Finnish banking crisis of 1990s
Encyclopedia
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.
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').
The most active role was played by savings bank
s 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.
Ulf Sundqvist
, who was chairman of the SDP
until resignation in 1993, was convicted of his crimes that contributed to the downfall of STS Bank. Sundqvist became a personification of the crisis.
.
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.
, 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.
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
).
Finland
Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...
financial sector that took place mainly in the years 1991–1993, after several years of debt-based economic boom in the late 1980s
1980s
File:1980s decade montage.png|thumb|400px|From left, clockwise: The first Space Shuttle, Columbia, lifted off in 1981; American President Ronald Reagan and Soviet leader Mikhail Gorbachev eased tensions between the two superpowers, leading to the end of the Cold War; The Fall of the Berlin Wall in...
. Its total taxpayer cost was roughly 8% of the Finnish GNP
GNP
Gross National Product is the market value of all products and services produced in one year by labor and property supplied by the residents of a country...
, 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.
Background
Until 1980s the Finnish financial market was tightly regulated: the Bank of FinlandBank of Finland
The Bank of Finland is the central bank of Finland. It is the fourth oldest central bank in the world.-History:The Bank of Finland was established on 1 March in 1812 in the city of Turku by Alexander I of Russia. In 1819 it was relocated to Helsinki...
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
1980s
File:1980s decade montage.png|thumb|400px|From left, clockwise: The first Space Shuttle, Columbia, lifted off in 1981; American President Ronald Reagan and Soviet leader Mikhail Gorbachev eased tensions between the two superpowers, leading to the end of the Cold War; The Fall of the Berlin Wall in...
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 bank
Savings bank
A savings bank is a financial institution whose primary purpose is accepting savings deposits. It may also perform some other functions.In Europe, savings banks originated in the 19th or sometimes even the 18th century. Their original objective was to provide easily accessible savings products to...
s 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
Tampella
Oy Tampella Ab was a Finnish heavy industry manufacturer, a maker of paper machines, locomotives, military weaponry, as well as wood-based products such as packaging. The company was based mainly in the city of Tampere....
(a Finnish heavy industry manufacturer that went bankrupt in 1990), and in 1988 it granted 400 million FIM of credit to a Virgin Islands
Virgin Islands
The Virgin Islands are the western island group of the Leeward Islands, which are the northern part of the Lesser Antilles, which form the border between the Caribbean Sea and the Atlantic Ocean...
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
Helibor
Helibor was a reference rate that was used in 1987–1998 on the Finnish interbank market. It was calculated each day as an average of the interest rates at which the banks offered to lend unsecured, Finnish markka nominated funds to each other.Helibor was quoted for 1, 2, 3, 6, 9 and 12 month...
exceeding 15 % at times), the stock market turned down, and debtors started defaulting on their loans.
Ulf Sundqvist
Ulf Sundqvist
Ulf Sundqvist is a former chairman of the Social Democratic Party of Finland, a minister in four cabinets in 1970s and a banker in 1980s....
, who was chairman of the SDP
Social Democratic Party of Finland
The Social Democratic Party of Finland is one of the three major political parties in Finland, along with the Centre Party and the National Coalition Party. Jutta Urpilainen is the current SDP leader. The party has been in the Finnish government cabinet for long periods and has set many...
until resignation in 1993, was convicted of his crimes that contributed to the downfall of STS Bank. Sundqvist became a personification of the crisis.
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 marketInterbank market
The interbank market is the top-level foreign exchange market where banks exchange different currencies. The banks can either deal with one another directly, or through electronic brokering platforms. The Electronic Broking Services and Thomson Reuters Dealing 3000 Xtra are the two competitors in...
.
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 crunchCredit crunch
A credit crunch is a reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates...
, the government gave a 7.1 billion FIM (€1.2 billion), initially zero-interest convertible loan
Convertible bond
In finance, a convertible note is a type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price. It is a hybrid security with debt- and equity-like features...
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.
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
Kansallis-Osake-Pankki
Kansallis-Osake-Pankki was a Finnish commercial bank operating from 1889 to 1995. It was created by the fennoman movement as a Finnish language alternative to the largely Swedish language bank, Suomen Yhdyspankki . The two banks were merged in 1995 to form the Merita Bank...
, merged in 1995 to become Merita (later Nordea
Nordea
Nordea Bank AB is a Stockholm-based financial services group operating in Northern Europe. The bank is the result of the successive mergers and acquisitions of the Swedish, Finnish, Danish and Norwegian banks of Nordbanken, Merita Bank, Unibank and Kreditkassen that took place between 1997 and 2000...
).