Government takes measures to strengthen financial stability

"The Government is now taking action to make it easier for banks to obtain medium-term funding. This paves the way for lower borrowing costs for banks, and lower borrowing rates and greater access to credit for companies and households," says Mats Odell, Minister for Local Government and Financial Markets.

The proposals have been formulated in accordance with European Council conclusions and build on the decisions taken by the Riksdag in response to the Government Bill on measures to enhance the stability of the Swedish financial system (2008/09:61).

"Today's decision also gives the National Debt Office a broad mandate to intervene if any financial institution should get into serious difficulties. The measures that can be taken have been designed to safeguard taxpayers' interests and secure financial stability," says Mr Odell.

The ordinances will enter into effect on Thursday 30 October.

The guarantee programme in brief

Those institutions that wish to do so will be able to enter into an agreement with the State on a guarantee for new borrowing, in exchange for a guarantee fee. The guarantee means that the State will step in if the institution itself is unable to pay.

The system will be administered by the National Debt Office. It will be temporary with effect until 30 April 2009, but if necessary the Government can extend this period, though no longer than until 31 December 2009.

The State will initially guarantee up to SEK 1 500 billion of debt instruments. Of this, a maximum of SEK 500 billion can be used to guarantee covered bonds with a maturity of between three and five years. A limit will be set on how much can be guaranteed for each institution. The limit will be calculated as the higher of:

• the total amount of the institution's debt instruments with a maturity of more than 90 days that mature between 1 September 2008 and 30 April 2009, and
• 20 per cent of the deposits from the public with the institution as per 1 September 2008.

Guarantees are available to banks, mortgage institutions and credit institutions that lend to municipalities and which are incorporated in Sweden. Only institutions with at least six per cent Tier 1 capital and at least nine per cent combined Tier 1 and Tier 2 capital will be eligible for guarantees. The capital requirements to participate in the scheme are higher than those in current legislation.

The price of guarantees will be differentiated by risk and will build on a model developed by the European Central Bank (ECB).

• The fee for credit guarantees for debt instruments with a maturity of up to one year will be set at 0.5 per cent of the guaranteed amount and will be the same rate for all institutions.
• For debt instruments with maturities of more than one year the fee will be differentiated by risk. The fee will be based on the historic market price of credit default swaps (the CDS spread) over the period 1 January 2007 to 31 August 2008, plus 0.5 percentage points.
• In the case of guarantees provided to institutions for which there are no market prices for credit default swaps, or where the prices are unreliable, the fee will be calculated by a standardised approach based on rating. The standardised fee will be based on CDS spreads for European institutions with the same rating, over the same period, plus 0.5 percentage points.
• If an institution has neither reliable CDS data nor a rating, the highest fee under the standardised approach will be used.
• For covered bonds, the add-on fee will be 0.25 per cent instead of 0.5 per cent.

The National Debt Office is being instructed to set guarantee fees on the basis of these guidelines.

Instruments covered by the guarantee are bonds, certificates of deposit and other debt instruments which are not subordinated and have a maturity of between 90 days and three years. Covered bonds may have a maturity of up to five years. Complex and structured products such as share index bonds are excluded from the scheme. The scheme is not subject to any currency restrictions.

Restrictions on compensation, etc.

Restrictions on remuneration to senior management 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:

• Fixed salaries may not exceed the level of compensation decided upon before 20 October 2008,
• Bonuses, including options etc. may not be approved during the period of the agreement,
• Previously earned bonuses may not be paid out during the period of the agreement,
• Severance packages may not be more generous than those applicable under the current Guidelines for the terms of employment of senior managers in state-owned enterprises.

Conditions will also be imposed aimed at preventing increases in fees to board members or other remuneration for board responsibilities. Where exceptional reasons exist the National Debt Office may enter into agreements in individual cases where the conditions above are not met.

EU approval

In view of the regulations governing state aid in the EC Treaty the European Commission has been informed of and has approved the terms and conditions of the guarantee programme. Formal approval is expected to be received today (Wednesday 29 October).

State aid to credit institutions

The Government today also instructed the National Debt Office to act as a state aid agency in accordance with the new act on state aid to credit institutions. Applications for state aid may be made to the state aid agency, which may also take up state aid cases without any application.

Agreements or decisions concerning state aid in the form of capital injections shall be made by the National Debt Office. The National Debt Office will submit agreements concerning such state aid to the Government for approval.

When a capital injection is made the State shall receive payment principally in the form of preference shares with strong voting rights.

If state aid is paid to a credit institution the National Debt Office will follow the institution's performance on a continuous basis and monitor compliance with the repayment and other conditions for the aid.

The National Debt Office will administer shares and other assets owned by the State or held as collateral in connection with the granting of aid.

Assignment to the Swedish Financial Supervisory Authority

The Government has also decided to instruct the Financial Supervisory Authority to ensure that the measures adopted in connection with the act on state aid to credit institutions also benefit households and business.

The Financial Supervisory Authority will draw up regular and in-depth reports on conditions governing the services offered by the institutions, and ensure that the credit institutions do not use the guarantees improperly. The premise for this assurance shall be that the percentage increase in the credit institutions' balance sheet totals does not exceed whichever is highest of the previous year's increase in nominal GDP, or the average growth in the Swedish credit institutions' balance sheet totals from 1987 to 2007, or the average growth in the banking sector in the EU in the past 6 months.

The assignment will be carried out after consultation with the National Debt Office and reports will be submitted to the Government on an ongoing basis.