3  Interested readers are referred to Moe, Solheim and Vale (2004), Norwegian Official Reports (1992), Wilse (1995), and Stortinget (1998). Steigum (2004) sets out the macroeconomic background and implications of the banking crisis. BIS Review 58/2003  1  During 1984 and 1985, the Norwegian banking system was deregulated. In this new environment, banks started to compete for market shares. We saw a huge increase in bank lending which, coupled with general optimism (oil!) and interest rates that were kept artificially low, created an economic boom. However, neither bank managers nor supervisors had much experience of banks operating in a competitive credit market, and did not pay sufficient attention to banks’ risk exposure. A sharp fall in prices for our main export commodities, oil and gas, and the need to consolidate the economy after the boom and bring down rampant inflation, led to a recession in the late 1980s. In short, deregulation, a lending boom, and an ensuing recession set the stage for increasing bank losses. The Norwegian banking crisis evolved in two stages: In the first stage from 1988 till 1990, several small and some medium banks failed. From 1990 - 1991, the crisis became systemic. The three largest commercial banks, accounting for half of the market for credit to the domestic non-financial sector, were in deep trouble. During the first stage of the crisis, the problems were mostly handled by the banks’ own guarantee funds.
Norges Bank had kept the key policy rate at 0.5 percent for a year, and there was a slightly higher probability that the key policy rate would be reduced further than that it would be increased in the near term. There were signs of some brightening, both internationally and in Norway, but considerable uncertainty prevailed. Chart: Global GDP growth The economic outlook changed through 2017. Global growth gradually gained a firm footing, and global growth projections were revised up. For several of Norway’s main trading partners, unemployment was lower towards the end of 2017 than before the financial crisis. Despite rising growth abroad and falling unemployment, wage growth remained moderate. In 2017, most of Norway’s trading partners were still experiencing below-target core inflation. Chart: International interest rates Policy rates in the US, UK and Canada were raised in 2017. In addition, the Federal Reserve started to cautiously reduce its balance sheet, while the European Central Bank (ECB) announced that it would reduce its asset purchases from 2018. Nevertheless, international interest rates remain low, and signals from central banks as well as market expectations indicate a very gradual rise in interest rates. Chart: Oil prices and the krone exchange rate Oil prices have risen over the past two years, which may reflect steady growth in global oil consumption. Oil prices have recently increased further owing to geopolitical tensions. The krone has appreciated somewhat in this period.