Why Do Banking Crises Occur? The American Subprime Crisis Compared with the Norwegian Banking Crisis 1987-92

Knutsen, Sverre

doi:10.2139/ssrn.2258443

Cited by 8 publications

(3 citation statements)

References 26 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Norway and other Nordic countries experienced a major house price boom in the late 1980s followed by a crash in the early 1990s . The earlier boom-bust pattern in Norway is similar in magnitude to the recent boom-bust pattern in U.S. house prices (Knutsen 2012). After peaking in 2006, U.S. real house prices have since dropped by nearly 40 percent.…”

Section: Housing Market Datasupporting

confidence: 54%

House Prices, Expectations, and Time-Varying Fundamentals

Gelain¹,

Lansing

2014

ERWP

View full text Add to dashboard Cite

We investigate the behavior of the equilibrium price-rent ratio for housing in a standard asset pricing model and compare the model predictions to survey evidence on the return expectations of real-world housing investors. We allow for time-varying risk aversion (via external habit formation) and time-varying persistence and volatility in the stochastic process for rent growth, consistent with U.S. data for the period 1960 to 2013. Under fully-rational expectations, the model significantly underpredicts the volatility of the U.S. price-rent ratio for reasonable levels of risk aversion. We demonstrate that the model can approximately match the volatility of the price-rent ratio in the data if near-rational agents continually update their estimates for the mean, persistence and volatility of fundamental rent growth using only recent data (i.e., the past 4 years), or if agents employ a simple moving-average forecast rule for the price-rent ratio that places a large weight on the most recent observation. These two versions of the model can be distinguished by their predictions for the correlation between expected future returns on housing and the pricerent ratio. Only the moving-average model predicts a positive correlation such that agents tend to expect high future returns when prices are high relative to fundamentals-a feature that is consistent with a wide variety of survey evidence from real estate and stock markets.

show abstract

Section: Housing Market Datasupporting

confidence: 54%

House Prices, Expectations, and Time-Varying Fundamentals

Gelain¹,

Lansing

2014

ERWP

View full text Add to dashboard Cite

show abstract

“…Norway and other Nordic countries experienced a major house price boom in the late 1980s followed by a crash in the early 1990s. The crash was accompanied by a financial crisis in Norway, Finland, and Sweden, resulting in numerous bank failures (Moe et al, 2004 andKnutsen, 2012). Interestingly, the earlier boom-bust pattern in Norway is similar in magnitude to the recent boom-bust pattern in U.S. house prices.…”

Section: Figure 1: Real House Price Indexed To 100 In 1890mentioning

confidence: 97%

Housing Bubbles and Expected Returns to Homeownership: Lessons and Policy Implications

Jurgilas¹,

Lansing

2013

SSRN Journal

View full text Add to dashboard Cite

observed property prices are assembled from an unobservable 'real' property price linked to macroeconomic conditions and the interest rate environment, and a noisy component given by market sentiment. Between January 1993 and July 2007 all IPD index logarithmic returns were positive. This long series of positive returns created an illusion among investors. It implied that they did not give proper consideration to macroeconomic evidence. That changed fundamentally in 2008. During the subprime crisis investor behavior changed from illusion to disillusion and the market prices occasionally fell well below the level indicated by fundamental economic considerations. IPD property derivatives can, according to the author, be used for risk management purposes. Investors have access to Eurex futures that can be utilized to hedge out property risk and avoid the consequences of price crashes.Giovanni Dell'Ariccia and Deniz Igan, IMF Research have authored chapter 3: "Dealing with real estate booms". Until the global financial crisis, the main policy tenet in dealing with a real estate boom was one of 'benign neglect'. It was considered better to wait for the bust and pick up the pieces than to attempt to prevent the boom. The crisis challenged this view. But preventive policy action is difficult to implement. The authors conclude that policy efforts should focus on booms that are financed through credit and where leveraged institutions are directly involved. Macroprudential tools (such as limits on loan-to-value ratios) are the best candidates to deal with real estate booms as they can be aimed directly at curbing leverage and strengthening the financial sector. Cycles are a common feature of real estate markets. Stylized facts suggest that the longer and higher prices go up, the more they will come down. Housing cycles are closely intertwined with credit and business cycles. Peaks and troughs are not far from each other. There are significant differences across countries. Legal and institutional structures matter. In order to improve policy options, the quality of empirical data should be heightened. Real estate is an important storage of wealth in the economy. Monetary policy is a blunt instrument for the task at hand. It is difficult to use fiscal tools. So, macroprudential regulation in the form of higher capital requirements, dynamic provisioning and limits on loan-to-value and debtto-income ratios are the most promising options.

show abstract

“…Although the study is limited to Denmark and Sweden, there are great similarities with the other Nordic countries. A rapid transformation and international opening-up of the financial system in Finland, Norway and Sweden in the 1980s paved the way for a boom-bust cycle that ended with a severe crisis (Honkapohja, 2014;Jonung, Kiander, & Vartia, 2009;Knutsen, 2013). In Finland, capital injections were made to private banks, while the state-control of banks was relatively short-lived.…”

Section: Introductionmentioning

confidence: 99%

The state as the investor of last resort: a comparative study of banking crises in Denmark and Sweden

Sjögren

Iversen

2018

Scandinavian Economic History Review

View full text Add to dashboard Cite

This article addresses the role of the state in bailouts, i.e. government objectives and measures during banking crises. Our main question concerns the incentives and measures that governments pursue in a state of a systemic banking crisis, and why they are launched. What have been the objectives and operations when a government has decided to act as an investor of last resort and take control of commercial banks? The answer is limited to cover the financial history of two countries. The study unveils government interventions in the latest crises in Denmark and Sweden, and critically analyse which objectives justified the setting up of organisations for financial stability. The two country-cases differ in terms of historical experience, context, and timeperiod. We compare intrinsic principles and perceptions for government intervention, with a focus on bailouts and state-owned banks. We argue that the implementation of measures dates back to the early phases of capitalism in the 19th century i.e. is part of a historical institutional pattern. The similarities shown indicate that there is an international standard for a public-private arrangement ensuring financial stability. Our results relate to the discussion of launching effective and legitimate state policies during and after a systemic banking crisis.

show abstract

Why Do Banking Crises Occur? The American Subprime Crisis Compared with the Norwegian Banking Crisis 1987-92

Cited by 8 publications

References 26 publications

House Prices, Expectations, and Time-Varying Fundamentals

House Prices, Expectations, and Time-Varying Fundamentals

Housing Bubbles and Expected Returns to Homeownership: Lessons and Policy Implications

The state as the investor of last resort: a comparative study of banking crises in Denmark and Sweden

Contact Info

Product

Resources

About