Macroeconomic shocks and the Nordic banking crises

Macroeconomics, topics  Economic growth  Unemployment  Inflation  Business cycles  Government finances  Balance of Payments

 Economic growth, 3 % p.a.  Unemployment, < 5 %  Inflation, < 2 % p.a.  Business cycles  Government finances (better than  -3% of GDP)  Balance of Payments

 Finland, Sweden and Norway: a severe banking crisis in the early 1990s  Bank customers: rapidly increasing indebtness in the 1980’s

 Rapid growth in bank lending  Poorly regulated financial liberalization programme  Just before the world-wide economic upswing

 The banks in Finland, Norway and Sweden were poorly capitalised as they faced deregulation  which made them vulnerable to loan losses in case of adverse economic shocks

 A severe economic recession  A vicious circle  bankruptcies and loan losses generate new bankruptcies  a banking crisis

 Why economic crisis in Finland?  Macroeconomics: C + I + G + (X-M)  C = private consumption  I = private investment  G = public c + i  X = export  M = import

 C usually rather stable %  I usually fluctuation – %  G (countercyclical?)  X, M usually fluctuation – %

 In Finland during the crises years  C – since consumers were paying back the loans taken in late 1980‘s  I – since firms made big investments in the late 1980‘s  X – since DDR, Soviet Union!  G ++ but …

 High indebtness combined with negative macroeconomic surprises  banking crisis

 When the macroenvironment changes (i.e. finance market deregulation in 1980‘s), the „old“ ways do not work any more (  banking crisis)