Main / Press releases and speeches / Press releases / Stabilisation of the financial markets in Finland
To stabilize the financial markets, the heads of the euro area economies reached a decision in their meeting on 12 October 2008 on certain joint principles and measures. The meeting recommended selected measures to provide access to bank liquidity, to address funding problems of liquidity constrained solvent banks and to safeguard bank solvency if necessary. The meeting also stressed the need to ensure that banks with solvency constraints but which are vital from the viewpoint of the system can be recapitalized and overhauled. Distressed banks must be handled in such a way that taxpayers' interests are secured and the responsibilities of management and owners are fulfilled. It was already recommended that the minimum deposit protection limit be increased from EUR 25,000 to EUR 50,000.
The plans being drafted in Finland have involved taking into account wherever possible the planned action in the rest of the Nordic countries.
Guarantees and capital investment made viable in Finland
Reports by the Financial Supervision Authority indicate that the situation in Finnish banks is good at present. Hence the emphasis in Finland is on enabling the bank system to manage through its own efforts as far as possible and without undue recourse to government support. At the same time, however, support will be provided in particular for longer term funding, for promoting solvency and for fostering sufficient conditionality of the resources. All forms of government support will involve conditions related to the bank's remuneration systems.
In terms of concrete measures it was proposed that the Finnish Government could start granting guarantees to Finnish banks for unsecured credit facilities with maturities from 3 months to five years. These optional guarantees would be restricted in a number of ways, for instance so that the guarantees cannot expand unreasonably. The system would be provisionally effective until the end of 2009, although the government would assess in April 2009 whether it is expedient to grant any more guarantees beyond that point in time. The overall maximum for the guarantees would thus be at most EUR 50 billion, which is slightly more than the volume of existing bank deposit certificates and bonds with maturities at the end of next year. Besides restrictions on the maximum volume, there would also be bank-specific limitations.
Guarantee payments, which are set with a view to achieving market returns over normal time spans, are expected to grow according to the guarantee limit per bank. The State Treasury has been suggested to be the effective operator under the guidance of the Ministry of Finance. It might become necessary to alter the provisionally determined guarantee payments in the light of market developments to obtain the desired effect.
In addition to guarantees, it was suggested that the government could invest in private equity in viable and solvent Finnish banks. Private equity resembles the financial instruments adopted during the 1990s crisis in Finland, which were used to improve bank lending capacity. Private equity is classified as bank equity capital. Interest on these investment instruments exceeds market rates and the terms are defined in such a way that the government receives sufficient compensation for the risk and the risks are of limited duration. Since Finnish banks have not expressed the need for such financing, at the moment it is very difficult to assess the volume of resources possibly required for such arrangements. However, at present it seems unlikely that the sum will exceed EUR 4 billion.
Amendments to the Act on the Government Guarantee Fund have been in progress for some time now. However, the scheduled amendments have been extended owing in part to measures designed to ensure stability, with which the legislative amendments in the guarantee fund must conform. The main legislative amendments proposed consist of allowing the government, where necessary and justified, to oblige distressed banks to apply for support that enables government measures to be put in place, and a legal provision that would more clearly make the Act applicable to all main Finnish banks irrespective of company form. Furthermore, a general provision is under consideration that would allow the government to take immediate and unscheduled action to stabilise the financial markets where necessary, such as preventing short selling.
Proposals to Parliament without delay
The aim is to formulate well-justified Government Proposals for guarantees issued to banks and optional capital support in the course of this week or at the latest next week. The types of support will be restricted to the above-mentioned euro-denominated sums. More specific terms and price tags for the financial support will consist of general guidelines at this stage, allowing Parliament to ensure that they are expedient.
The legislative amendments to the Government Guarantee Fund will likewise be presented as soon as possible, immediately after the above-mentioned urgent matters.
Global financial crisis was set in motion in the United States in summer 2007
Following several years of favourable economic developments, financial markets turbulence was fuelled by financial disturbances in the US housing markets in summer 2007. The market failure then deepened and spread onto other markets and economies around the world, including the EU member states.
General confidence in the stability of bank solvency is badly disturbed. Market failure derives mainly from poorly transparent investment instruments that are difficult to evaluate produced and owned by banks, including considerable amounts of bad investment instruments. Confidence has been further shaken in recent months, as signs of a weakening real economy both in the United States and Europe have mounted, which, if realized, would inevitably impact bank losses and profitability.
Currently, the problem in the financial markets of the developed countries is a lack of confidence, which is further exacerbated by the shortage of information about developments in bank solvency. As a result, banks are finding it more difficult to finance their operations and to meet customer funding needs.
Inquiries: Mr Peter Nyberg, Director General, tel. 358 (0)9 160 33055.
Ministry of Finance P.O BOX 28 FIN-00023 GOVERNMENT Tel. +358 295 16001 E-mail: valtiovarainministerio@vm.fi