The Financial Crisis and Norway

BJØRN SKOGSTAD AAMO was leader for The Financial Supervisory Authority of Norway from 1993 to 2011. He was deputy minister of finance from 1973-79 and 1986-
89. He is the former president of The Financial Action Task Force (FATF) and has held leadership positions in EFTA and Distriktenes utbyggingsfond. He is now Professor II
Emeritus at the University of Agder. In 2016 he published a book on financial crises, called Læring fra kriser (“Learning from crisis”).

The global financial crisis led to a ten year period of stagnation in most parts of Europe. Why was Norway able to contain the impacts of the global financial crisis?


The International Financial Crisis, which started in 2007-08, led to a ten-year period of economic stagnation in most parts of Europe. Norway also felt the impact of the crisis. Economic growth picked up however, after one year of stagnation and continued in the following years. This article will discuss some of the reasons why Norway was able to contain the impacts of the crisis. A primary explanation is that Norway had a banking crisis of its own in 1991-93. Both the banking industry and the financial authorities learnt from that crisis in the 90s which minimised the suffering in Norway due to the Global Financial Crisis.


The International Financial Crisis was initiated by the collapse of the subprime mortgage markets in the US. Millions of Americans had obtained loans with low interest rates and no repayments. While house prices were increasing, refinancing was easy. When the mar ket turned around, millions abandoned their loans and the banks were left with the houses. The banks further depressed housing prices when they released them for sale.

THE SUBPRIME MORTGAGES were “packed and sold” as securities to investors all over the world, known as ABS (Asset Backed Securities), MBS (Mortgage Backed Securities) or CDO (Collateralized Debt Obligations). The number of new CDO contracts was around 100.000 annually until 2004-2005 and then exploded up to 500.000 CDO contracts annually in 2006 and 2007. Rating agencies approved of these instruments as increasing house prices had prevented direct losses.

THE US INVESTMENT BANKS were highly exposed, both as traders and investors. Meanwhile, banks in most European countries were investing substantially in securities based on sub-prime mortgages. Other financial institutions such as hedge funds, mutual funds and pension funds also bought large quantities of these securities as they were expected to give higher returns than many other types of securities.

”While house prices were increasing, refinancing was easy. When the market turned around, millions abandoned their loan”

WHEN HOUSE PRICES in the US started to fall in 2007, the markets that handled securities became particularly nervous. BNP-Parisbas had to liquidate funds which had been invested in sub-prime backed securities. The British bank, Northern Rock, could no longer fund itself in the securities market and was forced to request Government assistance. Only deposits up to 2000 pounds were covered by the UK deposit insurance scheme. As a result, customers became nervous and thousands queued up to withdraw their money from the bank.

WHEN the fifth largest investment bank, Bear Stearns, was ‘rescued’ by US authorities, there was some sense of relief, that a crisis seemed to have been avoided. However, on September 15th, Lehman Brothers, the fourth largest investment bank, went bankrupt and the US authorities did not intervene. The bank was left to normal bankruptcy procedures managed by a private lawyer in New York. Financial markets all over the world were influenced, and in many markets normal bank-to-bank lending came to a standstill. Most banks depend on such loans for their liquidity supply.

LEHMAN BROTHERS had substantial operations in more than 60 countries, not at least as a broker and lender in the securities markets. To illustrate, in Norway some 20 000 deals at the Stock Exchange were stopped following the Lehman Brothers’ bankruptcy.

THE DAY AFTER the bankruptcy, September 16th, the Committee of European Banking Supervisors (CEBS) held a telephone-meeting. Our Belgian colleague, Peter Praet, expressed the general feeling when he stated: “There is no one in charge over there.” US Investment banks were only regulated by legislation for security firms without being subject to banking regulation. Authorities in other countries were left to clean up the mess created by the downfall of Lehman Brothers. Banks in North- America and Europe suffered heavy losses both on the subprime based bonds and their relations with Lehman Brothers. The losses reduced the ability of banks to serve industry and society.

SEVERAL MAJOR BANKS suffered significant losses which threatened their very existence, resulting in the need for government support or nationalisation. Banks in Greece, Portugal, Ireland, Spain and Cyprus in particular had significant problems which was exacerbated due to domestic issues, and requiring direct government assistance.

Figure 1: Nominal credit growth, during & after the Financial Crisis in Norway, Denmark, Sweden & the Eurozone (Source: BIS).


The crisis in the international financial market had a significant impact on the credit supply from European banks. With low levels of own funds, the losses in the security markets forced them to restrict credit, which resulted in both reduced private investments and private consumption. Because government funds were used to ‘bail-out’ various banks, this reduced the ability of governments to support other public activities.

BASED ON FIGURES from Bank for International Settlements, the nominal credit growth is seen in Figure 1. The figure shows that nominal credit stagnated in the Eurozone from 2008 onwards, and in real terms there was a decline. Norway and Sweden continued on a healthy growth path, while credit grew somewhat in Denmark before it stagnated.

