Drees, Burkhard and Ceyla Pazarbasioglu, “The Nordic Banking Crises: Pitfalls in Financial Liberalization?”, (Washington: IMF WP/95/61, June 1995).
Wilse, Hans Petter, “Management of the Banking Crisis and State Ownership of Commercial Banks”, Norges Bank Economic Bulletin, 2/95 pp. 217-229.
Prepared by David J. Ordoobadi.
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).
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.
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.
Further information on the BISC is provided in section (d) below.
The Government reduced its holdings in CBK from 69 percent to 51 percent in early December 1995.
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.
Wilse (1995) p. 224.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.