Banks Nonperforming Assets and Write-Offs in 1992

In this paper we present data collected by the banking supervision authorities on banks’ nonperforming assets and loan losses with a view to establishing a consistent database for analysing the condition of Finnish banks and firms. Over the past couple of years some FIM 100 billion’s worth of banks’ exposures have been nonperforming, for shorter or longer periods of time. At the end of 1992 banks’ nonperforming assets amounted to FIM 55 billion, after writeoffs of FIM 22 billion for the year. Firms in the domestic sector of the economy are facing the most difficult debt-servicing problems; nonperforming assets amounted to some 15 per cent of exposures on average. For manufacturing firms, the figure was less than five per cent. The relatively stronger position of manufacturing firms is also clearly seen in the breakdown of loan losses by industry. These firms accounted for only just over 10 per cent of loan losses attributable to domestic firms. Construction and real estate business accounted for 45 per cent of the total. Although a fifth of nonperforrning loans were accounted for by households, these loans have not caused the banks’ loan losses to any great extent so far. In 1992 they accounted for less than seven per cent of the total.

Introduction: As in the other Nordic countries, the private sector borrowing expanded rapidly in Finland in the secand half af the 1980s. The era of easy credit and economic growth ended in 1990 in an exceptionally severe recession marked by sharply falling real estate and stock prices, which has considerably weakened the financial positian of bOITowers. As inflation has declined while nominal interest rates have risen, the debt service burden has grown. With a higher real interest rate, business failures and bankruptcies have increased dramatically. Consequently, banks’ credit lasses have escalated, eroding their capital position and forcing them into greater dependency on government support ta maintain their capital ratios and lending capacity. The Govemment has clearIy stated that it wiII guarantee alI deposits without !imit and ensure the viability of the banking system in alI circumstances.

Author: Johanna Pensala,Heikki Solttila

Source: Research Discussion Papers, Bank of Finland

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