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The Norwegian banking crisis is typically described within the framework of a boom-bust cycle: Financial liberalization accompanied by massive credit expan- sion and soaring asset prices was accompanied by signi…cant increases in invest- ment and consumption. This is re‡ected in high economic growth around the mid-eighties, but also in unsustainably high levels of debt accumulation among Norwegian households and …rms. The following economic downturn resulted in a collapse of the over-in‡ated stock and real estate markets and severe di¢ cul- ties for banks that had based their lending on in‡ated asset values. Finally, the

government chose to intervene to rescue insolvent banks.5

5_{For a more detailed discussion of the Norwegian banking crisis, see Gerdrup (2003),}

THE NORDIC BANKING CRISES - SOME STYLIZED FACTS 123

Up to the early-1980s there was excess demand for credit (Stortinget, 1998). However, deregulation of the credit market resulted in an unprecedented growth in bank lending, where credit supply accommodated very fast to credit demand. The fast expansion of credit took place in a banking environment, characterized by an aggressive competition for market shares. Overall optimism about the future prospects of a booming economy combined with the easy access to credit fuelled economic growth. The …ght for market shares led to the situation, that banks were mainly interested in fast increases in lending volume. Thus, in 1985 the annual growth rate in bank lending exceeded 30 percent (Sandal, Chapter 3 in this publication). Banks …nanced high risk projects, which would not be undertaken in a framework, where gains in market shares were not the primary objective. Hence, banks actively contributed to positive GDP growth during the boom period.

The downturn period was triggered by the oil price shock in 1986 and was aggravated by increasing costs of borrowing due to changes in the tax law and

higher Norwegian real interest rates.6 _{Bankruptcy rates soared. Combined with}

the high level of non-…nancial sector debt, as well as the simultaneous decline in collateral values, these factors quickly translated into huge loan-losses, wiping out the capital of many banks. The banking crisis was on its way. During the …rst phase of the crisis (1988-90) problems were not regarded as systemic and only some small regional banks experienced heavy problems or liquidation. The

crisis has only reached systemic proportions in 1991 (Drees and Pazarba¸sio¼glu,

1998). However, in 1991 the economy had already started to show positive growth …gures again, so that the banking crisis actually came at a time when growth was starting to pick up after the preceding recession.

This development shows mainly two things. First, the easy lending behav- iour of banks contributed evidently to GDP growth. Using a macroeconomic model for the Norwegian economy, Hove and Moum (1997) …nd that a signi…cant part of the Norwegian business cycle during the boom period can be ascribed to the liberalization of the credit market, i.e. most of the economic upturn was a direct result of the liberalization. Thus, it is reasonable to take into account this potential e¤ect of banking behaviour on GDP development before the cri- sis. Second, the fact that the banking crisis became systemic only when GDP growth was already getting positive, suggests that the fall in GDP was driving the banking crisis rather than the other way round. Steigum (Chapter 2 in this publication) con…rms this view, when he argues that banking distress can not have had a strong negative impact on the real economy through restricted credit supply, i.e. a credit crunch is unlikely to have occurred. He bases his argument on the fast recovery of the Norwegian economy and the government’s willingness and Vale (Chapter 1 in this publication).

6_{Steigum (Chapter 2 in this publication) argues that the oil price shock can be interpreted}

as an “early warning” that seems to have prevented a longer-lasting boom and therefore also a longer lasting bust period.

to inject new capital. Moreover, in an analysis of the impact of bank distress announcement on the performance of equity values of …rms that maintain rela- tionships with these banks, Ongena et al. (2003) do not …nd signi…cant e¤ects of bank distress on their customers. According to this view, the Norwegian banking crisis hardly brought about output losses.

However, it can be argued, that in view of crises in small and middle size banks from 1988 until 1990, the whole banking sector became more risk averse contributing to the downfall of GDP during this period. Therefore, it is possible that negative e¤ects of "excess" risk-aversity after the oil price shock aggravated the fall in GDP during this period and hampered the rebound of economic growth in 1991 and 1992. The fact that the banking crisis became systemic only in 1991 can also mean, that there were hidden problems in the banks, which were countervailed by stronger risk aversity in order not to expose the banks to additional risks, thus potentially unveiling their fragility in an earlier point of time. This behaviour may indeed have contributed negatively to GDP growth.