## The Nordic Banking Crises: Pitfalls in Financial Liberalization?

_IMF Working Papers, June 1, 1995_

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## Bibliographic details
- Authors: Burkhard Drees, Ceyla Pazarbasioglu
- Published: June 1, 1995
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451848113.001

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### Summary / Key findings
- The paper examines the recent banking crises in Finland, Norway and Sweden to draw policy conclusions from their experiences.
- In all three countries, the timing of deregulation coincided with a strongly expansionary macroeconomic momentum.
- Delayed policy responses were important determinants of the crises' consequences.
- Structural characteristics of the financial systems and banks’ inadequate internal risk management controls contributed significantly to outcomes.
- In the absence of strengthened prudential banking supervision, incentives coupled with expectations of government intervention prompted many Nordic banks to increase their lending excessively.

### Determinants of the crises (as identified in the paper)
- Timing of deregulation coinciding with strongly expansionary macroeconomic momentum.
- Delayed policy responses to emerging vulnerabilities.
- Structural characteristics of the financial systems (noted as important determinants).
- Banks’ inadequate internal risk management controls.
- Expectations of government intervention in the event of a crisis that altered banks’ risk-taking incentives.

### Policy implications and recommendations (implicit in analysis)
- Strengthen prudential banking supervision before or alongside financial liberalization to mitigate excessive risk-taking incentives.
- Align the timing of deregulation with macroeconomic conditions to avoid releasing credit into an already expansionary environment.
- Improve banks’ internal risk management controls to limit excessive lending during transitions to more competitive financial systems.
- Address structural features of financial systems that can amplify vulnerabilities during liberalization.
- Reduce moral hazard by clarifying limits or conditions on government intervention to avoid encouraging excessive lending.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/the-nordic-banking-crises-pitfalls-in-financial-liberalization-1138_