Finnish banking crisis of 1990s
The Finnish Banking Crisis of 1990s was a deep systemic crisis of the entire Finnish financial sector that took place mainly in the years 1991–1993, after several years of debt-based economic boom in the late 1980s. Its total taxpayer cost was roughly 8% of the Finnish GNP, making it the most severe of the contemporary Nordic banking crises. The crisis has been attributed to a combination of macro-economic turbulence, weak regulation, and bank-specific problems. Governmental intervention included bank takeovers, direct monetary assistance and temporary blanket guarantees to the banks.
Until the 1980s, the Finnish financial market was tightly regulated: the Bank of Finland controlled interest rates, foreign exchange rates, and import and export of currency. Low interest rates caused a chronic excess demand of debt.
In the early 1980s the financial market was mostly deregulated, leading to a massive credit expansion largely based on foreign debt. Soaring stock and real estate prices attracted frentic speculative activity by banks, private companies and individual investors. For this, the period of late 1980s is colloquially known in Finland as kasinotalous ('casino economy').
Banks became speculators
The banks started to actively participate in profit-seeking, high-risk operations such as company takeovers and foreign investments, for which they had little experience.
The most active role was played by savings banks and their mutually-owned central institution Skopbank, which wanted to break free from the "old-fashioned" retail banking business. Some of Skopbank's operations were very large compared to the bank's equity, and would later cause great losses: in 1987 it acquired Tampella (a Finnish heavy industry manufacturer that went bankrupt in 1990), and in 1988 it granted 400 million FIM of credit to a Virgin Islands hotel project.
Skopbank's strategy was to use massive short-term credit, readily available from the money market, in order to finance their operations and long-term investments on the stock market and in corporate loans. This was often highly profitable during the boom, but also caused increasing losses when interest rates rose (Helibor exceeding 15% at times), the stock market turned down, and debtors started defaulting on their loans.
Culmination of the crisis
On several occasions during 1990, Skopbank had to resort to overnight debt from the Bank of Finland to cover its liquidity position, as it was unable to raise sufficient funds from the interbank market.
Skopbank's liquidity position finally collapsed on September 19, 1991, when other banks would not buy its money market debt papers at all. The Bank of Finland took over the control of Skopbank and bought the majority of its shares.
Government intervention and aftermath
In 1992, to stabilize the financial sector and to prevent a credit crunch, the government gave a 7.1 billion FIM (€1.2 billion), initially zero-interest convertible loan to Finnish banks. Most of the banks (with the notable exception of Skopbank) later paid back this loan.
A special state-funded Government Guarantee Fund (Valtion vakuusrahasto) was also set up to support the savings banks, many of which were first consolidated and then broken up; the healthy parts were sold to commercial banks. Ownership of defaulted or nonperforming assets was transferred to a bad bank, OHY Arsenal.
The total public expenditure in support of the banks has been estimated as roughly 50 billion FIM (€8.4 billion), the vast majority of which was spent on the savings banks.
Commercial banks raised capital from their stockholders to cover their losses. The two largest Finnish commercial banks, Suomen Yhdyspankki and Kansallispankki, merged in 1995 to become Merita (later Nordea).
- Liisa Halme: The 1990s banking crisis in Finland: main causes and consequences, lessons for the future. 2002.
- Managing the banking crisis: The Finnish banking crisis of the 1990s and its management. Finnish Ministry of Finance.
- http://www2.hs.fi/english/archive/today/261099-03.html Sundqvist argues hefty spending was business-related