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Finnish Banks' Problem Assets: Result of Unfortunate Asset Structure or Too Rapid Growth?

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  • Solttila, Heikki

    ()
    (Bank of Finland Research,)

  • Vihriälä, Vesa

    (Bank of Finland Research)

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    Abstract

    The paper focuses on the proximate causes of the Finnish savings and cooperative banks' non-performing assets in the current banking crisis. Specifically, the effects of the lending structure at the outset of the crisis and the rate of growth of lending in the latter half of the 1980s are investigated. The main findings are: (1) Lending structure alone is not sufficient to explain the variation in the share of non-performing assets among the local banks. (2) Growth of lending is a major explanatory factor: the faster the growth in the second half of the 1980s, the higher the later share of nooperforming assets. (3) Growth of lending is a particularly important "cause" in the case of the savings banks, where lending structure does not seem to have had much of an impact. (4) Lending to manufacturing, construction and trade has had a significant negative effect on the cooperative banks' asset quality. (5) Differences in the rate of lending growth go a long way in explaining why there are on average much more problem loans in the savings bank group than in the cooperative bank group. (6) The share of foreign currency loans is not an important factor when the effect of growth is accounted for, although the roles cannot be fully separated due to multicollinearity. (7) Assuming that growth of lending is more under the control of a bank than the structure of lending, the findings support the view that "bad luck" is not the only explanation of the Finnish banking problems but "bad banking" in the form of either ignorance of risks or deliberate risk taking is a major factor as well.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/DP_23_1994.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 23/1994.

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    Length: 35 pages
    Date of creation: 19 Dec 1994
    Date of revision:
    Handle: RePEc:hhs:bofrdp:1994_023

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
    More information through EDIRC

    Related research

    Keywords: banking crisis; asset structure; nonperforming assets;

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    Cited by:
    1. Santiago Fernández de Lis & Jorge Martínez Pagés & Jesús Saurina, 2000. "Credit Growth, Problem Loans and Credit Risk Provisioning in Spain," Banco de Espa�a Working Papers 0018, Banco de Espa�a.
    2. Kumbhakar, Subal C, et al, 2001. "The Effects of Deregulation on the Performance of Financial Institutions: The Case of Spanish Savings Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 101-20, February.
    3. Martín Vallcorba & Javier Delgado, 2007. "Determinantes de la morosidad bancaria en una economía dolarizada. El caso uruguayo," Banco de Espa�a Working Papers 0722, Banco de Espa�a.
    4. Vicente Salas & Jesús Saurina, 2002. "Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks," Journal of Financial Services Research, Springer, vol. 22(3), pages 203-224, December.
    5. Jesús Saurina-Salas, 1998. "Determinantes de la morosidad de las cajas de ahorro españolas," Investigaciones Economicas, Fundación SEPI, vol. 22(3), pages 393-426, September.
    6. Kinnunen, Helvi & Vihriälä, Vesa, 1999. "Bank Relationships and Small-Business Closures during the Finnish Recession of the 1990s," Research Discussion Papers 13/1999, Bank of Finland.

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