“The Banking Crisis in Norway”

Description of the Crisis:

The causes of the crisis once it had fully emerged could thus be summarized:

 Banks that were used to a regime of strict quantitative regulations became exposed to an
entirely new competitive environment. The response of a large number of the banks was
to strive for larger market shares.
 Prudential regulation was slow to adapt to the new competitive environment.
 With respect to first point, it has to be stressed that not all banks followed the strategy of
“increasing market share”. Most of the small local banks did not change their behavior
in any dramatic way. The same was also the case for a few regional banks.

Resolution of Banking Crisis:

During the first part of the banking crisis (1988 to 1990), measures taken to deal with problem
banks were mostly financed by the banking industry's own guarantee funds. There were two
guarantee funds with mandatory membership, one for the commercial banks and one for the
savings banks. Both funds capital consisted of accumulated annual premiums from member
banks. As the economy was in a recession during these years, this way of solving the problems
was regarded as less costly to the funds than liquidating the banks and selling or possibly even
calling back loans. Just one small and newly established commercial bank was liquidated. That
was the only case in which bank creditors other than the central bank lost money.

The purpose of the GBIF was to avoid the macroeconomic consequences of closing large banks
during the recession. This could include loss of depositors’ money, money market runs on banks,
further contagion in the financial system, severe credit crunch, and ultimately an even deeper
recession. The loans were given on certain conditions:

 The two banks were required to reduce their operating costs.

 The board of directors was replaced at both banks.
 The original share capital was written down according to the losses.
 The government got a majority of the board members in the commercial banks’ guarantee
fund. The loans were to be paid back with interest from the guarantee fund.
Regulatory Changes:

The basic structure of the regulatory system that was in place before the crisis was kept during
the crisis and afterwards. The same is true for the capital regulation in the sense that the decision
in 1990 to adopt the Basel Accord by the end of 1992 was maintained through the crisis.
However, some regulatory changes were made, mainly because of the crisis. These were
designed both to reduce the probability of future bank failures and to improve the resolution
process in the event of another bank failure.

Way Out of the Crisis:

During 1993, macroeconomic conditions in Norway improved. After the Norwegian krone
started to float in December 1992, the money market interest rate fell rapidly. Mainland GDP,
which grew by only 1% and 2% in 1991 and 1992 respectively, grew by 2.8% and 3.8% in 1993
and 1994. Banks' recorded loan losses fell markedly from 1992 to 1993, and were close to zero
by 1994. As a result, commercial banks overall started to record positive net operating profits
from 1993 onwards.

Conclusion:

The Norwegian banking crises started in 1988 and ended in 1993. Its most dramatically peak is
in 1991 with the second and fourth largest banks in Norway. They have combined market share
of 24%, but they losses all their shares and the largest bank also getting into serious difficulty.
From 1988 until 1990, the failing banks were mainly some local or regional banks. World War II
recession in Norway overlapped with the early part and the peak of the crisis. At the end of 1993,
the crisis was effectively over.