US economic crisis, Finnish déjà vu

Former Bank of Finland governor sees same mistakes behind US finance crisis that Finland made in 1990s

print this

By Teija Sutinen
     
      The hurricane that hit the financial sector was building up for months before it finally hit the United States with full force. History was made on Wall Street: one investment bank went under, and another was forced into a merger. One insurance company was nationalised.
      The storm seems to be spreading and getting closer to Finland. In one row house in Laajasalo in the east of Helsinki, the past week has been followed more closely than usual, with eyes that have seen it all.
      Sirkka Hämäläinen, 69, was one of the key decision-makers when the same kinds of events were on the move in Helsinki’s banking district in the early 1990s. She rose from her seat on the board of a commercial bank to the Board of the Bank of Finland in 1991, and became the central bank’s Governor in 1992.
      The past week has been a déjà vu experience for Sirkka Hämäläinen.
      “The mistakes that led to the crisis in the Untied States are largely the same as the ones that were made in Finland in the 1980s before the Finnish bank crisis occurred. Decision-makers in economic policy were greedy for growth, and investors, banks, borrowers, and consumers were in an awful frenzy to get rich”, Hämäläinen says.
     
In the Finnish banking crisis the central bank had to take control of one bank, Skopbank.
      A little bit later, owners of Skop, the largest members of the Savings Bank Group, took fright and merged to form Suomen Säästöpankki. It was not viable, and it ended up being carved up among four competitors, which were in trouble themselves because of credit losses. Branch offices were closed, and thousands of bank employees lost their jobs.
      The main goal in Finland was to keep the banks solvent and to secure the funds of depositors. Those who had borrowed money, and those who guaranteed their loans, ended up suffering. Many are still paying off bills from the years of the recession.
     
In both countries, the United States and Finland, rapid changes in financial markets lurked in the background.
      In the US, the free market has meant that the financial sector has been allowed to develop increasingly difficult and dangerous financial instruments. In Finland, when regulation was dismantled, banks started lavishing money on their customers. They were especially keen to offer loans denominated in foreign currencies, whose inherent risks were largely ignored.
      “Another thing that that these two crises had in common was that financial supervisors were always a few steps behind”, Hämäläinen says.
      According to Sirkka Hämäläinen, the Bank of Finland tried to bring the banks in line, but the methods it used were inefficient. For instance, Skopbank could not care less about the ceilings that the central banks placed on lending.
     
Skop financed the growth in its lending by taking short-term credit from the market between the banks, and from abroad.
      “Skop was warned many times. There were tensions in the inter-bank market, just like there is now on the global scale, and foreign cash began to become more expensive."
      One September morning in 1991 confidence in Skop ran out, and the money taps were suddenly turned shut.
      Something like that can cause a bank to fall, as was seen last week.
      Skopbank director Juhani Riikonen called Hämäläinen to ask frantically what should be done now.
      The Bank of Finland did the same thing that recently became necessary in the United States. Skopbank was, for all practical purposes, nationalised.
     
This is not to say that no risk analyses had been made in the central bank: there had been theoretical exercises of financial crises, but the reality differed from what had been imagined. For that reason, the activities “had to be improvised”, Hämäläinen says.
      The risk analysts of the central bank could never imagine the magnitude that the bank crisis would reach after Skop collapsed.
     
The same problem exists now. Nobody can find a wise person who would be able to predict the events that are currently unfolding.
      “Nobody can reliably predict the one-off effects. There is a vast amount of psychology and complicated interdependencies involved. the content of the balance sheets should be known, and no enforcer knows exactly what they are.”
      In the autumn of 1991 everything in Finland seemed to be falling apart. What was it like to be in the eye of the storm at that time?
      “We gathered all of the information that was available, and then we simply had to make as well-considered decisions as possible. No matter how well we knew that the decisions would have serious consequences, I have always managed to sleep at night”, Hämäläinen says.
      A crisis requires speed. According to Hämäläinen, the Finnish bank crisis went from bad to worse in 1992, when Parliamentary debate on an extensive bank subsidy package was drawn out.
     
Is Finland sheltered from the storm this time? The question makes Hämäläinen serious.
      She sighs and says that she was “terribly pessimistic” already at the beginning of 2007, when there were indications of an overheating of the finance market.
      Finland cannot be completely protected from the consequences.
      “Disturbances should be repulsed during good times. It would be wonderful just once to hear political decision-makers call for higher interest rates in a growing economy.”
     
Helsingin Sanomat / First published in print 21.9.2008


Previously in HS International Edition:
  Market upheaval wipes out billions in Finnish wealth (19.9.2008)
  Wall Street woes send Helsinki stocks tumbling in Wednesday afternoon trading (18.9.2008)
  Limited impact of Lehman Brothers bankruptcy on Finnish investors and bank customers (16.9.2008)

TEIJA SUTINEN / Helsingin Sanomat
teija.sutinen@hs.fi