Research Discussion Papers, Bank of Finland
No 9/1993:
Private Indebtedness and the Banking Crisis in Finland
Anne Brunila and Kari Takala ()
Abstract: In Finland the private sector borrowing started to rise
rapidly in conjunction with the liberalization of capital movements and
deregulation of the domestic financial sector during the second half of the
1980s. The financial deregulation coincided with and amplified an economic
boom marked by favourable income expectations, loose fiscal policy
associated with improved terms of trade and anticipated reduction in income
tax rates. All these factors contributed to the overheating of the Finnish
economy that finally turned into a severe recession in the beginning of
1990s. The reaction of households to financial deregulation in Finland was
similar to that in the other Nordic countries. As in Norway and Sweden,
household indebtedness started to rise in the mid-1980s, after the
abolishment of lending rate regulations and prior savings requirements for
housing loans. Measured by the ratio of household debt to annual disposable
income, household indebtedness peaked in 1990 at more than 80 per cent of
annual disposable income. Since then, it has fallen slightly. Debt
financing in the corporate sector started to increase rapidly in
conjunction with the liberalization of capital movements, which enabled
firms also in the domestic sector to raise loans in foreign currencies.
During the 1980s debt financing grew most in the real estate business,
construction and services. Despite increased borrowing, the debt with
respect to equity of Finnish firms did not rise significantly until
1990–91, because a large part of the debt growth was matched by increases
in corporate earnings and equity values during the late 1980s. Recession
turned the situation for the worse as corporate earnings and the market
value of assets plummeted. High indebtedness and overcapacity especially in
the domestic sector will require several years of adjusting.
Keywords: banking crisis; indebtedness; (follow links to similar papers)
42 pages, May 7, 1993
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
DP_09_1993.pdf 
Download Statistics
Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design by Joachim Ekebom
