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 An economic expansion is an increase in the level of economic activity, and of the goods and services available. It is a period of economic growth as measured by a rise in real GDP. The explanation of fluctuations in aggregate economic activity ...

in the late 1980s. Its total taxpayer cost was roughly 8% of the Finnish

GNP The gross national income (GNI), previously known as gross national product (GNP), is the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP), plus factor incomes earned by foreign ...

, 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.Liisa Halme
The 1990s banking crisis in Finland: main causes and consequences, lessons for the future
. 2002. Governmental intervention included bank takeovers, direct monetary assistance and temporary blanket guarantees to the banks.Managing the banking crisis: The Finnish banking crisis of the 1990s and its management
. Finnish Ministry of Finance.

Background

Until the 1980s, the Finnish financial market was tightly regulated: the

Bank of Finland The Bank of Finland ( fi, Suomen Pankki, sv, Finlands Bank) is the central bank of Finland. It views itself as the fourth oldest surviving central bank in the world, after Sweden's Riksbank, the Bank of England, and the Bank of France. History ...

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 Helibor (''Helsinki Interbank Offered Rate'') was a reference rate that was used in 1987–1998 on the Finnish interbank market. It was calculated each day as an average of the interest rates at which the banks offered to lend unsecured, Finnish ma ...

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 who did not do that earlier. For this, the period of the late 1980s is colloquially known in Finland as ''kasinotalous'' ('casino economy').

Banks became speculators

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 bank A savings bank is a financial institution whose primary purpose is accepting savings account, savings deposits and paying interest on those deposits. History of banking, They originated in Europe during the 18th century with the aim of providi ...

s 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 Oy Tampella Ab was a Finnish heavy industry manufacturer, a maker of paper machines, locomotives, military weaponry, as well as wood-based products such as packaging. The company was based mainly in the Naistenlahti district of the city of ...

(a Finnish heavy industry manufacturer that went bankrupt in 1990), and in 1988 it granted 400 million FIM of credit to a

Virgin Islands The Virgin Islands ( es, Islas Vírgenes) are an archipelago in the Caribbean Sea. They are geologically and biogeographically the easternmost part of the Greater Antilles, the northern islands belonging to the Puerto Rico Trench and St. Croix ...

hotel project. SKOP's strategy was to use massive short-term credit, readily available from the money market, 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 (

exceeding 15% at times), the stock market turned down, and debtors started defaulting on their loans. The director of SKOP, Christopher Wegelius, was charged but was cleared of charges after a lengthy process. He was a key witness in the trial that resulted in the impeachment and conviction of then-Minister of Trade and Industry Kauko Juhantalo of corruption. Another bank that collapsed was

STS STS, or sts, may refer to: Medicine * Secondary traumatic stress, a condition which leads to a diminished ability to empathize * Sequence-tagged site, a gene-reference in genomics * Soft-tissue sarcoma * Staurosporine, an antibiotic * STS (gen ...

(''Suomen Työväen Säästöpankki''), another savings bank central joint venture. With approval by STS management, well-connected trade union and socialist party politicians could borrow money without criteria, and reinvest in various ventures, many of which ultimately failed. Notable established, STS-owned businesses to collapse were EKA, a retail store chain, and Haka, a construction company.

Ulf Sundqvist Ulf Ludvig Sundqvist (22 February 1945 – 22 April 2023) was a Finnish politician who served as chairman of the Social Democratic Party of Finland, a minister in four cabinets in the 1970s and a banker in the 1980s. Political career Sundqvis ...

, who was chairman of the SDP until resignation in 1993, was held financially responsible for these loose policies that contributed to the downfall of STS Bank, along with other members of the board. His failure to pay the compensation led to a conviction of

debtor's dishonesty Dishonesty is to act without honesty. It is used to describe a lack of probity, cheating, lying, or deliberately withholding information, or being deliberately deceptive or a lack in integrity, knavishness, perfidiosity, corruption or treacherousne ...

. Sundqvist became a personification of the crisis.

Culmination of the crisis

On several occasions during 1990, SKOP had to resort to overnight debt from the Bank of Finland to cover its liquidity position, as it was unable to raise sufficient funds from the

interbank market The interbank market is the top-level foreign exchange market where banks exchange different currencies. The banks can either deal with one another directly, or through electronic brokering platforms. The Electronic Broking Services (EBS) and Thom ...

