Finland: Government Guarantee Fund, Blanket Guarantee, 1992

On August 6, 1992, the Finnish government issued a press release outlining its economic policy and stated the “Government Guarantee Fund will secure the stable functioning of the banking system under any circumstances [emphasis added]” (Government of Finland 1992, 1). In February 1993, the Parliament specifically required the GGF to guarantee banks’ liabilities. Officials at the Finnish Ministry of Finance stated that the motivation was to reassure foreign creditors of Finnish banks and avoid a major default in the banking sector due to liquidity shortages.

Several support measures preceded the announcement of the blanket guarantee. In September 1991, the Bank of Finland (BoF) acquired 53% of Skopbank, a commercial bank that acted as a central bank for the Finnish savings banks, following an acute liquidity crisis that was caused by the bank’s large portfolio of bad assets (Nyberg 1992). In October 1991, the BoF extended FIM 13.4 billion as overnight credit to commercial banks, mostly to Skopbank (Borio, Vale, and von Peter 2010). In March 1992, the government announced its intention to inject up to FIM 8 billion of capital into Finnish banks. By December 1992, virtually all banks had used the facility (Nyberg and Vihriälä 1994).

The government established the GGF on April 30, 1992, “to help ensure the stability of the banking system, and secure the claims of both domestic and foreign depositors” (Nyberg and Vihriälä 1994, 29).^FNBefore 1992, cooperative, commercial, and savings banks all had their own security funds that had nearly identical provisions, but their activities differed in practice. For more information see Valori and Vesala (1998, 12). Lastly, in June 1992, the GGF supported 41 savings banks that later formed the Savings Bank of Finland (SBF) by providing a capital injection of FIM 5.5 billion and a guarantee of FIM 1.7 billion for the issue of subordinated loans that was later used.

Following the August 6, 1992, announcement, the GGF provided further capital injections into Skopbank, SBF, and STS-Bank; and funding for asset management companies to manage nonperforming assets. The GGF also provided specific guarantees to Kansallis-Osake-Pankki, Union Bank of Finland, and the cooperative banks, which were not used (Nyberg and Vihriälä 1994).

By the end of 1992, the BoF had FIM 9.5 billion outstanding in the form of stabilization loans to the asset management company Sponda. Appendix A provides a table detailing all bank support measures undertaken during the crisis.

The Finnish Parliament passed the Act on the Government Guarantee Fund on April 30, 1992, to “secure the stable operation of deposit banks and depositors’ claims” (Government Guarantee Fund 1992, 1). On February 23, 1993, the Finnish Parliament approved an amendment to the Act on the Government Guarantee Fund and unanimously endorsed the blanket guarantee by stating that “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, 33).

The Finnish Parliament established the GGF on April 30, 1992, and stated that the fund’s function was “to secure the stable operation of deposit banks and depositors’ claims” (Government Guarantee Fund 1992, 1). Before the GGF’s establishment, the BoF was solely responsible for upholding systemic stability; its acquisition of Skopbank in 1991 was outside the typical scope of a central bank’s responsibilities.

A BoF discussion paper stated that the GGF made extensive use of the staffs of the Bank of Finland and the Banking Supervision Office (BSO). The administration of the GGF initially proved to be inadequate because the fund had no full-time staff. Also, representatives from the BoF and BSO could not act as owners of the troubled banks and perform their supervisory duties without a conflict of interest (Nyberg and Vihriälä 1994).

Appendix B provides a figure outlining the administrative structure of bank support measures in Finland.

