Guarantee Scheme for Banks’ Funding in Finland

In light of the international credit crunch and severe market volatility occurring in October 2008 as a result of the global financial crisis (GFC), governments worldwide sought to implement stabilization measures to calm and protect their domestic economies. Although Finnish banks were not under immediate threat of insolvency, it became clear that frozen money markets and soaring interbank lending costs had the potential to impact the daily operation of healthy institutions at a time when access to liquidity was considerably restricted (European Commission 2008). The Republic of Finland thus authorized the creation of the Guarantee Scheme for Banks’ Funding in Finland to support the short- and medium- term financing needs of banks and credit institutions and, in turn, the mortgage market. Along with two other preemptive interventions—a state-funded investment program for deposit banks and a commercial paper acquisition scheme for the State Pension Fund—the Guarantee Scheme was designed to mitigate the negative spillover effects of the global crisis on the Finnish financial system.

On November 11, 2008, the Finnish Ministry of Finance introduced to the European Commission (EC) a draft of the Guarantee Scheme for Bank Funding in Finland (the Guarantee Scheme). The EC found the terms of the program to be in accordance with State Aid rules and granted its approval on November 13, 2008, citing the “severely impeded access to liquidity for many banks” (European Commission 2008). The program was announced publicly as one of three interventions by the Finnish Cabinet Committee on Economic Policy on October 22, 2008, and implemented on February 12, 2009, after having undergone modifications to its terms on February 5, 2009.

The Guarantee Scheme was governed by the Act on State Lending and State Guarantees (449/1988) and administered by the Central Government Debt Management branch of the State Treasury. The Finnish program was designed to support the short- and medium-term financing needs of domestic banks.  

Per Parliamentary Decision No EV 110/2008 vp of December 12, 2008, up to €50 billion in debt issuances could be guaranteed by the government, though this was subsequently reduced to €17 billion. Eligibility was restricted to all Finnish deposit banks and mortgage banks, including the Finnish subsidiaries of foreign financial institutions, considered to be solvent (i.e. possessing a Tier 1 capital ratio of at least 7%) by Finnish authorities (European Commission 2008). Furthermore, deposit banks were allowed to apply either individually, on behalf of their parent company, or as a representative member of a group. Types of debt eligible for coverage under the Guarantee Scheme included certificates of deposit, unsecured bonds, and other non-subordinated debt instruments with maturities of greater than 90 days but less than three years. An exception was made for covered (mortgage-backed) bonds, which could have maturities of up to five years. Debt of any type had to be issued within six months of the initial notification of the Guarantee Scheme to the European Union (i.e. by April 30, 2009). The Guarantee Scheme was not subject to any currency restrictions, and there was no minimum amount required for each issuance.   

Caps on individual institutions’ participation varied based on the maturity of the debt to be issued. For short-term debt with maturities of up to 12 months, the overall limit was equal the nominal value of such short-term debt outstanding on October 17, 2008. Additionally, the government imposed a monthly limit equal to the total nominal value of the debt that matured during the given month. For medium-term debt with maturities of between 12 months and five years, the overall limit was equal the total nominal value of bonds maturing between October 17, 2008, and December 31, 2009. There were no restrictions placed on the issuance of non-guaranteed debt by participants.

Participation fees were assessed in accordance with both Government Decree No. 67^FNGovernment Decree No 67 laid out fees applicable to temporary State guarantees to deposit banks and mortgage banks of 12 February 2009. and the “Recommendations on Government Guarantees on Bank Debt,” set forth on October 20, 2008, by the European Central Bank. The fee charged for short-term debt with maturities up to 12 months equaled 50 basis points (bps) on an annual basis. The fee scheme for medium-term debt with maturities of more than 12 months was more complex and took into account banks’ credit default swap (CDS) spreads or credit ratings. Banks with neither a credit rating nor CDS data derived their applicable CDS spread from the median value of the five-year CDS spread over the same period but for the lowest rating category.

Participants issuing medium-term debt with maturities greater than 12 months also had to pay an add-on fee of 50 bps on an annual basis. If issuing guaranteed covered bonds, participants paid a reduced add-on fee of 25 bps on an annual basis.

This fee structure remained constant throughout the duration of the Guarantee Scheme unless a participant’s Tier 1 capital ratio fell below 7%, in which case an additional five basis points would be assessed as a supplement to the add-on fee.  

