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Resolving the financial crisis: are we heeding the lessons from the Nordics?

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  • Claudio Borio
  • Bent Vale
  • Goeth von Peter

Abstract

How does the management and resolution of the current crisis compare with the response of the Nordic countries in the early 1990s, widely regarded as exemplary? We argue that, while intervention has been prompter, the measures taken so far remain less comprehensive and in-depth. In particular, the cleansing of balance sheets has proceeded more slowly, and less attention has been paid to reducing excess capacity and avoiding competitive distortions. In general, policymakers have given higher priority to sustaining aggregate demand in the short term than to encouraging adjustment in the financial sector and containing moral hazard. We argue that three factors largely explain this outcome: the more international nature of the crisis; the complexity of the instruments involved; and, hardly appreciated so far, the effect of accounting practices on the dynamics of the events, reflecting in particular the prominent role of fair value accounting (and mark to market losses) in relation to amortised cost accounting for loan books. There is a risk that the policies followed so far may delay the establishment of the basis for a sustainably profitable and less risk-prone financial sector.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 311.

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Length: 51 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:bis:biswps:311

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Keywords: Crisis management and resolution; principles for successful resolution; Nordic countries; fair value and amortised cost accounting; mark to market losses;

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References

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
  2. Fabio Panetta & Thomas Faeh & Giuseppe Grande & Corrinne Ho & Michael King & Aviram Levy & Federico M. Signoretti & Marco Taboga & Andrea Zaghini, 2009. "An assessment of financial sector rescue programmes," Questioni di Economia e Finanza (Occasional Papers) 47, Bank of Italy, Economic Research and International Relations Area.
  3. Stephen G. Cecchetti & Marion Kohler & Christian Upper, 2009. "Financial crises and economic activity," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 89-135.
  4. Ingo Fender & Nikola Tarashev & Haibin Zhu, 2008. "Credit fundamentals, ratings and value-at-risk: CDOs versus corporate exposures," BIS Quarterly Review, Bank for International Settlements, March.
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Cited by:
  1. Claudio Borio, 2011. "Rediscovering the Macroeconomic Roots of Financial Stability Policy: Journey, Challenges, and a Way Forward," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 87-117, December.
  2. Claudio Borio & Mathias Drehmann & Kostas Tsatsaronis, 2012. "Stress-testing macro stress testing: does it live up to expectations?," BIS Working Papers 369, Bank for International Settlements.
  3. William R. White, 2012. "Credit Crises and the Shortcomings of Traditional Policy Responses," OECD Economics Department Working Papers 971, OECD Publishing.
  4. Garry Tang & Christian Upper, 2010. "Debt reduction after crises," BIS Quarterly Review, Bank for International Settlements, September.
  5. Claudio Borio, 2011. "Central banking post-crisis: What compass for uncharted waters?," BIS Working Papers 353, Bank for International Settlements.
  6. Thorvald Grung Moe, 2012. "Shadow Banking and the Limits of Central Bank Liquidity Support: How to Achieve a Better Balance between Global and Official Liquidity," Economics Working Paper Archive wp_712, Levy Economics Institute.
  7. Adrian Van Rixtel & Gabriele Gasperini, 2013. "Financial crises and bank funding: recent experience in the euro area," BIS Working Papers 406, Bank for International Settlements.
  8. Brown, Martin & Lane, Philip R., 2011. "Debt overhang in emerging Europe ?," Policy Research Working Paper Series 5784, The World Bank.
  9. Claudio Borio, 2012. "The financial cycle and macroeconomics: What have we learnt?," BIS Working Papers 395, Bank for International Settlements.
  10. J.-P. Niinimäki, 2012. "Optimal Design of Bank Bailouts: The Case of Prompt Corrective Action," Finnish Economic Papers, Finnish Economic Association, vol. 25(1), pages 1-19, Spring.

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