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Annual Report 2008 ANNUAL REPORT 2008 CONTENTS Contents – Annual Report 2008 The Norwegian Banks’ Guarantee Fund – objects and activities page 4 Leader page 5 Directors’ report 2008 page 6 Annual accounts 2008 • Profit and Loss Account page 14 • Balance Sheet page 15 • Notes to the accounts page 16 • Cash Flow Statement page 32 Auditor’s report 2008 page 33 Asset management • Result of asset management in 2008 page 34 • The market in 2008 and the outlook for 2009 page 38 • Investment strategy for 2009 page 42 • Measuring performance and managing risk page 45 • Ethical capital management page 46 • Compliance page 47 • Key terms used in asset management page 48 The development and operations of the Guarantee Fund • The Guarantee Fund levy for 2009 page 49 • Management of banks in crisis page 51 • Glitnir Bank ASA page 52 • Kaupthing Bank hf NUF page 52 • Policy for supporting banks in crisis page 54 • The Agreement between the Guarantee Fund, the Norwegian page 56 • Financial Services Association and the Norwegian Savings Banks Association page 56 • Topping-up agreements with branches of foreign credit institutions page 56 • Contact with the membership - analysis of banks and information page 56 • Cooperation at international level page 57 The financial crisis, international framework conditions and the Norwegian package of measures page 59 The bodies of the Guarantee Fund • The organisation page 60 • Organogram page 61 List of members of the Norwegian Banks’ Guarantee Fund as at 27 February 2009 page 62 Statutes of the Norwegian Banks’ Guarantee Fund page 63 3 NORWEGIAN BANKS’ GUARANTEE FUND ANNUAL REPORT 2008 The Norwegian Banks’ Guarantee Fund – objects and activities The Norwegian Banks' Guarantee Fund was established The Norwegian Banks' Guarantee Fund does not have under a legislative amendment on 25 June 2004. sufficient personnel resources to handle crisis situations The Act came into force on 1 July 2004 with the unaided. Accordingly, binding agreements have been amalgamation of the Commercial Banks' Guarantee concluded with the Norwegian Financial Services Fund and the Savings Banks' Guarantee Fund. The Association (FNH) and the Norwegian Savings Bank operations of the Norwegian Banks' Guarantee Fund Association, under which access to additional resources are regulated in the Guarantee Schemes Act of 6 can be provided should a crisis arise. These agreements December 1996 No. 75. came into their own in connection with the crisis encountered by the two Icelandic banks Glitnir Bank Membership of the Norwegian Banks' Guarantee Fund ASA and Kaupthing Bank hf NUF in the autumn of is mandatory for all savings banks and commercial 2008. This situation also necessitated an extensive banks with headquarters in Norway. The King may expenditure of resources on the part of both FSA and also decree that in addition to banks, other credit The Central Bank. Close cooperation between the institutions are required to be members of the parties concerned produced effective solutions to the Guarantee Fund. situations. Credit institutions headquartered in other EEA states The Guarantee Fund has accumulated considerable but receiving deposits from the general public through funds over time for use in the event of a crisis and as at branches in Norway, may become members of the 31 December 2008 the equity capital of the Guarantee deposit guarantee scheme if the deposit guarantee Fund stood at NOK 15.3 billion. In addition, an scheme in the branch's home country is not considered ordinary levy of NOK 1.5 billion will be called up from to provide the branch’s depositors with protection equal members in 2009. Moreover, members have furnished to that afforded under the Act. Membership requires guarantees of NOK 2.3 billion, bringing the aggregate the approval of The Financial Supervisory Authority of capital base of the Fund up to NOK 19.1 billion. Norway (FSA). At yearend 2007, the equity capital stood at NOK 17.2 billion and the aggregate capital base at NOK 17.7 The purpose of the Guarantee Fund is to secure the billion. deposit liabilities of its members in such a way that deposits of up to NOK 2 million per depositor per The bodies responsible for the day-to-day operations of bank are guaranteed, should a member be unable to the Guarantee Fund include a department responsible meet its commitments. All banks domiciled in EEA for, amongst other areas, preventative work in the form states have equivalent arrangements. The rules in force of analyses of member institutions using various in the European Union provide for a guarantee of at standard and key figures, providing advisory services to least € 20,000. In December of 2008 the European smaller banks, organising courses, calculating and Parliament enacted amendments to the deposit collecting the levy and guarantees and reporting on the guarantee legislation, increasing the minimum limit for cover provided under the