Most often these included: •  the management and board of directors of the bank were replaced  •  the existing share capital was written down to cover losses to the fullest extent possible  •  the bank’s operating costs were reduced and some of its activities downsized  •  measures were taken to restrain growth in the bank’s total assets. An example of the conditions that were imposed can be found in chart 8. These conditions were of course rather unattractive to bank managers, board members and shareholders. And that was part of the objective; the management of a troubled bank should have a strong incentive to try other solutions before approaching the GBIF. For those that had to resort to the GBIF, an important aim was to force them onto a sounder track of business. Curbing the activities of banks receiving capital from the GBIF also implied that there was no competitive advantage for these banks over rival banks that were not receiving this kind of support. In addition, the value of the existing share capital in the bank would be written down according to the bank’s losses. In cases where the losses exceeded the existing share capital, the entire capital would be written down to zero. Such decisions would normally have to be made by the banks’ General Meetings. In order to avoid a stalemate if a majority at the meeting objected to the decision, the Storting had one month earlier made an amendment to the Commercial Bank Act.
Membership in the funds is mandatory and the funds are financed ex ante by fees from the member banks. These funds had a wider mandate than just paying out depositors at the closure of a failed bank. If liquidating the failed bank and paying out the depositors was considered a more costly alternative than recapitalizing the bank or providing guarantees or financial support to facilitate a take-over, the funds were free to do so. However, by the end of 1990, bank-owned funds had effectively depleted almost all of their capital and it became apparent that the larger banks might also face problems. To make sure that there would still be a safety net present, the government established the Government Bank Insurance Fund - or GBIF in early 1991. At the same time it was made clear that it was through this fund only that public money might be injected into failing banks. The central bank might provide liquidity support only once solvency was assured. The GBIF was given a specific grant by the Storting (parliament). The new fund could lend money to the banks’ own guarantee funds to enable them to recapitalize failing banks. Later, as the crisis escalated, the GBIF was permitted to recapitalize the banks directly. In both cases, strict conditions were attached.