Banking crises vs. depositor crises: the era of the finnish markka, 1865–19981

Abstract

This paper represents an attempt to elucidate the chains of events that led to banking crises in Finland during the period 1865-1998. The aim is to use Finnish experience to shed light on the causal mechanism of banking crises and the possibilities of affecting the development of crises. In four of the five cases studied, developments during the bank-crisis cycle in the real and financial sectors conformed to the classical boom-bust cycle, as documented in many previous studies of bank crises. The onset of a recession and the subsequent bank crisis was triggered by a fall in export demand and a rise in real interest rates. The third crisis period differed interestingly from the others, and developments during this crisis show how financial regulation and expansionary policies shifted the burden of the recession from banks to depositors. A particularly worrisome finding is, that, as a result of a marked decline in the solidity of firms during the markka era, the risk of financial instability in Finland has increased significantly.