. SKOP's liquidity position finally collapsed on 19 September 1991, when other banks would not buy its money market debt papers at all. The Bank of Finland took over the control of SKOP and bought the majority of its shares. Bad debt was stripped from STS and transferred to the government's

bad bank A bad bank is a corporate structure which isolates illiquid and high risk assets (typically non-performing loans) held by a bank or a financial organisation, or perhaps a group of banks or financial organisations. A bank may accumulate a large por ...

Arsenal An arsenal is a place where arms and ammunition are made, maintained and repaired, stored, or issued, in any combination, whether privately or publicly owned. Arsenal and armoury (British English) or armory (American English) are mostly ...

, and the remaining parts were sold to another major bank, KOP (''Kansallis-Osake-Pankki''), which absorbed them completely.

Government intervention and aftermath

In 1992, to stabilize the financial sector and to prevent a

credit crunch A credit crunch (also known as a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit cr ...

, the government gave a 7.1 billion

FIM FIM may refer to: Organizations and companies * Fédération Internationale de Motocyclisme, the International Motorcycling Federation * Flint Institute of Music, in Michigan, United States * Fox Interactive Media, now News Corp. Digital Media * ...

(€1.2 billion), initially zero-interest convertible loan to Finnish banks. Most of the banks (with the notable exception of SKOP) later paid back this loan. A special state-funded Government Guarantee Fund (''Valtion vakuusrahasto'') was also set up to support the savings banks, many of which were first consolidated and then broken up; the healthy parts were sold to commercial banks. Ownership of defaulted or nonperforming assets was transferred to a

, OHY Arsenal. The government founded the company Sponda to manage the property obtained as collateral. Unlike Arsenal, which was gradually wound down, Sponda was gradually privatized and continues today as a private company. The total public expenditure in support of the banks has been estimated as roughly 50 billion FIM (€8.4 billion), the vast majority of which was spent on the savings banks. Commercial banks raised capital from their stockholders to cover their losses. The two largest Finnish commercial banks, ''Suomen Yhdyspankki'' and '' Kansallispankki'', merged in 1995 to become ''Merita'' (later

Nordea Nordea Bank Abp, commonly referred to as Nordea, is a European financial services group operating in northern Europe and based in Helsinki, Finland. The name is a blend of the words "Nordic" and "idea". The bank is the result of the successive m ...

Key people involved

Mauno Koivisto Mauno Henrik Koivisto (; 25 November 1923 – 12 May 2017) was a Finnish politician who served as the ninth president of Finland from 1982 to 1994. He also served as the country's prime minister twice, from 1968 to 1970 and again from 1979 to 19 ...

, President of Finland and the architect of the "strong

markka The markka ( fi, markka; sv, mark; sign: Mk; ISO code: FIM, typically known outside Finland as the Finnish mark) was the currency of Finland from 1860 until 28 February 2002, when it ceased to be legal tender. The mark was divided into 100 p ...

" policy *

Esko Aho Esko Tapani Aho (born 20 May 1954) is a Finnish politician who was prime minister of Finland from 1991 to 1995. Early life and career Aho was born in Veteli, Finland. Prior to attending university, he began a career in politics. From 1974 to ...

, Prime Minister during the crisis *

Iiro Viinanen Iiro Viinanen (born 27 September 1944, in Kuopio, Finland) is a Finnish politician. Viinanen graduated as an engineer from a Tampere institute in 1967 and as a M.Sc. Tech. from Helsinki University of Technology in 1974 . He was a Member of the F ...

, Minister of Finance, architect of the financial policies applied, including subsequent austerity * Christopher Wegelius, CEO and chairman of the board of SKOP * Kauko Juhantalo, Minister of Trade and Industry, convicted for taking bribes from Wegelius and expelled from Parliament *

, CEO of

STS Bank National Workers' Savings Bank (1971-1989) (In Finnish; ''Suomen Työväen Säästöpankki'', in Swedish; ''Arbetarsparbanken'') or STS-Bank (1989-1992) was a Finnish savings bank and commercial bank. Workers' savings banks were syndicalist, so ...

and party president of the

Social Democratic Party of Finland The Social Democratic Party of Finland (SDP, fi, Suomen sosialidemokraattinen puolue ; sv, Finlands socialdemokratiska parti), shortened to the Social Democrats ( fi, link=no, Sosiaalidemokraatit; sv, link=no, Socialdemokrater) and commonly kno ...

References