Finland’s 1992 Capital Injection

A working group was established in early 1992 by the Finnish Prime Minister. The group included finance ministers and the heads of all of the major banks. They issued a report in March 1992 in which they outlined two recommendations: (1) offer a capital injection to the banking system of between FIM 5 billion and FIM 10 billion and (2) establish a Government Guarantee Fund, which was done in April 1992 (Kuusterä and Tarkka 2012).

Another action often associated with the two just mentioned was the government’s public announcement in August 1992 that the stability of the banking system would be secured under all circumstances (Moe et al. 2004). The government also abolished a stamp duty on securities trading on stock exchanges (Budget 1992).

The legislative process began with the Prime Minister’s working group. The parliament then took up and added details to the working group’s suggestions. The Finnish parliament chose to allocate FIM 8 billion for capital injections into the banking system. The money was included in the Supplementary Budget legislation passed on April 29, 1992. The legislation included the following introduction, “At the heart of the measures is the State’s involvement in strengthening the capital structure of banks by making equity investments in the form of preferential equity certificates which would be included in its equity for the purposes of calculating the bank’s solvency” (Budget 1992).

As the banking crisis began to unfold, the Prime Minister formed a group of government officials and leaders of the banking industry. The group made their report public on March 16, 1992 (Kuusterä and Tarkka 2012). The government published the terms of the capital injections in June of the same year (Vihriälä 1997). The list of banks that received injections was also made public in official government statistics (Borio et al. 2010; Vihriälä 1997).

The government made their most significant public announcement just before the capital was deployed. In August 1992 they issued a statement saying, the government would secure the banking system under all circumstances (Moe et al. 2004).

The FIM 8 billion was allocated via the Ministry of Finance (Budget 1992). All bank support operations were run by the Government Guarantee Fund (GGF), an off-state-balance-sheet entity created in late April 1992 to prevent a collapse in domestic and international confidence in the stability of the banking system and its claims. (See Nygaard 2020 for more information on how the GGF’s worked with the government’s asset management company Arsenal). However, the Bank of Finland did contribute personnel and had an observer on its Board.

Given the Prime Minister’s working group’s recommendation that between FIM 5 billion and FIM 10 billion would be needed (Kuusterä and Tarkka 2012), the parliament allocated FIM 8 billion in their Supplementary Budget of 1992 (Budget 1992). Eligible institutions could apply two times: by August 14, 1992, and later on December 16, 1992 (Teemu 1992).

Nearly all of the Supplementary Budget’s FIM 8 billion was deployed in Autumn 1992.

Regardless of solvency, all banks were eligible (but not required) to participate in the capital injections (Moe et al. 2004). In the end, FIM 7.9 billion of the FIM 8 billion was deployed (Nyberg and Vihriälä 1994) to 56 cooperative banks and 22 savings banks (Vihriälä 1997), of which FIM 5.0 billion went to five banks (Borio et al. 2010).

The amount of capital injected was determined based on a combination of banks’: (1) risk weighted assets (Nyberg and Vihriälä 1994), (2) balance-sheet size (Kuusterä and Tarkka 2012), and (3) off-balance-sheet commitments (Vihriälä 1997).

The injections were structured as nonvoting preferred capital. The non-cumulative shares were convertible if interest remained unpaid for three consecutive years or if the bank’s solvency ratio fell below the legal minimum (Budget 1992; Nyberg and Vihriälä 1994). The three-year target (1,080 days) was chosen because it was viewed as “enough time for the banks to put their houses in order” (Kuusterä and Tarkka 2012). None of the shares were converted (Moe et al. 2004).

The variable interest rate was set slightly above market rates “to incentivise banks to repay” (Nyberg and Vihriälä 1994).

The government-injected capital could, “be used to cover losses after the bank’s distributable equity capital and the reserve fund [had] been exhausted” (Nyberg and Vihriälä 1994). The government’s investment was subordinate to bank debt, but senior to common equity. Interest payments had to be made before dividends could be distributed (Report 1993).

One source indicated that by accepting the capital injections, banks “were obliged to show a flexible attitude towards borrowers having trouble in servicing their debt. To the extent that their solvency permitted, banks were required to meet borrowers’ needs for new loans. In addition, banks were not allowed to call in loans before maturity” (Borio et al. 2010). However, despite the obligation, the authorities did not develop an enforcement mechanism. Ultimately, banks were left in control of their loan books, something which was occasionally severely criticized later.

After some internal debates at the Bank of Finland, the decision was made to leave the restructuring plans in the hands of the banks themselves.

After some internal debates at the Bank of Finland, the decision was made that alternative professional executives (proficient in Finnish) in sufficient numbers were unavailable in Finland.

It doesn’t appear that there was an official sunset clause or claw-back timeline. However, the capital injections were designed to incentivize banks to pay the government back and return to private markets as soon as possible. The interest rates were set slightly above market rates and were set as variable rates so as the market rates fluctuated, the government’s capital would remain expensive (Nyberg and Vihriälä 1994). The difference between market rates and the interest on the government capital also increased over time to further encourage speedy payback^FThe interest rates were  calculated as follows: 1992-1997: one-year government debt + financial cost of debt + 50bp; 1997-2000: one-year government debt + financial cost of debt + 150bp; 2000-2007: same plus 200bp every year. (Teemu 1992). In the initial parliamentary approval for the FIM 8 billion capital injection, they anticipated the likelihood of not fully recovering their investment, “The return on an investment may be forfeited to the extent that the banks distributable earnings are insufficient to pay the return” (Budget 1992). All but approximately FIM 500 million was returned to the government by November 1999 (Report 1999).