1990s Finnish banking crisis
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.[1] Governmental intervention included bank takeovers, direct monetary assistance and temporary blanket guarantees to the banks.[2]
Background
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. High interest rates caused a chronic excess in potential demand vs. available supply of debt. Thus, interest rates were relatively high (Helibor ca. 10–15%[3]), the so-called Suomi-lisä "Finland surcharge" versus foreign less regulated markets.
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 frantic speculative activity by banks, private companies and individual investors. Banks aggressively expanded their borrowing in foreign currency, including even banks such as Osuuspankki or the Säästöpankki group who did not do that earlier.[3] For this, the period of the 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 SKOP (Säästöpankkien keskusosakepankki), which wanted to break free from the "old-fashioned" retail banking business. Some of SKOP'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.
SKOP's strategy was to use massive short-term credit, readily available from the money market, 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. The director of SKOP, Christopher Wegelius, was charged but was cleared of charges after a lengthy process. He was a key witness in the trial that resulted in the impeachment and conviction of then-Minister of Trade and Industry Kauko Juhantalo of corruption.
Another bank that collapsed was STS (Suomen Työväen Säästöpankki), another savings bank central joint venture. With approval by STS management, well-connected trade union and socialist party politicians could borrow money without criteria, and reinvest in various ventures, many of which ultimately failed. Notable established, STS-owned businesses to collapse were EKA, a retail store chain, and Haka, a construction company. Ulf Sundqvist, who was chairman of the SDP until resignation in 1993, was held financially responsible for these loose policies that contributed to the downfall of STS Bank, along with other members of the board. His failure to pay the compensation led to a conviction of debtor's dishonesty. Sundqvist became a personification of the crisis.[4]
Culmination of the crisis
On several occasions during 1990, SKOP 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.
SKOP's liquidity position finally collapsed on 19 September 1991, when other banks would not buy its money market debt papers at all. The Bank of Finland took over the control of SKOP and bought the majority of its shares.
Bad debt was stripped from STS and transferred to the government's bad bank Arsenal, and the remaining parts were sold to another major bank, KOP (Kansallis-Osake-Pankki), which absorbed them completely.
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.[1] Most of the banks (with the notable exception of SKOP) 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 government founded the company Sponda to manage the property obtained as collateral. Unlike Arsenal, which was gradually wound down, Sponda was gradually privatized and continues today as a private company.
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).
Key people involved
- Mauno Koivisto, President of Finland and the architect of the "strong markka" policy
- Esko Aho, Prime Minister during the crisis
- Iiro Viinanen, Minister of Finance, architect of the financial policies applied, including subsequent austerity
- Christopher Wegelius, CEO and chairman of the board of SKOP
- Kauko Juhantalo, Minister of Trade and Industry, convicted for taking bribes from Wegelius and expelled from Parliament
- Ulf Sundqvist, CEO of STS Bank and party president of the Social Democratic Party of Finland
See also
References
- ^ a b Liisa Halme: The 1990s banking crisis in Finland: main causes and consequences, lessons for the future Archived 24 April 2005 at the Wayback Machine. 2002.
- ^ Managing the banking crisis: The Finnish banking crisis of the 1990s and its management Archived 19 August 2007 at the Wayback Machine. Finnish Ministry of Finance.
- ^ a b "SUOMEN PANKKI - Historiallisia aikasarjoja". www.suomenpankki.fi. Archived from the original on 30 July 2014.
- ^ "www2.hs.fi". Archived from the original on 4 June 2011. Retrieved 20 June 2009.
