The role of government in financial institutions pros and cons. Bjørn Skogstad Aamo, Kredittilsynet, Norway

Transcription

1 The role of government in financial institutions pros and cons Bjørn Skogstad Aamo, Kredittilsynet, Norway

2 The Nordic banking crises a brief history Finland, Norway and Sweden had severe banking crises in the early 1990 s The crises were mainly caused by boom-bust cycles in credit markets following deregulations in the 1980 s Together with other macro-economic problems the banking crises led to significant losses of production and employment The peak banking loss in Norway was 2.8 % of GDP (1991) while the peaks (1992) in Sweden and Finland were 3.8% and 4.4 % of GDP In Norway cumulative bank losses in were 13 % of outstanding loans in 1990, thus wiping out substantial parts of the banks own funds

3 Pragmatic solutions: The Government as owner of last resort (1) All three Nordic countries were able to resolve their crises within few years, using active government involvement when necessary The resolutions were based on broad political support - no typical socialist agenda When losses exploded, own funds were insufficient for banks to continue credit operations. No Private capital was available. The governments had to step in Sweden and Finland used state guarantees to secure the funding of the banks. Fearing moral hazard, Norway avoided such blanket guarantees In Norway two Government institutions were set up: 1. The Government Bank Insurance Fund 2. The State Bank Investment Fund

4 Pragmatic solutions: The Government as owner of last resort (2) The insurance fund recapitalised failed banks including the three largest - on the following conditions: Writing down of shareholders value according to the banks losses Change of boards of directors and management Restrictions on the banks activities Programmes for cutting operating costs and branch networks The investment fund strengthened banks own funds on a commercial basis, to increase their lending capacity The Government started privatising the state-owned banks in 1994 Nr. 3 (Fokus) was privatised in 1995 and later bought by Danske Bank The majority of shares in nr. 2 was sold to Nordea in 1999/2000 The Government has held on to 1/3 of nr. 1: DnB - now DnBNOR, after merging with the largest savings bank

5 Pragmatic solutions: The Government as owner of last resort (3) To secure continuous bank operations, the Government took a risk no private investor would take The two funds operated with own boards, on an arm s length from Government and ministries Once the framework was set, daily operations were left to Boards and management of individual banks. No board members represented the government Supervison was carried out on a normal basis, with improved credit and other bank practices as main goal Economic growth and credit expansion picked up fairly quickly in increasing profits to the banks Calculations made as of end 2001 show gross outlays of NOK 39.7 bn, income (and stock values) of 53.4 bn and net profits of NOK 13.7 bn for all government rescue operations in total

6 The present international financial crisis (1) Norwegian banks had no direct exposure to CDO s containing sub-prime loans, and small exposures to other financial instruments hit by the crisis They had limited exposures to Lehman Brothers, Icelandic banks, Madoff etc. The banks encountered significant liquidity challenges in October These problems have largely been solved by a state facility where preferential housing bonds issued by the banks are swapped with Government bonds and certificates on market terms - supplementet by general central bank liquidity measures Norway is moderately hit by the crisis of the real economy with GDP declining some 1 per cent this year and unemployment climbing towards 3 per cent

7 The present international financial crisis (2) Bank losses are so far moderate, some 0.4 % (annual basis) of outstanding loans in Q Market requirements for banks own funds have been rising while access to private capital remains limited. The Government has thus set up a State Finance Fund of NOK 50 bn to support the credit functions of healthy banks - fulfilling minimum requirements with good margins Kredittilsynet has decided that banks with more than 6% tier 1 capital thus will ble eligible for capital from the Fund By Q1 all Norwegian banks passed this test The fund offers core tier 1 capital as preferantial shares issued by the banks and hybrid capital of tier 1 quality Only if the preferential shares are not paid back within 5 years or the banks are hit by severe losses, will the preferential shares be swapped into ordinary shares, giving the fund part ownership in the banks In addition a Government Bond Fund of NOK 50 bn has been set up to ease the access to long term credits for industry

8 Concluding remarks Government intervention as a owner of last resort seems to be necessary to secure continuous banking operations during severe crises Such ownership should avoid controlling the daily operations and credit functions of the banks Instruments used should be as close to market conditions as possible, thus making the banks return to marketbased ownership easier Transparency should be a leading principle for both the instruments and processes applied by governments Provided such guidelines are followed, it is clearly better to resolve banking crises quickly and thoroughly by Government intervention than to let crisis conditions drag on for longer periods