During the first years of the 1990s Sweden experienced a severe financial crisis. Many companies and banks in Sweden were in financial distress. In 1992, the number of bankruptcies was the highest in Swedish history and the financial system was headed towards a total break down. Several Swedish banks were forced to accept governmental support in order to avoid bankruptcy, and were at the same time publicly criticised for driving companies into bankruptcy through unexpected termination of credit contracts and demands for additional security. Bank ethics were highly questioned.
This thesis discusses what happens to the implicit and explicit contracts between banks and their customers when both parties are in financial distress. According to the traditional principal-agent theory, as principals, banks are supposed to monitor their customers, the agents, in order to ensure that the agents fulfil their loan agreements and repay their debts to the banks. The agents are assumed to behave opportunistically to the detriment of the banks. During a period of deep financial crisis for the Swedish banks, there was, however, reason to believe that the banks may have acted opportunistically to the detriment of the customers.
The major findings of this thesis show that the banks broke the implicit contracts and activated the explicit contracts to a greater extent during the financial crisis. This indicates that the banks’ relationship with the customer became more formal, and branch managers and local loan officers became more closely tied to internal rules during and following the financial crisis than before the crisis.
The major conclusion of the thesis is that when the principal, in this case the bank, experiences a period of crisis, implicit contracts are likely to be neglected and explicit contracts activated due to increased external pressure on the bank to change its procedures. The principal can thus be expected to behave more opportunistically in order to disassociate itself from previous standard operating procedures found to be illegitimate, at the same time as individual branch managers and loan officers can be expected to behave opportunistically and terminate loan agreements in order to evade personal responsibility for possible future credit losses.