Dutch Credit Guarantee Scheme

As fallout from the global financial crisis intensified in October 2008, governments worldwide acted swiftly to calm and protect their domestic markets. The Netherlands sought to address the liquidity problems that its “fundamentally sound and viable financial institutions” faced under the extraordinary circumstances (European Commission 2008). In implementing the Dutch Credit Guarantee Scheme, the government hoped to ensure the flow of credit to households and businesses at a time when interbank lending had become severely restricted. To support specific institutions in need of further assistance between late 2008 and 2013, Dutch authorities later enacted individual recapitalization and restructuring measures for banks. It was expected that the implementation of the Guarantee Scheme would not only encourage interbank lending at a time when the market for medium-term, non-guaranteed loans had “dried up,” but that the measure itself would help to stabilize the Dutch economy in the midst of the global financial crisis (European Commission 2008).

The Dutch government authorized plans for the creation of the Guarantee Scheme—whose design was modeled after the Unied Kingdom’s Credit Guarantee Scheme—on October 13, 2008. A week later, on October 21, 2008, the Dutch Ministry of Finance notified the European Commission of its plans to implement the Guarantee Scheme in response to recent disruptions in the global credit markets. The program was officially implemented on October 23, 2008. Having found its features to be in accordance with State aid rules, the European Commission granted approval for the Guarantee Scheme on October 30, 2008.

The Dutch program was jointly administered by the Dutch State Treasury Agency of the Ministry of Finance and De Nederlandsche Bank, the Netherlands’ central bank. According to the original terms of the program, the DSTA commited €200 billion to support the issuance of debt guaranteed by the government. Participation in the voluntary, opt-in program was open to Dutch financial institutions meeting solvency and liquidity standards according to the Dutch Financial Markets Supervision Act of 2006, including foreign subsidiaries established in the Netherlands with “substantial business in the country” (European Commission 2008). Additionally, only one institution in a group was allowed to apply for the Guarantee Scheme. De Nederlandsche Bank bore responsibility for ensuring that these standards and requirements were met prior to participation in the Guarantee Scheme.  

Initially, only debts with maturities of more than three months and less than three years were eligible for coverage under the Guarantee Scheme. Qualifying debt instruments included new, non-complex senior unsecured loans—limited to plain-vanilla commercial paper, certificates of deposit, and fixed- or floating-rate medium-term notes that could be redeemed in a single payment. The terms of the debt instruments could not include any provisions for cross-default, cross-acceleration of default, or call option on the principal (Ministry of Finance 2008). Though there were no minimum amounts specified for the issuance of individual guarantees, debt instruments were required to be denominated in euros, US dollars, or pounds sterling.

Interested institutions meeting solvency and liquidity requirements applied through the DSTA to issue guaranteed debt. Both the government and the participant then signed a Guarantee Certificate, a contractual agreement specifying each party’s obligations under the Guarantee Scheme. For instance, only one guarantee could be associated with a single debt issuance, and the Dutch government reserved the right to cancel coverage under the Guarantee Scheme if either the terms of the debt were amended in any way or if the debt were issued after the cut-off date specified in the Guarantee Certificate. Additionally, the participating bank was required to pay a termination fee to the DSTA if it failed to issue the guaranteed debt by the cut-off date agreed upon with the Dutch government.

Participation fees consisted of a flat fee of 50 basis points on an annual basis and a variable fee determined according to an individual bank’s creditworthiness as well as the maturity of the debt to be guaranteed. The fee schedule was designed in accordance with the European Commission’s “Recommendations on government guarantees on bank debt” of October 20, 2008.

The DSTA imposed restrictions on individual participation by limiting any bank’s usage to the amount of existing debt maturing between October 23, 2008, and December 31, 2009. Participating banks also had to comply with a series of conditions designed to prevent abuse of the Guarantee Scheme, including limits on marketing the Guarantee Scheme as a commercial advantage, executive compensation, and severances packages. There was also a limit placed on growth in balance sheet volume, which was not to exceed the higher percentage of “1) the annual growth of nominal GDP in the Netherlands in the previous year, 2) the average historical growth of the balance sheets in the Netherlands for the period 1987–2007, or 3) the average growth in balance sheet volume of the EU banking sector in the previous six months (European Commission 2008).

