Opinion of the European Central Bank of 24 November 2008 at the request of the Finnish Ministry of Finance on a draft law on state capital investment in deposit banks (CON/2008/75)
Date: 2008-11-24
Institutions: European Central Bank
Subjects: Finland, bank deposit, credit guarantee, credit institution, financial aid, financial requirements, financial stability, investment

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 24 November 2008 

at the request of the Finnish Ministry of Finance 

on a draft law on state capital investment in deposit banks 

(CON/2008/75) 

Introduction and legal basis 

On 18 November 2008 the European Central Bank (ECB) received a request from the Finnish Ministry of 

Finance  for  an  opinion  on  a  draft  proposal  for  a  law  on  State  capital  investment  in  deposit  banks 

(hereinafter the ‘draft law’), including as an annex a draft decree on State capital investment in deposit 

banks (hereinafter the ‘draft decree’). 

The  ECB’s  competence  to  deliver  an  opinion  is  based  on  Article  105(4)  of  the  Treaty  establishing  the 

European  Community  and  the  sixth  indent  of  Article 2(1)  of  Council  Decision  98/415/EC  of 

29 June 1998  on  the  consultation  of  the  European  Central  Bank  by  national  authorities  regarding  draft 
legislative provisions1, as the draft law relates to rules applicable to financial institutions insofar as they 

materially  influence  the  stability  of  financial  institutions  and  markets.  In  accordance  with  the  first 

sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council 

has adopted this opinion. 

1.  

Purpose of the draft law 

In consequence of the global financial crisis, the Finnish Government has announced measures that may 

be taken to stabilise the financial markets, including (i) State guarantees for new debt instruments issued 

by  banks;  (ii) State  capital  support  for  solvent  financial  institutions;  and  (iii) State  recapitalisation  of 
distressed  banks2.  The  draft  law  relates  to  the  second  measure,  which  is  aimed  at  providing  capital 

support to solvent deposit banks to ensure the proper financing of the economy. 

Capital support is proposed to be provided by subscribing a capital loan as referred to in Section 45 of the 

Law  on  credit  institutions,  i.e.  an  unsecured  capital  loan  belonging  to  original  own  funds  of  the  bank 

(Tier 1 capital). The terms of the loan must be approved by the Financial Supervision Authority (FSA). 

Support  may  be  provided to  sound  and  solvent  Finnish  deposit  banks,  including  subsidiaries  of  foreign 

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OJ L 189, 3.7.1998, p. 42.  
For  further  details,  see  press  releases  164/2008  and  168/2008  of  the  Ministry  of  Finance,  available  on  the  Ministry’s 
website at www.vm.fi. As regards Government guarantees, the Finnish Government requested on 22 October 2008 the 
Parliament’s consent to State guarantees for debt instruments issued by banks (Government proposal HE 181/2008 vp). 
Recapitalisation of distressed banks would be, where necessary, conducted according to procedures laid down by the Law 
on the Government Guarantee Fund. 

 
 
 
 
                                                 
credit  institutions.  According  to  the  draft  law,  capital  loans  could  be  subscribed  up  to  a  maximum  of 

EUR 4 billion  in  total,  and  up  to  20  %  of  each  supported  bank’s  original  consolidated  own  funds.  The 

State  could  subscribe  capital  loans  until  30 April  2009  or,  if  the  Government  so  decided,  until 

31 December 2009. The capital amount of a capital loan would only be repayable to the State after five 

years from the date of its issue, provided that certain solvency requirements were met and that the FSA 

gave its consent for the repayment. The Government would have no right to demand such repayment, but 

the capital of the loan would be gradually raised in the event of non-repayment. In the event of a deposit 

bank’s bankruptcy, other debts would have priority over capital loans. 

The  interest  rate  of  the  capital  loan  would  be  the  higher  of  the  following:  (i) 12-month  Euribor  plus  a 

margin of seven percentage points; or (ii) a proportion of the issuer’s net earnings after tax, corresponding 

to the proportion of the subscribed capital loan of the issuer’s original consolidated own funds. Interest 

would be payable only if the deposit bank had distributable funds for the payment. If the deposit bank had 

not paid interest for two calendar years, the Government would be entitled to appoint two members to its 

board of directors. 

