The Nordic Experience of Financial Liberalization
Edited by Lars Jonoug, Jaakko Kiander and Pentti Vartia
Chapter 8: How did Denmark Avoid a Banking Crisis?
Claus Vastrup INTRODUCTION1 The financial situation of Danish commercial banks deteriorated in the late 1980s, and the problems peaked in the early 1990s. This was the first time since the Second World War with more than isolated problems in financial institutions, but the problematic situation never developed into a systemic crisis comparable to the banking crises in the other Nordic countries. Denmark did not experience bank failures to the same extent as Finland, Norway and Sweden as only a couple of small banks went bankrupt. Nor did the unfavorable conditions in the financial sector upset the macroeconomic situation in Denmark as the banking problems did in the other Nordic countries. This chapter explains how Denmark avoided a banking crisis like those of the other Nordic countries in the early 1990s even though Denmark was affected by the same European economic environment as its Nordic neighbors, that is, high economic growth in 1988–89, mixed performance and tensions in 1990–91 when Germany was unified, and the European recession and exchange rate crisis in 1992–93. The chapter is arranged as follows. First, I review some results from the literature on banking crises. Second, an overview of the problems of the Danish banking sector 1984–94 is given. Third, I search for microeconomic contributions to an explanation of the Danish record. Here the Danish record is compared with those of the other Nordic countries. Next, Danish macroeconomic developments are reviewed and interpreted. Finally, my conclusions on Denmark, relative to the other...
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