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. 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. this amendment entitled the government by royal decree to write down the share capital of a bank against losses in the audited interim accounts, if the shareholders ’ general meeting did not do so. this authority was used in two instances where shareholders refused to write down a bank ’ s shares as required by gbif. shareholders in one bank brought the case to the courts, but lost. that shareholders in this way were forced to

has - at least so far - led the government to opt for remaining an important owner. when the government as part of a crisis resolution steps in as an owner of last resort, the intention is usually to get out of this position once the bank has proved to be profitable again. this is probably cf. kane and klingebiel ( 2002 ). source : st. meld. 39 ( 1993 - 94 ). source : for sweden : jennergren and naslund ( 1998 ). for norway : norges bank, moen ( 2003 ). see hoggarth, reis and saporta ( 2002 ). peek and rosengren ( 2000 ) look at the loan supply shock facing u. s. firms borrowing from japanese banks during the banking crisis in japan. they identify a substantial impact on u. s. real estate activity from this supply shock. see ongena, smith and michalsen ( 2003 ) and vale ( 2002 ). good advice, but there is a delicate balance between restoring private ownership quickly and trying to recover as much as possible of the government ’ s fiscal costs. the norwegian banking crisis was handled swiftly and transparently and at relatively low cost to the taxpayers. furthermore, the banks that came out of the crisis had trimmed their operating costs and established much better systems to evaluate credit risks. in one respect, we were rather lucky compared to others. the crisis built up gradually, so there was time to assess the situation and strengthen the defences of the financial system before the crisis became systemic. the banks ’ equity capital provided the first line of defence and the banks ’ collective guarantee funds the second when bank losses started to soar. the third line of defence - the government bank insurance fund - was only established when it was evident that the first and second lines of defence did not hold, but it was nevertheless established in time. by and large most scholars seem to agree that the resolution of the crisis in norway was fairly successful. but even if it was, right there and then, there is no guarantee that the same recipe will be successful in future or in other countries. in recognition of this and to avoid moral hazard, the law establishing the government bank insurance fund has now been repealed and the fund has ceased its operations. even if government capital injections in the large problem banks were the right resolution method in the early 1990s, it is far from evident that such a rescue operation would be the right method should a large bank fail in the future.