Financial Fragility, Growth Strategies and Banking Failures: The Major Norwegian Banks and the Banking Crisis, 1987-92

Abstract

Norwegian financial institutions experienced a severe banking crisis in the late 1980s and early 1990s. This article examines the development of the two largest Norwegian banks before and during the crisis within a financial fragility approach. Deregulation of the markets for credits and lax monetary policy triggered a rapid growth of lending from Norwegian banks in the mid-1980s. Systemic risk was dramatically increased by changes in mentality and strategies in the largest banks. During the banks' expansion, a fragile debt burden was built up and systems of steering and control were given a lower priority. The mechanisms in the process of growths and failure of the two major Norwegian banks indicate that sudden institutional change triggered by the liberalisation of financial markets as well as organisational factors should be emphasised when explaining the crisis.