TAILIEUCHUNG - FIRMS AND THEIR DISTRESSED BANKS: LESSONS FROM THE NORWEGIAN BANKING CRISIS (1988-1991)

In the wake of the Great Recession of 2007–2009, however, many of these institu- tional investors now say they are eager to diversify their portfolios by investing in infrastructure. The California Public Employees’ Retirement System, for example, has already allotted $4 billion to be invested in . infrastructure projects over the next three years. 9 The success of so-called Build America Bonds has demonstrated that alternatives to traditional municipal bonds can have success in attracting pension funds and inter- national investors. The program, initiated in 2009, issued an estimated $117 billion in taxable state and local bonds for which the federal government directly subsidized. | Board of Governors of the Federal Reserve System International Finance Discussion Papers Number 686 November 2000 FIRMS AND THEIR DISTRESSED BANKS LESSONS FROM THE NORWEGIAN BANKING CRISIS 1988-1991 Steven Ongena David C. Smith and Dag Michalsen NOTE International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. References to International Finance Discussion Papers other than an acknowledgment that the writer has had access to unpublished material should be cleared with the author or authors. Recent IFDPs are available on the Web at . Firms and their Distressed Banks Lessons from the Norwegian Banking Crisis 1988-1991 Steven Ongena David C. Smith and Dag Michalsen Abstract We use the near-collapse of the Norwegian banking system during the period 1988-91 to measure the impact of bank distress announcements on the stock prices of firms maintaining a relationship with a distressed bank. We find that although banks experienced large and permanent downward revisions in their equity value during the event period firms maintaining relationships with these banks faced only small and temporary changes on average in stock price. In other words the aggregate impact of bank distress on listed firms in Norway appears small. Our results stand in contrast to studies that document large welfare declines to similar borrowers after crises hit Japan and other East Asian countries. We hypothesize that because banks in Norway are precluded from maintaining significant ownership control over loan customers Norwegian firms were freer to choose financing from sources other than their distressed banks. We provide cross-sectional evidence to support this hypothesis. Keywords bank relationship bank distress Norwegian banking crisis. The authors are from Tilburg University the Board of Governors of the Federal Reserve System and the Norwegian School of Management .

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