The program initially included special conditions “aimed at eliminating or minimizing any spillover effects which may distort competition,” although these conditions were eliminated before the program was launched (European Commission 2008). Under those conditions, the Finnish Supervisory Authority, in particular, was charged with the task of monitoring participating banks to ensure that their aggregate growth in balance sheet volume did not exceed the higher of “the annual growth of Finnish nominal GDP in the preceding year, the average historical growth of balance sheets in the Finnish banking sector during the period 1987–Q3 2008, or the average growth rate of balance sheet volumes in the banking sector in the EU in the preceding six months” (European Commission 2008).

Other restrictions included prohibitions on mass marketing of the Guarantee Scheme and the significant expansion of activities that would not have occurred in the absence of the program, in addition to limits on wage increases, bonus payments, board remuneration, and bank executives’ severance packages during the guarantee period. A ban was placed on buy-back programs through which a bank repurchased its own shares. Similarly, savings banks were not allowed to buy back basic fund shares, while cooperative banks were not allowed to refund cooperative capital, additional cooperative capital, or cooperative investment capital except for the purpose of terminating their membership in the cooperative.

In the event that the guarantee were to be triggered, the Finnish State Treasury assumed responsibility for all principal (or deposits) and interest, up to the participant’s individual cap. If the triggering participant were a mortgage bank that had issued covered bonds backed by mortgages, the mortgages needed to be transferred to the State (European Commission 2009b). 

On February 5, 2009, a week before the program’s implementation, the European Commission approved a request from the Finnish government to amend the terms of the Guarantee Scheme. Significantly, the modifications included a provision to allow participating banks to roll over some short-term debt (with maturities ranging between 90 days and up to 12 months) to medium-term debt (unsecured bonds with maturities of up to three years). According to State Aid documents, “participating banks can renew the previously guaranteed short-term debt as medium term debt and still retain the same State guarantee” (European Commission 2009a). A total of €5 billion of the €50 billion overall cap would be made available for rollovers. The individual cap available under this provision was the participant’s share of the total lending of all eligible banks as of December 31, 2008. A monthly limit equal to the amount of short-term debt maturing in a given month would also be imposed (European Commission 2009a).

The February 5 modification of the Guarantee Scheme also provided for the repeal of the participation restrictions regarding balance sheet growth and buy-back programs. Additionally, the conditions for participation regarding management wages and other remuneration changed to reflect the principles of the competitive remuneration system for state-owned and associated enterprises of 2007 (European Commission 2009a). Other restrictions regarding the general prohibition on activities that would not have taken place in the absence of the Guarantee Scheme, as well as the program’s mass marketing, remained in place.

On April 30, 2009, the European Commission approved a request by the Finnish government to amend and prolong the Guarantee Scheme until December 31, 2009. Eligibility was expanded to include instruments with maturities of up to five years.  Previously, only covered bonds with maturities of up to five years were allowed coverage. These new terms also applied to medium-term debt that had been rolled over under the February 5 modification of the Guarantee Scheme. A maximum of €16.66 billion (i.e., a third of the program’s total cap) was earmarked for the guaranteed issuance of debt with a maturity of greater than three years and less than five years.

The Finnish authorities also repealed the requirement that mortgages be transferred to the State in the event that the guarantee was triggered.

On December 17, 2009, the European Commission approved a second request by the Finnish government to amend and prolong the Guarantee Scheme, this time until June 30, 2010. According to the EC’s assessment of Finland’s position, “renewed difficulties in banks’ access to market funding would cause serious repercussions for households’ and firms’ ability to refinance their own obligations” (European Commission 2009c). Due to the improved conditions in short-term lending markets, however, two modifications were made to greatly reduce the overall size of the program and focus assistance on banks and institutions issuing medium-term, rather than short-term, debt. The overall cap of the program was reduced from €50 billion to €17 billion, and the minimum maturity for all eligible debt was increased from 90 days to twelve months (“Second Prolongation”).

Though in operation for nearly two years, the Guarantee Scheme for Bank Funding in Finland was never utilized. A section in the European Commission’s approval of the first prolongation of the program, dated April 30, 2009, detailed potential reasons for the lack of usage, at least initially: until April 17, 2009, no bank or mortgage institution had applied to issue guaranteed debt. Finnish authorities blamed the non-use on the relatively short issuance window (February 12, 2009–April 30, 2009); the brevity of the three-year maximum maturity for debt instruments other than covered bonds; the fact that banks could obtain short-term funding from the national central bank and from the ECB with more lenient participation restrictions; and the requirement that mortgage banks transfer their mortgages to the State in the event the guarantee were triggered (European Commission 2009b).

The program concluded with the final expiration of its issuance window on June 30, 2010.