Measures to boost financial markets
Today, on 27 January 2009, the Cabinet Committee on Economic Policy discussed measures to boost the financial markets.
Banks have recently had to focus their efforts on satisfying the financial needs of large-scale businesses. The measures laid down today aim to facilitate banks' financial situation and, in turn, to help the finances of households and smaller actors. This arrangement will allow banks to better support the Government's economic policy objectives: maintaining Finnish businesses in operation and ensuring their ability to employ people and pay salaries, Minister Mari Kiviniemi states.
Banks to have access to government subordinate loan
In early February, the Government will submit to Parliament a proposal for state capital investment in deposit taking banks. The state will offer banks interest bearing subordinate loans. The subordinate loan can be considered as banks' core capital (Tier 1 capital). The subordinate loan earns interest totalling the interest-rate of the five-year Finnish Government bond plus 6 percentage points.
A bank taking out a subordinate loan commits itself to paying interest before distributing dividends. Similarly, it will not undertake major business rearrangements without the consent of the Government. In addition, banks need to be committed to maintaining their lending to households and SMEs, and reporting about their lending activities to the Ministry of Finance on a regular basis.
State guarantees to provide refunding for banks
The Government will grant state guarantees to the refunding of Finnish banks in accordance with the authorisation issued by Parliament in December 2008. A market-based fee will be charged for guarantees. Under a decision of Parliament, the maximum value of state guarantees to be granted is EUR 50 billion. Guarantees are granted until 30 April 2009, and limited to the amounts becoming due up to that date. At a later date, the Government will carry out a separate evaluation of the need to continue granting guarantees after 30 April. State guarantees can be granted until the end of 2009 at the most.
Medium term funding for banks, in particular, has become significantly more difficult over the past months. The Cabinet Committee therefore considered that restricted amounts of short-term funding to become due could be refunded as longer maturity funding. The scope of banks' lending to the public and to businesses will determine the amount of funding to be extended. The maturity extension possibility is hoped to support lending to businesses and public in general.
Restrictions to top management pay systems
The conditions both on subordinated loans as well as on guarantees include restrictions applying to banks' top management pay systems. Banks need to adhere to the common principles set by the Cabinet Committee on Economic Policy to be employed in state-owned companies. In accordance with this, pay is to be reviewed as a whole, and it must not, under any circumstances, result in excessive benefits. Performance and other bonuses need to be result-based, and options must not be given as bonuses.
The State Pension Fund may acquire commercial papers
The Ministry of Finance has decided to grant the State Pension Fund the right to a limited use of the assets in its possession to acquire commercialpapers of significant and financially solid Finnish companies. Such a decision is to promote the recovery of the commercial paper market.
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As required by the EU rules on state aid, the European Commission's DG Competition will be notified of the conditions for the state guarantee as soon as possible. The Commission will be notified of the Government proposal on subordinated loan once the proposal has been submitted to Parliament.
The Government will decide on the conditions for the state guarantee as soon as the Commission has given its reply to the notification.
Further information: Peter Nyberg, Director General, tel. 358 9 160 33055