We experienced a collapse in house prices, as well as a severe banking crisis, a foreign exchange crisis, fiscal deficits and high inflation. Hermod Skånland, the Norwegian central bank governor at that time, summarised the causes of the crisis as “bad banking, bad policy and bad luck.” Efforts were now focused on bringing public spending under control, while large parts of the banking system were nationalised. Unemployment soared. Monetary policy aimed at a stable krone exchange rate, resulting in high real interest rates. But with a binding commitment to a fixed exchange rate, inflation was brought under control. The banking crisis and the downturn in the early 1990s made clear how vulnerable our small open economy was to terms-of-trade shocks and that our banks needed to be properly regulated. Furthermore, it became evident to policymakers how hard it is to conduct countercyclical economic policy, or even to avoid being procyclical. In the following years, structural reforms were implemented in order to increase growth capacity, including a major general tax reform. The tax code had already been tailored to capture the economic rent in the petroleum sector – the petroleum company tax rate is about 80 percent. Confidence in monetary policy gradually gained a firmer footing, after a succession of devaluations had come to a halt. Inflation and the real interest rate declined, and cost competitiveness improved considerably. Norway has not experienced a really pronounced economic downturn since the crisis around 1990.
Let me again make some observations from my home country:  Norway had a severe banking crisis around 1990. Three of the four largest banks failed and the direct capital injections required were alone more than 3½ per cent of GDP. Just to put this figure into perspective, the 106 billion euros the European banks need for recapitalisation now is less than 1 per cent of GDP in the euro area. Ever since the Norwegian banking crisis in the early 1990s, our banking industry has been regulated more strictly than banks in comparable countries.   For instance, bank capital definitions have been tighter and the financial supervisor has been more actively restricting banking activities.   Another example is that packaging loans into complex financial instruments was in practice not permitted until 2007 when new regulations provided for the issuance of covered bonds. The complex instruments central in the creation of the subprime crisis were never introduced, and Norwegian banks did not invest in them. Our GDP growth rates have still been high during the years up to 2008, also outside the petroleum sector. And the downturn we experienced in 2009 was modest in relation to comparable countries. At the early stage of the banking crisis in the1990s, the Norwegian central bank provided a large liquidity loan to a savings bank. It soon became clear that the loan would not be paid  2  BIS central bankers’ speeches  back. A liquidity problem turned into a problem of solvency.