Finland: Arsenal

The asset management company Arsenal was announced in the Fall of 1993 and became operational on January 15, 1994, after multiple steps had been taken by the Finnish Government and the Bank of Finland to handle the banking crisis.^FVarying sources report different establishment dates in October and November 1993. Skopbank, a correspondent bank for savings banks, had been taken over by the Bank of Finland. Then 41 of the nation’s 81 savings banks were forced to merge into a new entity called the Savings Bank of Finland. After parts of the healthy pieces of the Savings Bank of Finland were sold to four larger banks, Arsenal was created to absorb, manage, and liquidate the non-performing assets.

As the financial crisis began to unfold, the government sought new legal authority to, among other actions, establish an asset management company. This authority was granted in the Government Guarantee Act of 1992 (Parliament of Finland 1992). In June 1995 a significant amendment was made to the original act to allow Arsenal to hold other asset management companies (Arsenal 1995). This was necessary to accommodate the acquisition of other, smaller asset management companies that had been created during the crisis to handle the bad assets of other financial institutions.

Arsenal did not have any special powers of note to pursue its mandate.

According to the first annual report of Arsenal, its assignment was to “manage and liquidate, in an orderly manner and at a minimum cost to the Finnish society and its taxpayers, the assets and lending activities, of which the responsibility was assumed from the former Savings Bank of Finland” (Arsenal 1994). Throughout Arsenal’s lifetime, it managed bad loans and sold real estate and other assets (NAOF 2015).

Arsenal’s other guiding principle was the so-called clarifying objective, alternatively translated as an “interest in investigation” of nonpaying debtors.^FSee the English translation from Finnish: https://www.vtv.fi/julkaisut/omaisuudenhoitoyhtio-arsenal-oyn-selvitystilan-kaytannot/. The National Audit Office of Finland cited the Parliamentary Finance Committee’s definition of this objective: “The bank subsidies should be subjected to more public scrutiny and all economically significant credit losses should be thoroughly investigated in connection with the granting of the bank subsidies, and the granting of the subsidies should be made conditional on investigating the credit losses. Investigated cases involving suspected crimes and offences should be brought before a court, which would make them open to public scrutiny. In special audits, opinions should also be expressed on the irregularities in which liability for damages and criminal liability has expired” (NAOF 2015). Parliament’s view was that this objective would serve “the citizens’ sense of justice.” Under this objective, Arsenal could allow for a review of debtor irregularities to take priority over the minimization of taxpayer losses. In the pursuit of this objective, Arsenal initiated long-term trial and debt collection processes against some debtors, rather than quickly liquidating and winding them down in the fastest manner possible (NAOF 2015).

The Government of Finland made a number of public statements and commitments regarding their plan to contain the banking crisis. In March 1992 a special working group formed by the Prime Minister to review the situation published a report encouraging, among other actions, the creation of the Government Guarantee Fund. In August 1992 the Government announced that it would secure the Finnish banking system under all circumstances (Nyberg and Vihriälä 1994).

In January 1993 the Government made this final commitment more explicit via a Parliamentary Resolution. The resolution stated, “Parliament requires the state to guarantee that Finnish banks are able to meet their commitments on time under all circumstances. Whenever necessary, Parliament shall grant sufficient appropriations and powers to be used by the Government for meeting such commitments” (Nyberg and Vihriälä 1994).

At creation, the Government of Finland owned 74% of the share capital of Arsenal, while the Government Guarantee Fund held the remaining shares (Arsenal 1994). Originally structured as a limited joint stock company governed by the Government of Finland, Arsenal converted to a limited public company in 1998 (Arsenal 1997).

The board of directors of Arsenal was made up of four members from the government sector (the Director General of the State Treasury, the Deputy Head of the Budget Department in the Ministry of Finance, the Director of the Government Guarantee Fund Board, and the Industrial Counsellor of the Ministry of Trade and Industry) and two members from the private sector (Senior Vice President of KOP Bank and CFO of Huhtamaki Oy, a food and beverage packaging company). The management team was brought from the private sector (the President and CEO came from a Senior Executive Vice President role at Partek Corporation, a building materials company). Operations were overseen by a number of Government agencies, including: the Government Guarantee Fund, the National Audit Office, and Parliamentary State Auditors (Klingebiel 2000).

Arsenal was required to publish monthly public reports and a full annual report with audited financial statements. The company created a website that contained interim reports and key figures on the company’s capital and shareholders (Klingebiel 2000).

In its 1994 Annual Report, Arsenal indicated that it had built an extensive new data system to manage the growing number of clients, asset portfolios, and internal employees (Arsenal 1994).

