Credit Losses in Nordic Banks

In the 1980s the central banks of the Nordic countries began to deregu- late their financial markets. Within the space of a few years, several of the existing regulations were abolished that had for long restricted banks' lending volumes, interest rate setting and foreign exchange. For the banks a door was opened to a new world; the changed environment offered exciting business opportunities. The demand for new loans seemed almost infinite, but simultaneously the competition between banks, and between banks and other financial institutions, was strength- ened. Therefore, many banks reorganised and decentralised their busi- ness. Competitiveness and market (customer) orientation became buzz words and were considered by many banks to be strategical key factors for success. Branches became profit centres and, within certain limits, the authority to make credit decisions was often delegated to the local branch manager. The new world, however, was also a world of which most of the banks had no real experience and, apparently, very limited understanding. Today it is obvious that the majority failed to realise the magnitude of the underlying credit risk exposure when expanding the loan portfolio.