nkr 32.1 billion, or 3.9 percent of GDP.

2/

Further information on the BISC is provided in section (d) below.

3/

The Government reduced its holdings in CBK from 69 percent to 51 percent in early December 1995.

4/

The Fokus Bank offering, which was heavily oversubscribed, was split into two tranches reserved, respectively, for retail (one quarter) and institutional (three quarters) investors, with the retail tranche containing a subscription option for pre-crisis holders of Fokus Bank stock, most of whom took up the option offered. No investor received more than 1.6 percent of the shares offered, reflecting the authorities’ objective of limiting the concentration of bank ownership.

1/

Wilse (1995) p. 224.

2/

During 1987-94, the number of man-years employed in the commercial and savings bank sectors declined by 35 percent and 9 percent, respectively (Table 3.2).

1/

The 1994 commercial banks operating results comprise two countervailing one-off elements: poor proprietary trading performance and the abnormally low level of loan losses. Taking these extraordinary factors into account, Norges Bank has calculated a normalized post-loss operating surplus for commercial banks of 0.86 percent of average total assets in 1994, compared with the actual surplus of 1.23 percent of average total assets.

2/

Post-loss operating profits for savings banks fell from 2.02 percent of average total assets in 1993 to 1.38 percent in 1994, or, on a normalized basis, to 1.44 percent.

1/

Savings banks are mutually owned, private foundations whose equity capital has traditionally represented accumulated retained earnings, while the commercial banks have typically had a standard corporate structure with equity in the form of publicly traded shares as well as retained earnings. Since 1987, however, savings banks have issued primary capital certificates, publicly traded equity-like instruments which afford the investor only limited ownership and corporate governance rights.

2/

Savings banks, which were less affected by the crisis than commercial banks should be able to reconstitute their deposit guarantee fund within two years, compared with 5-7 years in the case of the commercial banks.

1/

The benchmark bonds together account for Nkr 102 billion, or 80 percent of total outstanding government bonds. Four of the five currently outstanding benchmark bonds are covered under the primary dealer agreement: the 9 percent of 1999, the 7 percent of 2001, the 9½ percent of 2002, and the 5¾ percent of 2004. The fifth, the 10 percent of 1996, has been excluded from the agreement because of its short maturity.

1/

For example, there are 600-700 investors in each of the four benchmark bonds, with little participation by households and non-residents; the 15 largest players account for 90 percent of the market.

2/

During 1992-94, turnover in the bond market increased from NKr 501 million to NKr 1.5 billion, with the share of central government bonds in total turnover increasing from about one third to three quarters.

3/

Tenders are ranked by price in descending order. The price for each issue is the final accepted bid, which, together with all higher bids, sells out the amount offered. Thus all tenderers allotted bonds pay the same price, which is equal to the lowest accepted tender.

1/

In times of extreme market volatility, liquidity may dry up completely (or spreads widen to levels designed to discourage business) as primary dealers temporarily renege on their obligation to make markets.

1/

The maximum spreads established for trades in round lot trades between Nkr 1-10 million are as follows: 15 basis points for maturities of up to 4 years; 20 basis points for bonds with a maturity of 4-7 years; 25 basis points for bonds with a maturity of 7-10 years; and 30 basis points for 10 year maturities. Orders between Nkr 0.1-1 million in round lots of 0.1 million are subject to a maximum additional spread of 15 basis points.

Norway: Background Paper
Author: International Monetary Fund