8 September 2009

Summary of Government Interventions in Financial Markets

Overview: date. However, this has now been extended to include instruments granted until 31 December 2009, with the Finland has weathered the financial crisis well, with addition that the guarantees can now cover Finnish banks remaining in good standing and able to instruments with a maturity of up to 5 years. rely so far on managing the crisis without recourse to government support. An IMF report on the Finnish A market-based fee will be charged to the recipient in economy concluded that “exposure to US subprime line with European recommendations. assets, US GSEs, and Lehman is minimal… banks have Conditions to the guarantee include limitations on not experienced deposit withdrawals and most have beneficiaries’ balance sheet growth with regard to actually gained deposits”. national and EU averages, limitations on expansion and IMF Report: marketing, and strict conditions for staff remuneration or bonus payments. http://www.bof.fi/en/suomen_pankki/ajankohtaista/ tiedotteet/2008/tiedote32_2008.htm. http://europa.eu/rapid/pressReleasesAction. do?reference=IP/09/681 Bank of Finland Financial Stability Report 2008: http://europa.eu/rapid/pressReleasesAction.do?referen http://www.bof.fi/en/julkaisut/bulletin/financial_ ce=IP/08/1705&format=HTML&aged=0&language=E stability/index.htm. N&guiLanguage=en. Despite this Finland’s economy has still suffered from Bank Deposit Guarantee the financial crisis, with estimations that GDP would decline by 0.5 per cent in 2009, to recover by 0.7 per As of 8 October 2008 the coverage of the deposit cent in 2010. Recession was declared on 27 February guarantee was increased from EUR 25,000 to EUR 2009 by the Finnish National Statistics Office. 50,000. It is hoped that interbank distortion of competition caused by an increase in the level of deposit guarantee in other countries would be levelled out as a State Guarantee Scheme result. The European Commission has also brought The European Commission has approved under the EC forward a proposal to promote convergence of deposit Treaty state aid rules on the prolongation of the Finish guarantee schemes in the future. support scheme to stabilise financial markets by providing guarantees to eligible financial institutions. Notable developments with commercial Previously it had been decided that the Finnish State Treasury, acting under the guidance of the Ministry of banks Finance, guarantees up to a maximum of EUR 50bn for Rescue of Finnish Kaupthing branch by Finnish banks. all solvent Finnish deposit and mortgage banks, Following the discontinuation of operations at including Finnish subsidiaries of foreign banks. Kaupthing Bank’s Finnish branch after 9 October Individual guarantees are capped up to the nominal 2008, some EUR 115m including interest could not be value of short term debt issued by 17 October 2008. withdrawn by depositors. The 3 Finnish banks Nordea Initially, guarantees were granted until 30 April 2009, Bank Finland plc, OP-Pohjola Group Central and limited to the amounts becoming due up to that Cooperative and Sampo Bank plc, arranged a solution which was approved by Finnish and Icelandic State Pension Fund to acquire commercial papers regulatory authorities and backed up by an Act of the The Ministry of Finance has granted the State Pension Finnish parliament guaranteeing participating banks Fund the right to a limited use of assets to acquire against legal action from Kaupthing creditors. With commercial papers in financially solid Finnish full financing from the Finnish banks, and pledging companies, to promote the recovery of the commercial assets of the branch as collateral, the arrangement was paper market. hailed as a private-sector solution with no government funds being used. Nordic credits to Iceland