”the strength of the German economy had inflated the value of the Euro more than what suited other countries”

THERE WERE two primary reasons for the stagnation of credits in the Eurozone:

Lack of own funds. Banks need their own funds both to fulfill legal requirements and to gain confidence from those who offer liquidity. The capital requirements are a fraction, where own funds are the numerator and loans and credits are the main items of the denominator. As banks were unable to attract capital to increase or maintain the numerator, the only way to maintain the capital fraction was to keep the denominator low by restricting credit.

Lack of liquidity. The markets for bonds and other liquid assets stagnated as private investors became hesitant. The European Central Bank became the main supplier of liquidity, through the programmes of quantitative easing, whereby the bank bought securities in the market.


In the EU, the decline in economic activity was most significant in the Eurozone countries. They had no flexibility in their currencies, and highly diverse economic developments. Germany had improved its competitiveness and was running a surplus in current accounts of some 6 – 8 per cent of GNP in the years 2006 – 2008. Spain, Portugal and Greece had deficits of some 10 to 15 per cent of GDP.

THE STRENGTH of the German economy had inflated the value of the Euro more than what suited other countries. Other Eurozone countries had to maintain or improve their competitiveness by forcing prices and wages down by restricting economic demand. They paid a high price for the fixed exchange rates.

THE EUROZONE suffered a recession with declining GDP for 15 months from Q2 2008 and then 18 months from Q4 2011. These countries lost their fiscal ability to manoeuvre, partly due to the support given to banks. The Sovereign Debt Crisis thus paved the way for The Great Recession, – the deepest recession since the 1920s and 30s. This is illustrated by the figure below:

Figure 2. Development of GDP in the first years following the Financial Crisis of 2007-2008. (OECD Statistics).

NORWAY had a very mild recession with GDP bouncing back to the 2008 level in 2010. Sweden had a deeper recession but recovered strongly in 2010. The ECB has in recent years added substantial funds to the markets by buying bonds, which helped to get the Eurozone economies out of stagnation by 2017-18.

THE WORLD BANK has developed a special method, “The Atlas Method” for comparing economic developments between countries. The method shows that the Gross National Income per capita (GNI) in the Eurozone stagnated from 36.800 current USD in 2007 to 37.500 USD in 2015. For Sweden it rose from 52.000 USD in 2007 to 57.800 in 2015. For Denmark from 55.700 in 2007 to 60.300 in 2015. The Norwegian GNI per capita was on top in 2007 with 78.400 USD and grew more than other European countries, reaching 93.600 current USD by 2015. The US stimulated its economy by fiscal and monetary measures. The GNI per capita grew from 48.600 USD in 2007 to 56.100 USD in 2015, according to the World Bank. (Figures based on the report published in 2017).


Norway suffered a severe banking crisis in the early 1990s. During that time, I closely monitored the developments of the banks. Becoming Director General of the Norwegian Financial Supervisory Authority (FSA – Finanstilsynet) in early 1993, after being Undersecretary in charge of economic affairs at the Prime Minister’s Office from late 1990. The losses of the three largest commercial banks were so big that all their own funds were used to cover them. The three banks had to be fully taken over by the Government in 1991-92. There were both macro- economic and bank-industry reasons for the crisis.

NORWAY had strict quantitative credit regulations throughout the post-war era. In the 1950s and 1960s, with low inflation, this system worked reasonably well. Creditors paid a positive real interest rate after tax, even though interest rates were very low. Credit flows were steered towards the housing and manufacturing industries, thus rebuilding Norway after the German occupation. Higher inflation put the system under pressure in the 1970s and 1980s. With limited adjustments of the tax system, high wage inflation led to substantial increases in marginal taxes on net income. Because interest paid on loans was deducted before paying tax on net incomes, net interests were lower than the inflation, implying there were no real borrowing costs. The highest marginal tax rate was 66.4 per cent, implying that two-thirds of the interest due was paid by the public authorities. Average income earners had a marginal tax rate of 46.4 per cent.

CREDIT MARKETS were deregulated in 1984, and credit and housing markets followed a typically boom and bust pattern. Bank credits exploded, growing 100 per cent in the three years 1984, -85, -86. House prices doubled from 1983 to 1987, and then halved from 1987 to 1992.

Minister of Finance, Per Kleppe (Labour), proposed tax reforms to reduce the value of the deductible paid interest in 1979, while I was his Undersecretary. However, the proposal was rejected in Parliament by both the Conservative Party and the Socialist Left Party (SV). No tax reform was prepared until the right-wing Willoch-government had been replaced by the Harlem Brundtland Labour government in 1986.

TAX REFORMS were announced in the parliamentary session 1986/87 by Minister of Finance, Gunnar Berge (I was also his Undersecretary), which were aimed at reducing the value of interest deductions. Combined with restrictive fiscal measures, this played a significant role in the turnaround of housing and property markets. Without these announcements, the turnaround might have come later and with similar or even greater consequences.