At its peak at the end of 1994, Arsenal had assets worth FIM 40 billion (Bank of Finland 1994). Although Arsenal acquired additional assets and asset management companies during the following years, they were disposing of more assets than they were acquiring and thus never surpassed the peak size that was reached in the first year (see Arsenal’s annual reports for the full financial statements).

Primary funding for Arsenal came from the Government Guarantee Fund and the Government of Finland. The combined equity capital investments included a total of nearly FIM 23 billion: FIM 5 billion in 1993, FIM 6 billion in 1994, FIM 8 billion in 1995, and FIM 4 billion in 1996 (Borio, Vale, and von Peter 2010). The initial investments allocated 74% ownership to the Government and 26% to the GGF (Arsenal 1994). After the subsequent rounds of additional capital injections, the Government’s ownership stake increased slightly to 79% and the GGF’s ownership decreased to 21% (Klingebiel 2000). GGF’s stake in Arsenal was paid for with KOP Bank shares (Arsenal 1994).

In addition, Arsenal issued mostly short-term, government-guaranteed debt securities on the market. In 1996 two long-term bonds, worth a total of FIM 3 billion, were issued with the same government guarantee (Arsenal 1996).

The Government of Finland said in May 1994 that it would guarantee Arsenal’s funding up to FIM 28 billion for all “repayment of bonds and other debt financing issued by Arsenal” (Arsenal 1994). In December 1996 the guarantee was reduced by FIM 10 billion to FIM 18 billion (Arsenal 1996). In 1997 it was reduced an additional FIM 3 billion to FIM 15 billion (Arsenal 1997). In 1998 it was reduced FIM 6 billion to FIM 9 billion (Arsenal 1998). In 1999 it was reduced to just FIM 1 billion (Arsenal 1999). In Figure 9, the red line shows the Government guarantee and the blue bars show the actual amount of debt issued.

Sources: Arsenal 1994; 1995; 1996; 1997; 1998; 1999; 2000.

Arsenal was founded with the purpose of taking on the bad assets of the Savings Bank of Finland (SBF), itself created through the forced merger of 41 of the country’s 81 savings banks (Arsenal 1994). Over time Arsenal accepted assets from other institutions and even transformed into a group with its holdings of other asset management companies. In March 1995 Siltapankki, an asset management company handling the non-performing assets of STS–Bank was acquired by Arsenal (Arsenal 1995). Also, real estate assets worth FIM 1 billion were transferred from Skopbank in May 1996 (Kuusterä and Tarkka 2012, 694; Arsenal 1997). See Figure 10 for an organization chart of Arsenal.

Source: Arsenal 1997.

Beyond the four institutions that took the healthy assets of SBF, there was no period in which Arsenal accepted non-performing assets from the broader banking or any other sector.

Arsenal took on all non-performing assets of the Savings Bank of Finland. According to a report by the World Bank, the asset portfolio of Arsenal broke down as follows: Real estate 33.7%; client receivables 41%; and other assets 25.3% (Klingebiel 2000; Arsenal 1996). The four institutions that acquired the healthy assets of SBF were permitted to return any of those assets that became non-performing during the first year of operation (Bank of Finland 1994).

During the following years, when additional assets and/or asset management companies were acquired, acquisitions were done in single transactions and not during a specified, open purchase window.

Arsenal acquired the non-performing assets of the Savings Bank of Finland at their original book values. The book values were significantly higher than the market value of the time (Arsenal 1994).

In the summer of 1994, shortly after the initial asset acquisition, Arsenal hired outside surveyors to conduct a valuation of the entire real estate portfolio (Arsenal 1994). This valuation was conducted to assist in the disposal of the assets and did not affect the acquisition price.

When Arsenal was created, it was not given a target end date or sunset clause. The first annual report estimated that activities would last between five to seven years, with a plan to divest by the end of 2000; however, it was noted that “the divestment process will possibly continue after year 2000 if it will assist in reducing the financial burden levied on the Government” (Arsenal 1994).

More than 90% of the assets had been sold or written off by 1999. In 2003 Arsenal was placed in liquidation (NAOF 2015). In 2017 Arsenal was down to a single employee managing a handful of final bankruptcies that were expected to be finalized within three years (Arsenal 2017).

The National Audit Office of Finland wrote in 2015 that the pursuit of debtors under Arsenal’s clarifying objective mandate was “one of the main reasons why Arsenal has remained operational for considerably longer than was anticipated at the establishment of the company” (NAOF 2015).