Dutch Credit Guarantee Scheme

Other interventions, implemented independently throughout an extended period spanning from late 2008 through 2013, included individual capitalization, investment, and restructuring measures for major Dutch banks such as Aegon, ING, and SNS REAAL. A majority of the later actions were taken in response to deteriorating conditions exacerbated by the European sovereign debt crisis.

Existing Dutch law thus provided the authority for the Guarantee Scheme.

The European Commission authorized the Guarantee Scheme on October 30, 2008.  As discussed in more detail below, the need to structure the Guarantee Scheme in such a way as to ensure EC approval significantly influenced the design of certain program features.

Program documents do not provide a specific rationale for this amount.

The Guarantee Scheme as announced provided for eligibility for all banks with substantial operations in the Netherlands. Banks would have to meet certain liquidity and solvency requirements as specified in the Dutch Financial Markets Supervision Act of 2006. Included among eligible institutions were foreign subsidiaries established in the Netherlands deemed by De Nederlandsche Bank to have met the substantial operations test (European Commission 2008a).  Applicants to the program needed explicit approval from De Nederlandsche Bank before applying for coverage under the Guarantee Scheme.

As noted in the Outcomes section, LeasePlan Corp. N.V., a fleet management company held mainly by Volkswagen Group, and Achmea Hypotheekbank N.V., a mortgage company, complied with the conditions set forth in the original terms of the Guarantee Scheme and were deemed eligible to issue guaranteed debt despite their non-bank status.

On July 7, 2009, the European Commission approved a request by the Dutch Ministry of Finance to expand eligibility to include all senior unsecured debt instruments.

The July 7, 2009, modifications expanded eligibility to include debt with maturities up to five years. Relatedly, the Dutch government committed one third of the total budget (i.e., €66.6 billion) for the granting of guarantees for debt with maturities over three years. An individual limit of one third of this designated amount (i.e., €22.2 billion) was imposed on banks issuing guaranteed debt with maturities greater than three years.

Program documents do not provide a specific rationale for limiting eligibility to these currencies.

Participating institutions were not allowed to issue guaranteed debt in excess of the amount of existing debt maturing between October 23, 2008, and December 31, 2009.

The guarantee fee was determined according to the guidelines presented in the European Central Bank’s “Recommendations on government guarantees on bank debt” of October 20, 2008. Guarantees for debts with any length of maturity incurred a flat fee of 50 bps. In addition, variable charges for guaranteed debt with maturities over 12 months were calculated using the lower of either the median five-year CDS spread for that institution from January 1, 2007, to August 31, 2008, or the median five-year CDS spread based on a comparison with peer group members with a similar rating over the same period. For banks without representative CDS spreads but with a credit rating, fees were calculated in accordance with peer group members’ ratings over the same period.  Banks without either CDS spreads or credit ratings incurred fees based on De Nederlandsche Bank’s regulatory assessment (European Commission 2008).

Participation fees were later increased with the December 17, 2009 (see Figure 2), modification and prolongation of the Guarantee Scheme. The flat fee for guaranteeing debt of any maturity increased from 50 bps to 70 bps. Additionally, the variable fees for guaranteeing debt instruments with maturities over 12 months increased due to a change in the period used to calculate CDS spreads, from January 1, 2007 to August 31, 2008 as referenced in the European Central Bank’s “Recommendations on government guarantees on bank debt,” to March 1, 2008–November 1, 2009 (European Commission 2009a).

Source: Dutch Ministry of Finance.

On June 29, 2010, the Dutch Ministry of Finance once again increased the fixed component of the participation fee for all credit rating categories according to a progressive scale (see Figure 3), ranging from 75 basis points for banks with triple-A ratings to 110 basis points for banks with ratings lower than A minues (European Commission 2010b). This followed new guidelines from the European Commission issued on April 30, 2010, that called for an increase in guarantee fees for programs still in operation, with the objectives of better matching market conditions and incentivizing firms to shift to non-guarantee issuance as soon as possible.

Source: Dutch Ministry of Finance.

All fees were to be paid on annual basis within forty days of the issuance of guaranteed debt.

A bank that failed to issue debt that it had successfully applied to have covered under the Guarantee Scheme was subject to a termination fee. This termination fee was equal to the participation fee that was to have been charged for each debt issuance.

Guidance issued by the European Commission in October 2008 on the creation of credit guarantee programs called for the inclusion in programs of a set of safeguards “to minimize . . . distortions and the potential abuse of the preferential situations of beneficiaries brought about by a State guarantee” and “to avoid moral hazard.”  This guidance did not specify exactly what safeguards a program should include, but required “an adequate combination” of elements including restrictions on advertising based on the guarantee, balance sheet growth, share buybacks and executive compensation some of which the Dutch adopted. (European Commission 2008).

Growth in balance sheet volume while taking part in the Guarantee Scheme was not to exceed the higher of the following:

1. The annual growth in nominal GDP in the Netherlands in the previous year;
2. The average historical growth in balance sheets in the Dutch banking sector for the period 1987–2007;  
3. The average percent growth in balance sheet volume of the European Union banking sector in the previous six months (European Commission 2009b).

Although executive compensation and severance package increases were initially restricted unconditionally, the July 7, 2009, modifications to the Guarantee Scheme outlined more specific requirements whereby participating banks would be required to:

1. Introduce and maintain a sustainable remuneration policy;
2. Ensure that the severance payments for members of the Board of Directors would be limited to one year’s fixed salary;

Adhere to the guidelines set forth by the Dutch Corporate Governance Code when calculating bonuses (European Commission 2009b).

Based on guidelines issued by the European Commission for guarantee programs to be continued beyond June 30, 2010, the Dutch authorities instituted a mandatory viability review for each bank whose total outstanding guaranteed debt as of July 1, 2010 exceeded both a ratio of 5% of total liabilities and a total of €500 million. The Ministry of Finance was required to submit such reports to the European Commission within three months of a new debt issuance or rollover by a participating bank. This requirement was motivated by the European Commission’s belief that market conditions had stabilized sufficiently by mid-2010 such that a “persistent failure to obtain a considerable proportion of the funding needed without government guarantees may indicate a lack of confidence in the viability of a bank’s business model.”  Thus, continued heavy reliance on government guarantees necessitated an examination of the institution’s business in the Commission’s view (European Commission 2010a).

In the event that a participating institution defaulted on its guaranteed debts, the Dutch State Treasury Authority would assume responsibility for paying principal and interest through maturity and pay all obligations within three months of the date of default. The government reserved the right to extend its payment date up to three times under extraordinary circumstances (European Commission 2008).

Per the original terms of the Guarantee Scheme, the guaranteed debt would have to provide for the repayment of principal in a single amount. The terms of the debt instruments were not permitted to include any allowance for cross-default, cross-acceleration of default, or any call option on the principal (Ministry of Finance 2008).

Although the original terms specified an end date of December 31, 2009, the Guarantee Scheme issuance window was prolonged for two periods of six months each. The program’s issuance window expired on December 31, 2010.