TO AVOID THE BOOM AND BUST CYCLE, fiscal and tax measures should have been introduced prior to, or concurrently with, the relaxation of credit regulations. The final tax reform was politically anchored in both the Labour Party and the Conservative Party. It took full effect in 1992, with a 28 per cent tax on net business and net personal income, which then became the share of interest paid by the public.

“Other Eurozone countries had to maintain or improve their competitiveness by forcing prices and wages down… they paid a high price for the fixed exchange rates”

MOST OF THE TURNAROUND came from a change in consumer behaviour when people realised they had borrowed too much. People stopped buying cars, TVs and other items so that they could service their housing debt. Private consumption declined by four per cent from 1986 to 1989.

THE BANKS did not prepare for a free credit market. They were used to choose borrowers from the queue and did not fully analyse the ability of people or companies to service and pay back the loans.

AFTER YEARS of quantitative regulations, the focus of banks was on growth. How to make present clients borrow more and attract new clients, including by expanding their network of bank-offices. The management of the second largest bank, Christiania Bank (Kredittkassen) made it their main aim to become the largest bank, by growing more than others. In the four years from 1983 to 1987, annual growth of credit in the bank was 37 per cent.

“A robust deposit guarantee scheme was established and capitalised, covering deposits up to two million NOK”

THE BANKS were not able to increase their own funds in line with the growing credits and exposure. Instead they used subordinated debt, which was of little value when the crisis came, as such money could not cover the losses without harming relations with international lenders of great importance to Norwegian banks. Only moderate losses were recorded the first years, and mainly in some regional banks. In late 1990 and in 1991 it became obvious that the downturn created substantial losses for the larger commercial banks, mainly in commercial and industrial property. Although the housing market played a leading role in the boom and bust developments, only one fifth of bank losses came from residential property mortgages. Norwegians gave priority to servicing their housing debt.


Banks gained valuable experience from the crisis in the nineties and improved their credit handling processes and internal controls significantly. This development was encouraged by the FSA with projects on better credit procedures and new regulations requiring good internal control systems and organised internal audit systems.

One important feature was that during the crisis, Norway did not give the banks the option of offloading lossmaking credit assets in separate “Bad banks”. The banks’ staff and management were forced to deal with the lossmaking credits internally and learn from their mistakes.

NEW CAPITAL REQUIREMENTS were set at the consolidatedv, sub-consolidated and solo level. Norwegian requirements were clearly higher than in other countries as well as international standards. The FSA required minimum 7 per cent core capital by all banks, well above minimum requirements abroad. Hybrid capital was only accepted when core capital was above seven per cent.

BANKING SUPERVISION was substantially strengthened by increasing personnel levels within FSA, many with banking experience. The supervisors conducted regular audits in all large and medium sized banks. Specific capital requirements were added if risks in a bank were considered to be higher than average. A robust deposit guarantee scheme was established and capitalised, covering deposits up to two million NOK. The confidence of the public in the banking system was thus strengthened.

THE BANKING CRISIS and the period of public ownership developed a more cautious attitude. Norwegian banks in general did not buy sub-prime based bonds and consequently, did not experience the resulting losses. Absence of US and UK banks in Norway reduced the direct sale of such bonds.

Photo: The entrance to Norges Bank, Norway’s Central Bank [FROM MARKETSLANT.COM]
MANY EUROPEAN BANKS had substantial losses on Icelandic bank bonds when the financial crisis hit these banks in late 2008. By 2004, Icelandic banks had given loans at the same size as the GNP of Iceland. By extending branches and subsidiaries to nearly twenty other countries, their total credits expanded to nine times the Icelandic GNP in a few years. The expansion was financed by selling bonds to European banks with slightly better dividends than other bonds. Only Norwegian banks did not buy them. This was influenced by the sceptical view of the Norwegian FSA on the Icelandic banks, which became generally known when the FSA denied the Icelandic bank, Kaupthing the right to buy 25 per cent of the shares in Storebrand, the largest Norwegian insurance company.

BOTH FSA AND NORGES BANK (the Central Bank) developed their macroeconomic surveillance of the financial markets. A close tripartite cooperation with the Ministry of Finance was developed. When the International Financial Crisis struck in the autumn of 2008, the authorities were able to cooperate closely and make quick decisions.

A barter arrangement whereby covered bonds secured in housing could be exchanged by the Central Bank for short-term government bonds was of great importance to improve liquidity. A state Finance Fund was set up to help banks with low ratios of own funds. This strengthened general stability and gave flexibility for banks who had to obtain own funds from the market. Only a few banks did however need assistance from the Fund.

THE ROBUSTNESS of the Norwegian banking system compared to other European countries was of key importance for the better economic performance of Norway.

Strong public finances, helped by incomes from oil and gas, was also valuable, as the Government could stimulate the economy by increasing government spending. While unemployment levels in the Eurozone more than doubled and passed ten per cent of the work force, it was kept clearly below 4 per cent in Norway also in the years following the Financial Crisis.

This article was published in our Rethinking Finance publication, Check out the full magazine here

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