Upon the first event of default, the Dutch government assumed responsibility for 100% of principal and interest and paid the lender within three months of the date of default. The DSTA was allowed to extend this payment date up to three times under extraordinary circumstances.

On July 7, 2009, the Ministry of Finance notified the European Commission of modifications to the original terms of the Guarantee Scheme. Under the amended conditions, eligibility was expanded to include all senior unsecured debt instruments with maturities of up to five years. Relatedly, the DSTA committed up to €66.6 billion (i.e., one third of the total budget) for debt instruments with maturities of greater than three years; individual caps for banks issuing guaranteed debt with maturities of greater than three years was further limited to €22.2 billion (i.e., a third of a third of the total budget).

The July 7, 2009, modifications also provided more detailed requirements for participation regarding corporate governance and compensation. Rather than unconditionally restricting executive bonuses and other incentives, participating banks would need to introduce and maintain a sustainable remuneration policy, ensure that severance payments for members of the Board were limited to one year’s fixed salary, and adhere to the provisions of the Dutch Corporate Governance Code when distributing bonus packages.

On December 17, 2009, the Ministry of Finance notified the European Commission of further modifications to the Guarantee Scheme. First, the issuance window was extended from December 31, 2009 to June 30, 2010. Second, the flat fee included in the participation fee increased from 50 basis points (bps) to 70 bps for all guaranteed debt instruments. For debt instruments with a maturity of over 12 months, the variable fee also increased as a result of the change in reference period used to calculate credit default swap (CDS) spreads.^FNThe ECB’s “Recommendations” previously referenced the period between January 1, 2007, to August 31, 2008, but the Netherlands updated the reference period to reflect CDS spreads calculated for the period between March 1, 2008, to November 1, 2009.

On June 29, 2010, the Ministry of Finance notified the European Commission of two additional modifications to the Guarantee Scheme prompted by the European Commission’s April 30, 2010 guidelines for the phase-out of guarantee programs. First, the fixed participation fee increased for all credit rating categories according to a progressive scale, ranging from 75 bps for banks with triple-A ratings to 110 bps for banks with ratings lower than A minus. Additionally, the Ministry of Finance needed to undertake a viability review for each institution whose total outstanding guaranteed debt (as of July 1, 2010) exceeded both a ratio of 5% of total liabilities and a total of €500 million. The Ministry of Finance was then be required to submit such reports to the European Commission within three months of a new debt issuance or rollover by a participating bank (European Commission 2010a).  

Although the Guarantee Scheme issuance window was originally set to expire on December 31, 2009, it was prolonged two times, in each case for a period of six months, closing on December 31, 2010.  

Between October 23, 2008, and December 1, 2009, the Guarantee Scheme was utilized by six Dutch financial institutions.^FNAchmea Hypotheekbank N.V., Fortis Bank Ned. (Holding) N.V., ING Bank N.V., LeasePlan Corp. N.V., NIBC Bank N.V., and SNS Bank N.V.These were not exclusively the six largest banks in the Netherlands— although large banks SNS, ING, and Fortis accounted for well over half of utilization—but rather the ones facing the greatest liquidity pressures (Leal 2011). LeasePlan Corp. N.V.. a fleet management company held mainly by Volkswagen Group, and Achmea Hypotheekbank N.V., a mortgage company, complied with the conditions set forth in the original terms of the Guarantee Scheme and were deemed eligible to issue guaranteed debt despite their non-bank status.

The following table (Figure 1) details the usage of the Guarantee Scheme up to December 1, 2009, after which no debt was issued under the program. This slowdown was due in part to the improving conditions in global markets and, consequently, the steady return of non-guaranteed debt issuance as well as the “revival of equity issuance aimed at market investors” (Levy and Schich 2010).

Source: Dutch Ministry of Finance.