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

  • Claudio Borio

    (Bank for International Settlements)

  • Bent Vale

    ()

    (Norges Bank (Central Bank of Norway))

  • Goetz von Peter

    (Bank for International Settlements)

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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Paper provided by Norges Bank in its series Working Paper with number 2010/17.

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Length: 45 pages
Date of creation: 31 Aug 2010
Date of revision:
Handle: RePEc:bno:worpap:2010_17
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  1. 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.
  2. Bank for International Settlements, 2009. "An assessment of financial sector rescue programmes," BIS Papers, Bank for International Settlements, number 48, March.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
  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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