Tài liệu Financial fragility or information asymmetry? - The inter-war banking crisis in Norway

EBHA Conference 2001: Business and Knowledge
C3: Information Asymmetries in the Financial Industry


Financial fragility or information asymmetry? -
The inter-war banking crisis in Norway


Sverre Knutsen
Norwegian School of Management


July 2001


Copyright by Sverre Knutsen


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Financial fragility or information asymmetry? -
The inter-war banking crisis in Norway


Introduction


This paper analyses the severe banking crisis that shook the Norwegian banking


system to its foundation during the early 1920s. The prevalent explanation among


Norwegian historians is that the major cause for the crisis was 'flawed monetary


policy'. The so-called par policy that aimed at returning to gold at the prewar parity


caused depression, it is argued. This brought about deflation, which in turn affected


business adversely. Consequently the banks’ amount of non-performing loans


increased drastically. The problem is, however, that the value of the krone did not


start to rise substantially until 1924/25. The resulting gold-parity depression occurred


1925-28, whilst the most serious phase of the banking crisis took part during the years


1921-24. As will be demonstrated in this paper, the policy carried out by the central


bank over the period 1921-23 can hardly be labeled par policy at all. Actually, the


main feature of central bank policy during these years was ‘production assistance’ by


the way of bank support. This fallacy of chronology is the first of two major research


problems I'll address in this paper.


The second major problem to be addressed in the paper is whether an


analytical framework build on the notion of asymmetric information or a financial


fragility approach best can explain the main causes of the inter-war banking crisis.


Mainstream economists have been neglecting topics like economic depression and


financial crises during most of the period since the end of World War II. The subject


was left to economic historians and a handful of heterodox economists. It was not


until the epidemic of financial crises during the 1980s and 1990s when mainstream


economists focused the theme of financial instability. In particular this literature has


surged in the wake of the 1997-1998 Asian financial crises. A large part of this


expanding literature emphasizes information and incentive problems like moral


hazard and asymmetric information in credit contracts or in bank-depositor relations


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