The draft law and draft decree contain certain restrictions applicable to issuers of a capital loan, inter alia 

with  regard  to  profit  distribution,  business  restructuring  (such  as  mergers),  marketing,  expansion  of  the 

business  activity  and  remuneration  and  benefits  of  the  management.  Compliance  with  the  terms  and 

conditions of the capital loan would be supervised by the FSA. 

2. 

General observations 

2.1  The  ECB  has  issued  recently  a  number  of  opinions  with  regard  to  measures  taken  by  Member 

States  in  the  context  of  the  financial  crisis.  It  has  emphasised  the  importance  of  a  common 

approach  aimed  at  restoring  confidence  in  the  financial  markets  and  compliance  with  the 
Declaration  on  a  concerted  European  action  plan  of  the  euro  area  countries3  of  12  October  2008 

(hereinafter the ‘Declaration’). Such an approach should include initiatives aimed at: (i) ensuring 

appropriate  liquidity;  (ii)  facilitating  the  funding  of  banks  through  various  means;  (iii)  providing 

additional  capital  resources  to  financial  institutions;  and  (iv)  recapitalisation  of  distressed  banks. 

These principles were also endorsed by the European Council on 16 October 2008 in respect of all 

Member States. In this context, the ECB delivered on 13 November 2008 its opinion CON/2008/68 
on the Finnish draft legislation concerning the Government Guarantee Fund4, making observations 

which also have a bearing in the context of the present opinion. 

2.2 

In  line  with  its  previous  opinions,  the  ECB  notes  that  it  should  be  ensured  that  beneficiary 

institutions  are  not  unfairly  advantaged  and  that  financial  support  arrangements  which  may  be 

considered  as  providing  preferential  treatment  to  specific  credit  institutions  should  be  avoided.  It 

also  notes  that,  in  line  with  the  Declaration,  Member  States  must  act  in  a  coordinated  manner  to 

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4  

The Declaration is available on the French Presidency’s website at www.ue2008.fr. 
ECB Opinion CON/2008/68 at the request of the Finnish Ministry of Finance on a draft government proposal for laws 
amending the Law on the Government Guarantee Fund and the Law on credit institutions. 

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avoid  significant  differences  in  national  implementation  of  support  measures  from  having  a 

counterproductive effect and creating distortions in global banking markets. The ECB would also 

like  to  emphasise  the  importance  of  ensuring  that  such  measures  are  in  accordance  with  the 

requirements of EC competition law, in particular State aid rules, and that the State’s provision of 

capital to banks is limited in time. In this regard, reference should also be made to the criteria set 

out  in  the  Commission’s  Communication  entitled  ‘The  application  of  State  aid  rules  to  measures 

taken  in  relation  to  financial  institutions  in  the  context  of  the  current  global  financial  crisis’ 
(hereinafter  the  ‘Commission  Communication’)5  and,  in  particular,  to  Section  4  concerning 
recapitalisation schemes6. 

3. 

Specific observations 

Eligibility criteria 

3.1 

In  line  with  the  Commission  Communication,  the  ECB  notes  that  eligibility  criteria  should  be 

objective and non-discriminatory. According to the draft law, capital support may be provided ‘to a 

deposit bank that is authorised to carry on credit institution activity in Finland’. The explanatory 

memorandum  further  clarifies  the  scope  of  this  provision,  referring  to  Finnish  deposit  banks 
including  subsidiaries,  but  excluding  branches  of  foreign  credit  institutions7.  The  ECB  welcomes 

this provision, as it avoids the preferential treatment of specific financial institutions and distortion 

of  the  level  playing  field.  Moreover,  only  institutions  fulfilling  the  solvency  requirements  laid 

down in Section 2(2) of the draft law would be eligible for capital support. The ECB understands 

that  this  condition  differentiates  the  draft  law  from  the  special  rescue  provisions  which  were  the 

subject  of  Opinion  CON/2008/68  and  which  were  aimed  inter  alia  at  credit  institutions  whose 

solvency had decreased or was expected to decrease in such a way that they no longer fulfilled the 
conditions  required  to  continue  their  operations8.  The  ECB  understands  that  the  clear 

differentiation  between  two  types  of  support  is  intended  to  be  maintained  (preventive  support  to 

sound  credit  institutions  under  the  present  draft  law  and  reactive  support  to  troubled  institutions 

under the law commented on in Opinion CON/2008/68). In this context, the ECB also welcomes 

the FSA’s involvement in the evaluation of the need for support of solvent institutions.  

