Research Discussion Papers, Bank of Finland
No 23/1994:
Finnish Banks' Problem Assets: Result of Unfortunate Asset Structure or Too Rapid Growth?
Heikki Solttila ()
and Vesa Vihriälä
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.
Keywords: banking crisis; asset structure; nonperforming assets; (follow links to similar papers)
35 pages, December 19, 1994
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