On 1 July 2009 the Ministry of Finance announced that Other developments loan agreements were signed between Iceland and Denmark, Finland and Sweden respectively. Under the Short Selling agreements the Nordic lenders stand ready to provide In late 2008 the Finnish Financial Supervision Iceland with total credits of EUR 1.775bn. The loans Authority (FFSA) considered the issue of short-selling of will be provided as a support of Iceland’s economic securities, in the light of decisions made by regulators in stabilisation and reform programme with the other countries. For the time being it did not consider International Monetary Fund (IMF) and are intended these kinds of measures necessary in Finland, but stated to strengthen Iceland’s foreign exchange reserves. on 6 October 2008 that it has intensified supervision of Disbursement of the loans will be in four equal tranches potential short-selling and co-operates with other tied to the first four reviews of Iceland’s International supervisory authorities in doing so. Monetary Fund programme with the payment of each tranche conditional on the approval of the relevant Proposed government subordinate loans review. Finnish Parliament is considering a proposal for state http://www.vm.fi/vm/en/03_press_releases_and_ capital investment in deposit taking banks. The state speeches/01_press_releases/index.jsp would offer banks interest-bearing subordinate loans, which can be considered as core tier-1 capital. The Credit rating for Finland confirmed by S&P subordinate loan earns interest totalling the interest On 13 January 2009 S&P rated the Republic of Finland rate of the 5-year bond plus 6 with AAA long-term and A-1 short term sovereign percentage points. credit ratings. The rating agencies Moody’s and Fitch Any bank would commit to paying the loan interest have both also affirmed ‘AAA’ ratings for Finland. before distributing dividends, and would require http://www.vm.fi/vm/en/03_press_releases_and_ Government consent before undertaking major speeches/01_press_releases/20090113Standa/name.jsp business arrangements. Banks would also commit to maintaining loans to households and SMEs and make http://www.vm.fi/vm/en/03_press_releases_and_ regular reports about lending activities to the Ministry speeches/01_press_releases/20090320FitchR/name. of Finance. jsp.

Increased banking sector reporting requirements The Ministry of Finance has set the base rate to 1,75 per cent. as of 1 July 2009 until the end of December 2009. The Finnish Financial Supervisory Authority The base rate had previously been set at 5,00 per cent. announced on 10 February 2009 an increase in since 1 January 2009. reporting frequency requirements for specified reports, in response to the rapid changes in operating http://www.vm.fi/vm/en/03_press_releases_and_ environment during the financial crisis. The full details speeches/01_press_releases/20090604Basera/name.jsp. are linked below. http://www.finanssivalvonta.fi/eng/tiedotteet/ Supervision_release_3_2009.htm

2 Summary of Government Interventions in Financial Markets Finland Stress tests as an integral part of supervision Contact us On 4 June 2009 the Finnish Financial Supervisory For further information, please contact Authority and the Bank of Finland announced that during April and May, they had performed a stress test Bruce Bloomingdale on Finnish deposit banks to analyse how banks’ Partner capacity to withstand losses would respond to a market T: +44 20 3130 3211 deterioration in the operating environment as E: [email protected] compared with the baseline economic forecasts. Under the stress scenario the economic decline would be much Kevin Hawken deeper in 2009–2010 than forecast and there would be Partner no economic growth yet in 2011. T: +44 20 3130 3318 E: [email protected] The Finnish Financial Supervisory Authority commented that Finland’s banking sector is strong Ed Parker enough to withstand an even deeper economic decline Partner than the current one. The existing substantial capital T: +44 20 3130 3922 buffers in excess of EUR 8bn would be sufficient to E: [email protected] secure the stability of the banking sector in response to the conditions outlined in the stress test. The Bank of Erica Johansson Finland has forecasted that GDP will contract by 5 per Associate cent this year and 1.1 per cent in 2010, with growth in T: +44 20 3130 3354 2011 seen at 1.5 per cent. However the Finnish banks’ E: [email protected] actual performance in the early part of 2009 has reduced the probability that the stress scenario of the exercise will materialise. http://www.finanssivalvonta.fi/en/Publications/ Press_releases/Pages/Default.aspx

Finnish banks credit fundamentals to be hit

On 2 July 2009 Moody’s announced that the severely contracting Finnish economy would take a toll on local banks’ credit fundamentals. Up until now the Finnish banking sector - lead by Pohjola Bank and local branches of Nordea and Danske Bank - have weathered the economic storm due to minimal exposure to toxic assets and their focus on traditional banking activities. Moody’s claims that due to the crisis in the financial markets spreading into the real economy, it expects Finnish banks to be adversely affected. Furthermore an increase in bankruptcies was indicative of the weakened credit environment. http://www.reuters.com/article/rbssBanks/ idUSL243680820090702

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