Transcript Finland - Suomen Pankki

The 1990’s Financial Crises in Nordic
Countries
"Financial Markets and the Macroeconomy:
Challenges for Central Banks",
Sveriges Riksbank, 6 November 2009
Seppo Honkapohja,
Bank of Finland
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I. Introduction
 19 crises in advanced countries since WWII before the
current one.
 1990’s crises in Finland, Norway and Sweden are
among the ”big five”.
 In 1990-93 bank loss provisions (of lending):
2.9 % in Denmark,
3.4 % in Finland,
2.7 % in Norway
4.8 % in Sweden
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 All Nordic countries provided public support to their
banks.
 Crises in Finland, Norway, and Sweden became
systemic.
 Crisis remained non-systemic in Denmark.
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Outline of Talk




Main developments
Reasons for the crises
Crisis management
Lessons
-------------------------- My perspective
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II. Main Developments
II.1 The Real Economies
Figure 1. Real GDP growth
Finland
8
Sweden
Norway
%
6
4
2
0
-2
-4
-6
-8
1980
1985
1990
1995
2000
2005
*European Commission forecast spring 2009.
Sources: Eurostat and IMF.
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Finland and Sweden




Overheating in 2nd half of 1980’s
Recession with negative growth in early 1990’s
Recovery, then good performance
Note: Finnish developments more extreme
--------------------------- Norway had an earlier upswing, recession in 1987, but
no (significant) negative growth.
 Fairly slow recovery, then good performance
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Figure 2. Current account
Finland
20
Sweden
Norway
% of GDP
15
10
5
0
-5
-10
1980
1985
1990
1995
2000
*European Commission forecast spring 2009.
2005
Source: European Commission.
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Current account
 Finland had major CA deficits in 1980s and early 1990s.
 Smaller but fairly persistent CA deficits for Sweden.
 Norway had CA surpluses, except in 2nd half of 1980s
after decline of oil prices in 1986.
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II.2 Financial developments
Figure 4. Real house prices
350
Norway
Sweden
Finland
Index, 1980 = 100
300
250
200
150
100
50
0
1980
1985
1990
1995
2000
2005
Nominal house prices deflated using the consumer price index.
Sources: Statistics Finland, Statistics Sweden, Norges Bank and
Bank of Finland.
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Figure 5. Real share prices
Finland
3500
Sweden
Norway
Index, 1980 = 100
3000
2500
2000
1500
1000
500
0
1980
1985
1990
1995
2000
2005
Nominal share prices deflated using the consumer price index.
Source: IMF.
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House prices
 Strong boom and subsequent decline in Finland and
Norway
 Long decline in Norway
 less pronounced and slow movements in Sweden
Stock prices
 Strong movements in Finland and Sweden in late 80’s
and early 90’s
 Little movement in Norway during the boom and crisis
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Figure 6. Lending growth
Finland
50
Sweden
Norway
%
40
30
20
10
0
-10
-20
1980
1985
1990
1995
Sources: OECD and Bank of Finland.
2000
2005
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Bank lending
(percent of GDP)
 Strong increase during the 80’s boom
 Major decline with the onset of the recession
 Finland and Sweden had negative lending growth for 2-3
years in early 90’s.
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Figure 7. Loan loss provisions in Finland
Commercial banks
7
Savings banks
Cooperative banks
% of balance sheet total
6
5
4
3
2
1
0
-1
1980
1985
1990
1995
2000
Sources: Drees and Pazarbasioglu (1998) and OECD.
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Figure 8. Loan loss provisions in Sweden
Commercial banks
7
Savings banks
Cooperative banks
% of balance sheet total
6
5
4
3
2
1
0
-1
1980
1985
1990
1995
2000
Sources: Drees and Pazarbasioglu (1998) and OECD.
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Figure 9. Loan loss provisions in Norway
Commercial banks
7
Savings banks
% of balance sheet total
6
5
4
3
2
1
0
-1
1980
1985
1990
1995
2000
Sources: Drees and Pazarbasioglu (1998) and OECD.
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III. Reasons for the Crises
 Focus on Finland (deepest crisis)
III. 1 Boom
 Finnish boom caused by
– financial market deregulation (with problematic elements)
– Freeing of capital movements, with attempt to tight monetary
policy under fixed exchange rate
– Upswing in western economies (bad timing)
 Swedish boom similar, but milder
 Norway: boom cut short by oil price decline in 1986
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III. 2 Bust
 Negative international shocks
– slow growth in the west
– collapse of Soviet Union -> huge decline in trade with
Russians
– German unification led to high real interest rates
(Figures)
 Domestic policy
– Domestic monetary policy very restrictive because of
defence of fixed exchange rate
 Finland started to recover in 1993-94
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Figure 10. Real interest rate in Finland and interest
rate differential to Germany (3-month rates)
14
%
Real interest rate in Finland* (LHS)