Conditions applicable 

3.2 

In line with previous opinions, the ECB recalls that harmonisation and coordination of government 

measures  intended  to  alleviate  tensions  in  the  financial  markets  is  of  crucial  importance.  The 

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2008/C 270/02. 
Section 4 concerns recapitalisation measures to be used to support financial institutions that are fundamentally sound but 
may experience distress because of extreme conditions in financial markets. In this context, the Commission laid down 
the following general principles: (i) objective and non-discriminatory criteria for eligibility; (ii) the temporal scope of the 
scheme; (iii) limitation of the aid to the strict necessary; (iv) the need for safeguards against possible abuses and undue 
distortions of competition; and (v) the requirement for recapitalisation as an emergency measure to support the financial 
institution through the crisis. 
See Section 4, ’Impacts of the proposal’. 
See  the  Section  11a  which  it  was  proposed  to  add  to  the  Law  on  the  Government  Guarantee  Fund  (379/1992)  of 
30 April 1992 by the draft law commented on in Opinion CON/2008/68. 

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recapitalisation  measures  considered  in  Member  States  are  aimed  at  strengthening  the  capital 

position  of  fundamentally  sound  financial  institutions  in  order  to  improve  the  functioning  and 

stability  of  the  banking  system  and  ensure  the  proper  financing  of  the  economy.  In  particular,  a 

consistent  approach  should  be  employed  in  defining  the  conditions  for  recapitalisations  and  the 

pricing of the instruments to provide Tier 1 capital to financial institutions, in order to support the 

implementation  of  the  Declaration.  Against  this  background,  the  ECB  notes  that  in  general  the 

conditions for capital support should aim at protecting the interest of taxpayers and respecting the 

level playing field among institutions. Moreover, the ECB highlights that the pricing conditions for 

capital support should be risk-based and market-oriented, determined by taking into consideration 

the  specific  risk  of  both  the  specific  instrument  chosen  for  injecting  capital  and  the  institution 

concerned. Specific features of the instruments for capital injections (such as preferred shares and 

other hybrid instruments) should be appropriately chosen so that, while encouraging an early end of 

the State’s capital support of banks, they should not result in an excessive increase in the cost of 

capital.  Finally,  the  temporary  nature  of  the  State’s  intervention  should  be  ensured  by  providing 

financial institutions with incentives to redeem such instruments as early as possible after a certain 

period of time. 

3.3  The ECB notes that, according to the draft law, in the event that a deposit bank did not pay interest 

for two calendar years, the Government would be entitled to appoint two  members to the bank’s 

board of directors. It also notes that the influence of such board members may vary depending on 

the management structure of the bank in question. In principle, such a provision should allow the 

involvement  of  the  State  to  the  extent  necessary  in  the  decision-making  of  the  defaulting  bank. 

Further,  the  ECB  would  like  to  reiterate  that,  as  stated  in  the  Commission  Communication,  the 

capital injection must be limited to the minimum necessary and should not allow the beneficiary to 

engage  in  aggressive  commercial  strategies  or  expansion  of  its  activities  or  other  purposes  that 

would imply undue distortions in competition.  

3.4  As  regards  the  temporal  scope  of  the  scheme,  as  mentioned  above  the  ECB  notes  that  under  the 

draft law capital loans could only be subscribed until 30 April 2009, or 31 December 2009 if the 

Government so decided. 

This opinion will be published on the ECB’s website. 

Done at Frankfurt am Main, 24 November 2008. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

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