The Finnish Banking Crisis and Its Handling

The paper gives a brief description of the evolution of the Finnish banking crisis and its handling. In the first section, the salient features of the Finnish banking system are described. We then briefly discuss the liberalization process, macroeconomic and regulatory policies, and the subsequent credit boom and its development into a recession of unprecedented depth. Next, we document the impact on bank profitablity of the drastic changes in macroeconomic conditions. The collapse and rescue of Skopbank are summarized. In section 2 we describe the public safety net, starting with the pre-crisis arrangements. This is followed by an exposition of the new measures taken in 1992, with the emphasis on the establishment of the Government Guarantee Fund, its organization, powers and principles of operation. Section 3 gives an account of the support measures taken by the Government Guarantee Fund in the course of 1992 and in early 1993. Section 4 describes the reform of the bank support arrangements in the early months of 1993. Finally, in section 5, we discuss the banks’ current economic environment and their prospects in the near future. We also take up some of the major issues of principle relating to the rationalization of the banking sector. The paper includes references to recent articles and discussion papers dealing with important aspects of the current banking crisis. The list of references is by no means exhaustive, and it is designed mainly to help foreign readers to find supplementary material. Therefore only those papers in Finnish or Swedish which have to do directly with the current crisis are included.

Introduction: Deposit banks are central ta the Finnish financial system. The bulk of financial inter mediation takes place through deposit banks. Thus, same 50 per cent of the financing needed by the public (the corporate and household sectors) is provided directly by deposit banks (Chart 1). 1n addition, banks have guaranteed about half of the lending by insurance companies. Also, with one exception, a11 mortgage institutions and the largest finance companies are subsidiaries of deposit hank groups. In all, about two-thirds of the credit risks associated with the borrowing by the public is carried by the banks. The role of the banks is especially predominant in the case of households and small and medium-sized businesses.

Author: Peter Nyberg,Vesa Vihriälä

Source: Research Discussion Papers, Bank of Finland

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