deposit guarantee scheme. the deposit guarantee from € 20,000 to € 50,000 from 30 June 2009. A maximum limit of € 100,000 will The Fund also has a department tasked with managing apply effective from 1 January 2011. For further details, the assets of the Fund and securing the best possible see the article on page 59. Thus if the proposal is return on capital. As well as implementing the strategic adopted, the current Norwegian scheme offering a decisions adopted by the Board, the department has deposit guarantee of NOK 2,000,000 could be cut by administrative responsibility in its own right and more than 50 per cent. supervises external asset managers. The Guarantee Fund's most important function is to The development of a guarantee fund institution has manage situations in which one or more banks been necessary in order to put in place satisfactory encounter difficulties in meeting their commitments. safeguards for customers, banks and Society. The By way of preparation for such a situation, contingency development process involves work on framework plans are drawn up and maintained and exercises are conditions and statutes etc. Establishing channels of conducted. The usefulness of these contingency plans cooperation with guarantee funds in other countries was demonstrated in full in the autumn of 2008. forms part of this work. 4 ANNUAL REPORT 2008 LEADER Leader 2008 was a dramatic year for the world’s financial meet these obligations, skilled services industry. The situation came to a head in mid personnel at the Fund and in September with the bankruptcy of US investment bank the industry organisations did Lehman Brothers. Norwegian banks have held their what they were supposed to do, own, notwithstanding a difficult funding situation, interaction with the Norwegian particularly in early October, before the authorities put authorities proceeded smoothly in place a package of measures under which and last but not least the government securities could be exchanged for covered employees and officers of the bonds, subject to certain conditions. two banks in Norway acted responsibly and efficiently. This 2008 confirmed the importance of a robust deposit case also serves to emphasise guarantee scheme. Many nations upgraded their deposit the importance to the Fund of guarantee cover substantially over the course of the year. having access to liquidity in a The European Union has now enacted a total critical situation. harmonisation directive under which all states will be required to have a deposit guarantee scheme of Managing the Fund’s assets in 2008 was no easy task in € 100,000 in place from 1 January 2011 onwards. It is the face of, for example, a 54 per cent fall on Oslo essential that we secure an exemption from this Stock Exchange. A return of minus 13.3 per cent, directive so that we can maintain our existing limit. It significantly below the benchmark rate, cannot in any would be paradoxical if in a period when financial way be said to be satisfactory. We can perhaps take strength and faith in the banking industry are of such some small comfort from the fact that our assets were primary importance we were to lower the guarantee managed in accordance with the adopted strategy. limit. We need to look no further than the example of The growth of the banks and the poor return on Kaupthing Bank, which became a member of the Fund investments mean that a full levy will be payable in without having to pay an entrance fee and burdened us 2009. It is regrettable that this scheme functions with a risk of some NOK 800 million, for confirmation procyclically. During the prosperous pre-2007 years the that our repeated requests over the years for permission banks paid no levy, whereas now, when the economy is to increase the entrance fee were and continue to be less buoyant, they must pay the full amount. entirely justified. The lesson from 2008 must therefore surely be that the regulations need to be changed in a At the outset of 2009 the outlook for the world number of respects. economy is highly uncertain. Policy rates of interest are being cut and crisis management measures are being The most serious effects of the financial unrest were felt adopted in very many countries. Nobody knows how by the Fund in mid October when the Norwegian deep this downturn will be. The Norwegian banking subsidiary of the Icelandic bank Glitnir Bank ASA and industry recorded acceptable results in 2008 and is well the Norwegian branch of Kaupthing Bank hf NUF capitalised. Moreover, with their liquidity package in found themselves with insufficient funds to meet their October 2008 and the hybrid capital/covered bond commitments. The Guarantee Fund furnished a package in February 2009, the authorities have made a liquidity facility of a maximum of NOK 5 billion to substantial contribution towards helping the banks to Glitnir Bank ASA while the bank was sold on the operate normally.

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