Finnish banking crisis of 1990s

The Finnish Banking Crisis of 1990s was a deep systemic crisis of the entire Finnish financial sector that took place mainly in the years 1991–1993, after several years of debt-based economic boom in the late 1980s. Its total taxpayer cost was roughly 8% of the Finnish GNP, making it the most severe of the contemporary Nordic banking crises. The crisis has been attributed to a combination of macro-economic turbulence, weak regulation, and bank-specific problems. Governmental intervention included bank takeovers, direct monetary assistance and temporary blanket guarantees to the banks.

Until the 1980s, the Finnish financial market was tightly regulated: the Bank of Finland controlled interest rates, foreign exchange rates, and import and export of currency. High interest rates caused a chronic excess in potential demand vs. available supply of debt. Thus, interest rates were relatively high (Helibor ca. 10-15%), the so-called Suomi-lisä "Finland surchange" versus foreign less regulated markets.

In the early 1980s the financial market was mostly deregulated, leading to a massive credit expansion largely based on foreign debt. Soaring stock and real estate prices attracted frantic speculative activity by banks, private companies and individual investors. Banks aggressively expanded their borrowing in foreign currency, including even banks such as Osuuspankki or the Säästöpankki group that did not do that earlier. For this, the period of the late 1980s is colloquially known in Finland as kasinotalous ('casino economy').

The banks started to actively participate in profit-seeking, high-risk operations such as company takeovers and foreign investments, for which they had little experience.

The most active role was played by savings banks and their mutually-owned central institution SKOP (Säästöpankkien keskusosakepankki), which wanted to break free from the "old-fashioned" retail banking business. Some of SKOP's operations were very large compared to the bank's equity, and would later cause great losses: in 1987 it acquired Tampella (a Finnish heavy industry manufacturer that went bankrupt in 1990), and in 1988 it granted 400 million FIM of credit to a Virgin Islands hotel project.

SKOP's strategy was to use massive short-term credit, readily available from the money market, in order to finance their operations and long-term investments on the stock market and in corporate loans. This was often highly profitable during the boom, but also caused increasing losses when interest rates rose (Helibor exceeding 15% at times), the stock market turned down, and debtors started defaulting on their loans.

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