The time profile of risk in banking crises: evidence from Scandinavian banking sectors

The purpose of this study is to characterize and document the historical time profile of risk in the Scandinavian banking sectors in the truly turbulent economic environment of the past decade, namely over the overlapping periods of financial liberalization, intensified competition, changing macroeconomic conditions and banking crisis. Of particular interest is whether, when and how the risk of banks evolved as the banking crisis unfolded in each Scandinavian country. Three modern econometric methods are used that allow for time-varying risk parameters in the standard one-factor market model. The main finding is that the state of and developments within the banking industry were not reflected in the sample path of the risk parameters until the damage had been done and the severe problems afflicting banks began to realize in full.