The GGF was managed by the supervisory board and the board of directors. The supervisory board of the fund was made up of the Parliament’s banking commissioners, and the chairman and vice chairman of the supervisory board were the chairman and vice chairman of the banking commissioners. The task of the supervisory board was to:

• Elect and dismiss the members and deputy members of the executive board and to appoint the chairman and vice chairman of the board;
• Approve the rules of the fund;
• Confirm the fund’s annual budget, income statement, and balance sheet;
• Make a proposal to the Government Council on taking out a loan for the operation of the fund;
• Decide on the organization of the fund’s internal audit;
• Decide on the granting of discharge from liability to the board of directors and the agent; and
• Deal with other issues presented by the board of directors. (Government Guarantee Fund 1992)

The GGF’s board of directors initially consisted of a chairman and five other members from the Ministry of Finance, the Banking Supervision Agency, the Bank of Finland, and the banks that belonged to the fund. The task of the board of directors was to manage the fund’s operations. When the government authorized the blanket guarantee, it implemented an administrative reform of the GGF by reducing the number of board members to five. Only one member in the newly constituted board was a representative of a specific organization, the Ministry of Finance. Although the BoF and BSO were no longer formally represented on the board, they continued as permanent advisers (Nyberg and Vihriälä 1994).

The Act on the Government Guarantee Fund stated that the GGF was required to follow the Accounting Act (655/73) in its accounting and was subject to an annual audit. The auditors were required to provide the supervisory board with a written audit report, which contained statements on the confirmation of the income statement and balance sheet, the granting of discharge from liability, a proposal for measures concerning the fund’s performance, and any reminders that affected the confirmation of the income statement and balance sheet. The GGF also published its annual reports in 1993, 1994, and 1995, providing information regarding bank support measures (GGF 1994; GGF 1995; GGF 1996).

The government issued a strong statement of public support for banks on August 6, 1992. The press release stated that the “Government Guarantee Fund will secure the stable functioning of the banking system under any circumstances [emphasis added]” (Government of Finland 1992, 1). In February 1993, the Finnish Parliament unanimously authorized a more explicit resolution, stating: “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, 33).

Officials at the Finnish Ministry of Finance also stated that there was some informal communication regarding the blanket guarantee between the Swedish and Finnish central banks.

The amendment to the Act on the Government Guarantee Fund that the Parliament passed in February 1993 stated that the Finnish Parliament committed to granting all funds that might be needed to guarantee that banks could fulfill their commitments (Nyberg and Vihriälä 1994).

The GGF’s members were deposit banks and branches of foreign credit institutions that received deposits from the public (Government Guarantee Fund 1992). It is not clear whether the blanket guarantee’s coverage extended beyond the GGF’s members.

The blanket guarantee provided full protection of depositors and other creditors. It is unclear which creditors were excluded from the guarantee, if any. The government specifically said that the guarantee did not cover equity holders, which are not creditors.

The act that established the GGF in April 1992 stated that banks in the fund must pay an annual fee, which would be not more than 0.01% of the total sum of the most recently confirmed balance sheets of the banks. The fund’s board was charged with determining the amount of each bank’s annual fee based on the risks the bank had taken in its operations. It is unclear who was in charge of determining the annual fee, the supervisory board or the board of directors. The act stated that the fund’s calculation basis must be the same for all banks belonging to the fund (Government Guarantee Fund 1992). Available sources did not specify the level of the fee that the fund’s board decided to impose on banks. It is also unclear if the GGF earmarked these fees for a specific purpose.

Research did not reveal the process for exercising the guarantee.

It does not appear that the blanket guarantee imposed specific restrictions. The broad-based capital injection in March 1992 required banks to be flexible toward borrowers having trouble servicing their debt and meet borrowers’ needs for new loans. Restrictions associated with other forms of bank support included: management replacement, restructuring, balance sheet and cost reductions, and the previous owners of the savings banks’ losing almost all of their capital (Borio, Vale, and von Peter 2010).

In the government’s statement on August 6, 1992, it did not identify an end date of government support for banks. However, the government said it would revise deposit protection after European Commission (EC) legislation on deposit insurance was approved and the Finnish banks’ financial conditions had stabilized (Government of Finland 1992). The EC legislation on deposit insurance was approved on May 30, 1994 (EC 1994). On December 8, 1998, a limited deposit insurance scheme with a coverage limit of FIM 150,000 per depositor per bank replaced the blanket guarantee (Garcia 2000; IMF Staff 2003; Valori and Vesala 1998).