Finnish banks say they have no need for EUR 50 billion in state guarantees

Passage of incentive package could put limits on bonuses for bank directors

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Finnish state guarantees for capital acquisition for Finnish banks will have a ceiling of EUR 50 billion, said the Ministry of Finance on Monday. The support package corresponds to policy lines agreed upon in the European Union.
      However, all Finnish banks have said that they do not need the promised state support.
      The state promised on Monday to guarantee banks’ unsecured capital acquisition up to EUR 50 billion. Under initial plans the guarantee system would be in effect initially until the end of 2009. In April of 2009 the government will determine if it is appropriate to grant guarantees after that.
     
After the announcement, Helsingin Sanomat asked eleven banks for their reactions to the promised support.
      All of the banks said that they would not need the billions.
      If support for the banks is needed, the state will have to borrow the money from international investors.
      Finland, the other countries of the euro zone, and Britain agreed over a week ago on common principles under which states would secure capital flows within the banking systems.
      The availability of support for the banks has been seen as a necessity. If the financial markets were to stagnate, companies and households would find themselves without financing, which would result in a deep recession.
      The support has also been criticised, as it is a way of rescuing banks and bank directors who have made stupid mistakes.
     
In addition to the guarantees, there is a proposal that the state could make capital investments into operational and solvent Finnish banks. The Ministry of Finance says that “it appears likely that the capital support could not rise beyond EUR 4 billion”.
      Capital investments call to mind the financial instruments used during the crisis of the 1990s, which were used to improve the capacity of banks to give credits.
     
Capital investments are classified as the bank’s own investments. Interest that is higher than the market interest rate is paid on the investments, and the conditions are formulated in such a way that the state gets sufficient return, and that the state’s risk has a time limit. As there has not been any indication from Finnish banks of a need for such financing, it is very difficult at the moment to evaluate the amount of money that is needed.
      The Ministry of Finance says, “the situation of Finnish banks at present is good, according to the Financial Supervision Authority”.
     
The purpose of the support package is to serve as a precaution in securing the long-term financing of Finnish banks, promoting their solvency, and emphasising that the state support has conditions set to it.
      All forms of state support are to include conditions with respect to the banks’ incentives systems.
     
In the government, Mari Kiviniemi (Centre), the minister responsible for financial markets, said that Monday’s announcement involved merely the overall guidelines of support for the banks.
      “No proposed legislation has been put forward”, Kiviniemi noted.
      Details are expected to become clearer before Wednesday, when the government gives Parliament a proposal for laws required by the stabilisation measures. Kiviniemi estimates that passing the legislation will take just two or three weeks.
     
Limits could be placed on monetary incentives for Finnish bank executives if the banks accept the types of support planned by the government.
     
Peter Nyberg, director general at the Financial Markets section of the Ministry of Finance, was quoted by the online financial publication Taloussanomat as saying that the political preconditions exist for limits to bank directors’ pay systems.
      Sweden and Germany, for instance, have made limits on bonuses that can be paid to bank directors, as conditions for state support.
      “It is my personal opinion that if Finland had set restrictions on the management pay system 10 to 15 years ago, the impact of the banking crisis would have been smaller”, Nyberg says.
      However, he adds that the Finnish pay systems have not demonstrated the sort of excesses that have existed in the United States.


Previously in HS International Edition:
  Vanhanen: Finnish banks in good shape (13.10.2008)
  Bank crisis makes Finns nervous (10.10.2008)
  Financial crisis: Banks in Finland and elsewhere raise deposit protection limit (9.10.2008)
  Finland´s bank deposit protection limit raised to EUR 50,000 (8.10.2008)

Links:
  Ministry of Finance press release 20.10.2008

Helsingin Sanomat