Interest rate differential to Germany (RHS)
Percentage points
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
1985
1990
1995
2000
2005
* Nominal interest rate - consumer price inflation.
Sources: Reuters and Bank of Finland.
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-2
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Figure 11. Bank of Finland currency index
140
Index, 1982 = 100
135
130
125
120
115
110
105
100
95
90
1980
1985
1990
1995
Trade-weighted currency index. Rising curve indicates FIM depreciation.
Source: Bank of Finland.
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 The recession was largely similar but smaller in Sweden,
except Sweden had no trade with Soviet Union.
 Swedish industry was also more modernized than
Finnish industry.
 Norway: recession in 1987-88 because of oil price
decline and restrictive policies; only slow recovery
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III. Reasons for the Crisis
 Problems in financial deregulation
– bad timing with international business cycle upswing
– Bank laws and bank supervision were outdated (tightening only
in 1991)
– tax system favored debt financing
– lending rates freed before deposit rates
– fixed exchange rate system
 International dimension for Finnish and Swedish crises
=> ”twin crises”
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IV. Crisis management
 Finland
– 1st measure: Bank of Finland took control of Skopbank in
September 1991.
– Public support: preferred capital certificates to banks, with
strict requirements
– Support to be converted into shares if not repaid
– Government set up a crisis management agency.
– Policy-makers made promises to guarantee banks’
obligations, also further public support.
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 Finland (continued)
– Banks became profitable again in 1996
– Improved efficiency (staff halved, etc.)
– Major restructuring of banking system:
• savings banks largely disappeared,
• one big commercial bank was merged to another
– Nowadays about 60 percent of banks owned by foreigners
=> Biggest part of the crisis was in Savings Banks.
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 Sweden
– Crisis erupted in autumn 1991 with Första Sparbanken;
government gave a loan and FS merged with other savings
banks.
– Nordbanken (3rd largest comm. bank) was 71% govt owned and
had to be recapitalized.
– Many banks made heavy credit losses.
– In autumn 1992 blanket creditor guarantee by government.
– Crisis resolution agency set up, public support with strict
criteria in risk reduction and efficiency.
– Some banks did not need public support.
 In the end nearly all support went into two banks, Gotabanken
and Nordbanken.
- Nordbanken became a pan-Nordic bank ”Nordea”.
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 Norway
– Crisis erupted in autumn 1988.
– Initially private guarantee funds provided support and bank
mergers took place.
– In late 1990 private funds were exhausted, so government
guarantee funds set up in early 1991.
– Support had to be converted into solvency support.
– In autumn 1991 capital support needed.
– In Spring 1992 several banks, incl. three biggest commercial
banks were nationalized.
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 Norway (continued):
– no blanket guarantee by government, but specific
announcements about securing depositors and creditors
– Banks situation started to improved in 1993.
– One of nationalized banks was sold in 1995 and two other banks
were sold later.
– Government still owns 34 percent of one bank (in 2008).
=> In the end the Norwegian tax payer made money out of the
crisis (not so in Finland and Sweden).
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Fiscal costs of the banking crises
(Sandal 2004)
Finland
Norway
Sweden
Gross cost
Net cost
9.0 (% of 1997
GDP)
2.0 (% of 1997
GDP),
5.3 (% of 1997
GDP)
3.4 (present
value , % of
2001 GDP)
-0.4 (present
value, % of
2001 GDP)
0.2 (% of 1997
GDP)
3.6 (% of 1997
GDP)
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V. Lessons
 Prevention of major crisis is first priority => stabilityoriented macro policies
 How to diagnose an overheating situation?
– rapid credit expansion
– strong increase in leverage
– big external deficits in open economies
 Political-economy reasons can be a major obstacle in
prevention.
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 Crisis management
– Maintaining confidence in banking system is crucial.
– Bipartisan political support; political guarantees to banks’
obligations in Finland and Sweden but not in Norway.
 Role of central banks
– Liquidity support in Norway and Sweden
– Bank of Finland had to take over a problem bank.
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 Crisis resolution agencies in all three countries
-
Administrative separation from central bank and ministry of
finance.
Capital injections to banks
Guiding of restructuring of the banking system
-
Treatment of ”old shareholders” was mixed
 Asset management companies (”bad banks”) to deal
with non-performing assets
– Norway: banks had their own bad banks
– Finland and Sweden had public agencies
=> Nordic practices in crisis resolution have been
praised afterwards.
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