Abstract: Great Expectations: Dividend Policy and Financial Fragility in Norwegian Banking before 1914

Lars Fredrik Øksendal


Norwegian commercial banking before the Great War stood out as relatively fragile compared to neighboring Sweden and Denmark. Banks were numerous, locally oriented, and in a contemporary perspective equipped with relative low equity to assets ratios. Out-of-city branching was shunned and no commercial bank with countrywide ambitions emerged. The fragility of the banking system was demonstrated by bank closures and heavy losses in the 1870s and 1880s and more severely in connection with the burst of the Christiania real estate bubble in 1899. This article examines the interplay between financial fragility and the dividend policy adopted by banks. Preference for high and stable dividends seriously limited the ability to build equity from operations and contributed to a strategy of relatively high gearing. Although the dividend policy made shares attractive, the less than effective and highly cyclical money market reduced the possible gains this policy could have in terms of raising capital through share issuing. Financial fragility made Norwegian banks more exposed to economic crisis and less equipped for growth in scale and scope.