The State Finance Fund – core capital to the banks

The Government proposes the establishment of a Fund, The State Finance Fund. The purpose for this Fund will be to provide tier 1 capital to financially sound Norwegian banks in order to strengthen the banks’ core capital and to improve their lending capacity. The State Finance Fund will be established as a separate legal entity, with NOK 50 billion in capital.

The Government proposes the establishment of a Fund, The State Finance Fund. The purpose for this Fund will be to provide tier 1 capital to financially sound Norwegian banks in order to strengthen the banks’ core capital and to improve their lending capacity. The State Finance Fund will be established as a separate legal entity, with NOK 50 billion in capital.

The banks’ ability to lend is influenced by the turmoil in financial markets and the set-back in the Norwegian and the international economy. The Government and the Central Bank have taken several measures in order to improve the access to funds for Norwegian banks. These measures have had a positive effect on liquidity and borrowing for Norwegian banks. We do however now face new challenges, which require other types of measures.

The establishment of the State Finance Fund will ensure that all Norwegian banks fulfilling prudential requirements may have access to core capital at reasonable market terms. The purpose is to temporarily provide core capital to enable the banks to maintain normal lending in a period with difficulties in the financial markets. The King in council will appoint the Board of Direction for the fund.

Banks may apply for injection of capital from the Fund. The supervisory authority (Kredittilsynet) must confirm that the bank meets ordinary prudential requirements. Specific terms and conditions for such injection of capital are to be determined in agreements between the Fund and the individual banks applying for capital. The Ministry of Finance will determine general terms for the instruments the Fund may use.

The fund may inject core capital through two different types of instruments. One instrument will be based on, and similar to, “fondsobligasjoner”, which is a capital instrument presently issued by banks that may be recognised as core capital. In addition, a preference capital instrument may be used. The preferance capital instrument will be designed with a risk profile close to shares/grunnfondsbevis (primary capital certificate). Both instruments will be designed with a coupon, reflecting risk. The coupon will be non-cumulative, and subject to annual profit.

Central elements determining yield and risk for the Government will be the instruments’ priority with respect to loss absorption, redemption terms, and eventual convertibility and other loss-sharing provisions.

The State Finance Fund measure will be designed to meet state aid requirements in the EEA agreement, the ESA guidelines for permissible state aid, and the ECBs recommendations with respect to price structure.

The terms to be established in the individual agreements will be balanced with regard to programme participation being voluntary for the banks, avoiding invitation to adverse behaviour, and meeting the Government’s financial interests. 

Banks receiving capital from the fund must also agree to certain restrictions on executive pay and bonuses. Salaries for executives cannot be raised until 31 December 2010, and senior executives with salaries exceeding NOK 1.5 million shall not receive bonus payment. For senoir executives with salaries below NOK 1.5 million, bonus payments of less than 20 per cent of the fixed salary may be paid, as long as the sum of salary and bonus does not surpass NOK 1.5 million.

The Government has received advice from Norges Bank (Norway’s central bank) and Kredittilsynet (The Financial Supervisory Authority of Norway). The Ministry of Finance has also had some contact with representatives for Finansnæringens Hovedorganisasjon (The Norwegian Financial Services Association) and Sparebankforeningen (The Norwegian Savings Banks Association).