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1. Norway

   Financial Crisis In 1987 Yaxin Wang Dylan Welch Garrett Thesan
2. Full Name: Kingdom of Norway Population: 4,707,270 Primary Language: Norwegian Currency: Norwegian Krone Capital City: Oslo Background http://country-facts.findthedata.org/l/179/Norway
3. GovernmentConstitutional Monarchy Chief Executive Second Chief Executive Jens Stoltenberg Type: Prime Minister Harald V Type: King http://country-facts.findthedata.org/l/179/Norway
4. Norges Bank Central Bank of Norway Head office is located in Oslo Exclusive right to issue banknotes and coins. Responsible for the execution of monetary and exchange rate policy http://www.regjeringen.no/en/dep/fin/the-ministry/Related-Institutions/Central-Bank-of-Norway.html?id=213276
5. How did it start? Financial Deregulation and Boom Regulations on banks lending were lifted. Such as means to control credit flows as part of macro stabilization policy A cap on the interest rates charged by the banks on lending were lifted in 1984 and 1985 respectively. Deregulation resulted in a bank lending boom. A boom in residential and non-residential real estate.
6. How did it start? After four decades of strict regulations on banks, neither bankers nor supervisors had any experience in the credit markets. Many bank managers became focused on capturing market shares. The theory of herd behavior may explain why it can be rational for the manager of an individual firm to follow the behaviors of other managers and ignore the private information he has. Such behavior can lead to increased aggregate risk taking. There is evidence that several medium and small sized banks followed the same strategy of the larger banks. Number of bank branches increased. The number of on site inspections of banks was 57 in 1980 it had dropped to 8 in 1985 and down to 1 and 2 in 1986 and 1987 respectively.
7. How did it start? In 1985 oil prices dropped significantly causing a Norwegian deficit because oil was a major export commodity as well as a devaluation of the Krone. As public and private institutions began to consolidate their books, a recession began. At first smaller banks began to fail. Credit began to freeze between banks as the lending rate began to rise. There was a shortage of capital and several banks were in danger of closing.
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15. The Solution

    Overview -Crisis resolved rapidly -No depositors lost money -Rapid economic recovery -Taxpayers faced very low resolution costs

16. Methods

    -Banks guaranteed their own funds before the crisis was systemic -Conditional capital injection was introduced by the government after crisis became systemic; only used for problem banks -There was no AMA -There was no guarantee for blanket creditors, thus deterring bankers from taking unfair advantage of the credit situation

17. What Saved Norway?

    -Overseas funding allowed large banks to keep from being drastically effected for the first part of the crisis (1987-1990) -When the crisis became systemic, they did not allow the banking system to fully collapse (started 1990) -They were able to find a solution that had a relatively low fiscal cost to the citizens -Conditional capital injections greatly helped resolve the issue at hand -Made it so owners were first in line to take losses

18. How Conditional Capital Injections Worked

    -Came from GBIF (Government Bank Insurance Fund), GBIF was independent legal entity -Private investors weren’t willing to invest new capital into the struggling banks -Government took the position of the “last resort” entity -The Capital Injections came with strict conditions so that supported banks couldn’t exploit the situation -Capital support was increasingly injected as more banks fell into trouble -Amendments were made to enable government to write down a banks shares to zero under certain conditions

19. Other Problems Addressed

    -Norway made it so that there was no blanket creditor guarantee -Dealt with issues involving moral hazard -Gave credibility to government measures that had been already taken -The board of directors and senior management of failed banks were replaced

20. What Happened Next?

    -Crisis was considered resolved by 1993 -Money market lenders and depositors were saved without losing money (fully reimbursed) -Solution costs were kept low, net costs ended up only being 0.8% of the countries GDP -They were able to avoid bank runs and a credit market collapse -Economy actually began to “boom” again after recovery
21. References Moe, Thorvald G., Jon A. Solheim, and Bent Vale, eds. The Norwegian banking crisis. Norges Bank, 2004. Norges Bank. “The Norwegian Banking Crisis 1988-1992.” Presentation at Bank of Slovenia Conference. PowerPoint. 28 October 2005 <http://www.bsi.si/library/includes/datoteka.asp?Datotekald=939> Norway Detail. Country-facts. Find the best. Web. 16 April. 2014 http://country-facts.findthebest.com/l/179/Norway RunarMalkenes. The Central Bank of Norway (Norges Bank). Ministry of Finance. 2007. Web. 16 April. 2014. http://www.regjeringen.no/en/dep/fin/the-ministry/Related-Institutions/Central-Bank-of-Norway.html?id=213276