- v
- t
- e
- Crisis of the Third Century (235–284 CE)
(1000–1760)
- Great Bullion Famine (c. 1400–c. 1500)
- The Great Debasement (1544–1551)
- Dutch Republic stock market crashes (c. 1600–1760)
- Kipper und Wipper (1621–1623)
- Tulip mania crash (1637)
- South Sea bubble crash (1720)
- Mississippi bubble crash (1720)
(1760–1840)
- Amsterdam banking crisis of 1763
- Bengal bubble crash (1769–1784)
- British credit crisis of 1772–1773
- Dutch Republic financial collapse (c. 1780–1795)
- Copper Panic of 1789
- Panic of 1792
- Panic of 1796–1797
- Danish state bankruptcy of 1813
- Post-Napoleonic Irish grain price and land use shocks (1815–1816)
- Panic of 1819
- Panic of 1825
- Panic of 1837
- European potato failure (1845–1856)
- Great Irish Famine
- Highland Potato Famine
- Panic of 1847
- Panic of 1857
- Panic of 1866
- Black Friday (1869)
(1870–1914)
- Panic of 1873
- Paris Bourse crash of 1882
- Panic of 1884
- Arendal crash (1886)
- Baring crisis (1890)
- Encilhamento (1890–1893)
- Panic of 1893
- Australian banking crisis of 1893
- Black Monday (1894)
- Panic of 1896
- Panic of 1901
- Panic of 1907
- Shanghai rubber stock market crisis (1910)
- Panic of 1910–1911
- Financial crisis of 1914
(1918–1939)
- Early Soviet hyperinflation (1917–1924)
- Weimar Republic hyperinflation (1921–1923)
- Shōwa financial crisis (1927)
- Wall Street Crash of 1929
- Panic of 1930
(1945–1973)
- Kennedy Slide of 1962
- 1963–1965 Indonesian hyperinflation
(1973–1982)
- 1970s energy crisis (1973–1980)
- 1973 oil crisis
- 1973–1974 stock market crash
- Secondary banking crisis of 1973–1975
- Steel crisis (1973–1982)
- Latin American debt crisis (1975–1982)
- 1976 British currency crisis
- 1979 oil crisis
- Brazilian hyperinflation (1980–1982)
Great Regression
(1982–2007)
- Brazilian hyperinflation (1982–1994)
- Souk Al-Manakh stock market crash (1982)
- Chilean crisis of 1982
- 1983 Israel bank stock crisis
- Black Saturday (1983)
- Savings and loan crisis (1986–1995)
- Cameroonian economic crisis (1987–2000s)
- Black Monday (1987)
- 1988–1992 Norwegian banking crisis
- Japanese asset price bubble crash (1990–1992)
- Rhode Island banking crisis (1990–1992)
- 1991 Indian economic crisis
- 1990s Swedish financial crisis
- 1990s Finnish banking crisis
- 1990s Armenian energy crisis
- Cuban Special Period (1991–2000)
- Black Wednesday (1992 Sterling crisis)
- Yugoslav hyperinflation (1992–1994)
- 1994 bond market crisis
- Venezuelan banking crisis of 1994
- Mexican peso crisis (1994–1996)
- 1997 Asian financial crisis
- October 1997 mini-crash
- 1998 Russian financial crisis
- 1998–1999 Ecuador economic crisis
- 1998–2002 Argentine great depression
- Samba effect (1999)
- Dot-com bubble crash (2000–2004)
- 9/11 stock market crash (2001)
- 2001 Turkish economic crisis
- South American economic crisis of 2002
- Stock market downturn of 2002
- 2002 Uruguay banking crisis
- 2003 Myanmar banking crisis
- 2000s energy crisis (2003–2008)
- 2004 Argentine energy crisis
- 2007 Chinese stock bubble crash
- Zimbabwean hyperinflation (2007–present)
(2007–2009)
- 2007–2008 financial crisis
- September 2008
- October 2008
- November 2008
- December 2008
- 2009
- Subprime mortgage crisis
- 2000s U.S. housing market correction
- U.S. bear market of 2007–2009
- 2008 Latvian financial crisis
- 2008–2009 Belgian financial crisis
- 2008–2009 Russian financial crisis
- 2008–2009 Ukrainian financial crisis
- 2008–2011 Icelandic financial crisis
- 2008–2011 Irish banking crisis
- 2008–2014 Spanish financial crisis
- Blue Monday Crash 2009
- European debt crisis
- Greek government-debt crisis
(2009–present)
- 2009 Dubai debt standstill
- Venezuelan banking crisis of 2009–2010
- 2010–2014 Portuguese financial crisis
- Energy crisis in Venezuela (2010–present)
- Syrian economic crisis (2011–present)
- August 2011 stock markets fall
- 2011 Bangladesh share market scam
- 2012–2013 Cypriot financial crisis
- 2013 Chinese banking liquidity crisis
- Venezuela economic crisis (2013–present)
- 2014–2016 Brazilian economic crisis
- Puerto Rican government-debt crisis (2014–2022)
- Russian financial crisis (2014–2016)
- 2015 Nepal blockade
- 2015–2016 Chinese stock market turbulence
- 2015–2016 stock market selloff
- Brexit stock market crash (2016)
- Venezuelan hyperinflation (2016–2022)
- 2017 Sri Lankan fuel crisis
- Ghana banking crisis (2017–2018)
- Turkish economic crisis (2018–present)
- Lebanese liquidity crisis (2019–present)
- Sri Lankan economic crisis (2019–present)
- COVID-19 pandemic
- Chinese property sector crisis (2020–present)
- 2021–2023 inflation surge
- 2022 Russian financial crisis
- Pakistani economic crisis (2022–present)
- 2022 stock market decline
- 2023 United States banking crisis
- 2023–2024 Egyptian financial crisis