Three episodes of financial fragility in Norway since the 1890s

This paper provides for the first time a comparative study of three major banking crises in Norway (1899-1905, 1920-28 and 1988-92), and presents financial and macroeconomic data spanning more than 130 years. Financial sector development appears to be closely linked to booms and busts in economic activity during these years. The boom periods that preceded each of the three crises all have some common features: they were characterised by significant bank expansion, considerable asset price inflation and increased indebtedness. The non-financial sector increased its debt only slightly more than its income during the first two boom periods, but subsequent deflation increased its debt burden. A puzzle in the two first boom periods was that the commercial bank equity-to-total assets ratio increased markedly. Nonetheless, the commercial banks were severely affected in the each subsequent bust. Possible explanations are provided, but this puzzle calls for more research. Altogether, a strong causal link between financial fragility and banking crises is suggested. The crises occurred in different institutional environments and monetary policy regimes, and the role of these is explored and policy lessons are drawn. In particular, the close link between monetary and financial stability is highlighted.