Government introduces recapitalisation scheme to safeguard lending to households and businesses

"This gives banks that are already strong the opportunity to strengthen their capital base further and thereby contribute to the public good. This is an important step to safeguard financial stability and ensure that households and businesses can obtain credit on reasonable terms," says Minister for Local Government and Financial Markets Mats Odell.

To safeguard the interests of the taxpayer, the banks will pay fees and returns on capital injections to the stability fund. At the same time, the state is guaranteed continuous returns and a significant share of the value growth achieved by the institution. Banks participating in the recapitalisation scheme will be required to put a stop to bonuses and freeze other compensation to top management.

The recapitalisation scheme in brief

The Ordinance adopted allows the National Debt Office to provide capital injections after obtaining Government approval. The institutions that will be offered the possibility of receiving such capital injections are the same ones that are entitled to participate in the state guarantee scheme for medium-term debt, i.e. banks, mortgage institutions and credit market companies serving municipalities, incorporated in Sweden. The total limit for the recapitalisation scheme is SEK 50 billion. The capital provided to a particular institution may amount to no more than the equivalent of an increase of two percentage points in the institution´s capitalisation.

Under the terms of the ordinance, the injection of capital can be provided in the form of share capital or hybrid instruments. To be included in an institution´s own funds as Tier I capital (i.e. capital of the highest quality), the instrument must fulfil the conditions in the Finansinspektionen (Swedish Financial Supervisory Authority) regulations.

Capital can be provided through either
- state participation in a market transaction, whereby the state acquires a maximum of 70 per cent of the shares or hybrid capital instruments issued on the same market terms as other investors, or
- state participation in a directed issue, whereby the state acquires shares or hybrid capital instruments on terms decided by the state.

In a market transaction, the National Debt Office participates on the same terms as private investors and the state therefore receives market-rate returns. In the case of a directed issue, where the state acquires more than 70 per cent, the National Debt Office will set the price based on a model reflecting the risk of the issuing institution and the returns on similar financial instruments under normal market conditions. The returns must always at least equal the level calculated according to the European Central Bank (ECB) recommendations. The conditions are designed to safeguard the interests of the taxpayer by guaranteeing the state continuous returns and a significant share of any value growth achieved by the institution during the time that the state contributes capital.

The Ordinance enters into force on 17 February.

Restrictions on remuneration

Restrictions on remuneration to senior management to apply during 2009 and 2010 will be included in the National Debt Office´s agreement with the institutions. The restrictions will apply to the five individuals receiving the highest total remuneration. There will be a freeze on pay and remuneration increases, a ban on bonuses and restrictions on severance payments for top management in the institutions receiving capital injections.

Furthermore, severance pay agreements may not be more advantageous than those applicable under the current guidelines for the terms of employment of senior managers in state-owned enterprises.

The agreement will also include conditions aimed at preventing increases in remuneration to board members in 2009 and 2010.

Introduction of stability fee

To strengthen the stability fund and safeguard the interests of the taxpayer, it is proposed that the stability fee announced in the autumn be introduced. Under the proposal, which will be referred for consultation tomorrow (Tuesday), the fee will be payable at half the full rate in 2009 and 2010. The Government intends to present a proposal in 2011 on how the fee scheme can be merged with the deposit guarantee scheme, allowing a single, risk-differentiated fee to be charged. Institutions participating in the state guarantee scheme for medium-term debt will be able to deduct half of the guarantee fee they have paid over the year from the stability fee.

EU approval

In view of the state aid rules in the EC Treaty, the European Commission has been notified of the recapitalisation scheme. Formal approval of recapitalisations provided via market transactions is expected tomorrow (Tuesday 10 February). For other capital injections, the Commission will review the situation on a case-by-case basis if and when it becomes necessary to provide such injections.
The approval expected from the EU permits a recapitalisation scheme that applies up to 17 August 2009. However, if necessary the Government intends to apply for an extension of the recapitalisation scheme and guarantee programme.