Report from the Board of Directors 2014
The Norwegian Banks’ Guarantee Fund object and activities
The Norwegian Banks’ Guarantee Fund was established by a statutory amendment that entered into force on 1 July 2004 through the merger of the Commercial Banks’ Guarantee Fund and the Savings Banks’ Guarantee Fund. The Guarantee Fund’s activities are regulated by the Norwegian Guarantee Schemes Act of 6 December 1996 No. 75.
Membership of the Guarantee Fund is mandatory for all savings banks and commercial banks headquartered in Norway. In addition, the King may decree that as well as banks, other credit institutions are required to be members of the Guarantee Fund. The Fund had 125 members with headquarters in Norway as of 31 December 2014.
Credit institutions headquartered in other EEA states but receiving deposits from the general public through branches in Norway may become members of the deposit guarantee scheme if the deposit guarantee scheme in the branch’s home country is not considered to give the branch’s depositors the same degree of protection as that under Norwegian legislation. Membership requires the approval of Finanstilsynet (the Financial Supervisory Authority of Norway). The Fund had seven branch members as of 31 December 2014.
The purpose of the Guarantee Fund is to hedge the deposits of its members, whereby deposits of up to NOK 2 million per depositor per bank are guaranteed in the event that a member is unable to meet its commitments.
The Guarantee Fund’s most important function is to manage situations in which one or more banks encounter difficulties in meeting their commitments. By way of preparation for such a situation, contingency plans are drawn up and kept up to date.
The deposit guarantee scheme is an important part of the regulation of the financial markets and helps create confidence among depositors, thereby safeguarding financial stability. For branch members with a home country guarantee of EUR 100,000 per depositor, the Guarantee Fund currently covers the excess amount up to NOK 2 million. As of 30 September 2014, total guaranteed deposits amounted to NOK 1,030 billion.
It is important that the guarantee fund institution is constantly enhanced in order to secure satisfactory safeguards for customers, banks and society. This includes work on framework conditions and statutes, in addition to meetings and talks with international funds. The Guarantee Fund is a member of the European Forum of Deposit Insurers (EFDI). The purpose of the forum is to contribute to the stability of the financial system by fostering European cooperation between deposit guarantee schemes. The New Deposit Guarantee Directive introduces requirements for closer collaboration between national guarantee schemes. The Guarantee Fund participated in a number of forums organised by EFDI in 2014, including general and working group meetings. The Guarantee Fund joined the International Association of Deposit Insurers (IADI) in 2014 in order to ensure that the Fund is represented in important arenas where guarantee fund issues are discussed across national boundaries and to be able to draw on international experiences.
Pursuant to the Act of 14 December 2012 no. 84, amendments were made to the Norwegian Guarantee Schemes Act with the intention of further reinforcing the Guarantee Fund’s equity and reducing the settlement dead line for the deposit guarantee scheme. In accordance with the amendments, member banks are obliged to pay a fee to the Guarantee Fund each year, regardless of the size of funds. The Guarantee Fund’s deadline for settlement of guaranteed deposits when a bank is not in a position to discharge its obligations itself has been reduced from three months to one week (five working days).
To enable it to manage potential crisis situations, the Guarantee Fund has built up considerable funds over time, and as of 31 December 2014 the Fund’s equity totalled NOK 28.6 billion, which equated to 2.66 per cent of total guaranteed deposits.
At the reporting date the Fund comprised two departments;The Department of Analysis and Control of Banks, Crisis Contingency Planning and Crisis Management and Mid Office. The former is responsible
for developing and maintaining routines for crisis contingency planning, including developing alternative payment solutions, and implementing periodic contingency exercises. The unit is also responsible for administration of the Fund, including calculation and collection of fees from members, and dissemination of information concerning the scope of the deposit guarantee. Mid Office is responsible for securing compliance with the board’s adopted management strategy and instructions, following up the external index manager and depository bank, and reporting results and established frameworks.
The Guarantee Fund’s performance in 2014
The annual financial statements have been prepared on the going concern assumption. The board confirms that the conditions for the going concern assumption are satisfied. The Guarantee Fund’s holding of securities and financial contracts is valued as a trading portfolio and these holdings are recognised at market value. The Guarantee Fund posted a surplus of NOK 2,133 million in 2014, of which membership fees constituted NOK 1,518 million. The corresponding surplus for 2013 was NOK 2,122 million. The surplus for the year is to be transferred to equity. The result of asset management operations before costs and fees was NOK 653 million, representing a time-weighted return of 2.4 per cent.
Other operating revenues
Other operating revenues totaled NOK 1.2 million in 2014, compared with NOK 1.3 million in 2013. Revenues primarily related to interest on bank deposits, compensation from lawsuits and course activities.
Total operating expenses for 2014 amounted to NOK 39 million, compared with NOK 52 million in 2013. The reduction is primarily attributable to the transition from active to passive asset management using only one index manager. The above switch has significantly reduced both internal and external costs in connection with asset management.
The statement of cash flow in the financial statements shows that the Guarantee Fund maintained satisfactory liquidity over the course of the year. The difference between the surplus for 2014 and the change in liquidity during the year is primarily attributable to the reinvestment of returns on investments.
The Guarantee Fund invests in low-risk assets with the requisite liquidity to be able to maintain the payment deadline of one week pursuant to § 2–11 of the Norwegian Guarantee Schemes Act. Consequently, since March 2013 the Fund has exclusively invested in foreign government bonds. The Fund’s assets are to be index-managed, and are currently externally managed by Legal & General Investment Management (LGIM). The bonds index comprises liquid government bonds with terms of 1 to 3 years with a credit rating of AA or better. Bank of New York Mellon (BNYM) is the Fund’s global security depository bank. BNYM is also responsible for independent valuations of all the Fund’s investments. The Guarantee Fund’s Mid Office monitors management.
The Guarantee Fund’s exposure to market risk,credit risk and liquidity risk
The Guarantee Fund is exposed to market risk (including currency risk and interest rate risk), credit risk and liquidity risk through investments in foreign government bonds. In accordance with the Guarantee Fund’s objects, stringent demands are made of liquidity in securities holdings, where investments may only be made in bonds issued by countries with high credit ratings. The portfolio is 100 per cent currency-hedged.
Crisis management and crisis prevention measures
The Guarantee Fund was not involved in any crisis management activities in 2014.
The Guarantee Fund has gradually sharpened its focus on crisis-preparedness and contingency arrangements, which is naturally also reflected in the Fund’s resource utilisation. Extra expertise has been added to this area through recruitment. The efficiency of processes has been improved by using extra IT support and digitisation of processes. The above changes were necessary in order to enable the business to adapt to changes in the Norwegian Guarantee Schemes Act as of 1 January 2013, and the two new EU Directives that were adopted in 2014 (the BRR and DGS Directives).
The Guarantee Fund’s contingency measures include the preparation and maintenance of contingency procedures. In 2014 a project was implemented to develop and improve the efficiency of payment procedures by using BankID to identify customers. Here the intention was to guarantee payments to customers in the event of a crisis in one or more banks within a time frame of one week. In collaboration with Finanstilsynet, in 2014 an exercise was implemented involving four banks relating to compliance with the «Regulation on Requirements for Establishment of IT Systems for Members of Guarantee Fund» (OF-2008-09-22-1080). The requirements embedded in the Regulation are intended to ensure that the banks submit quality-assured data files to the Guarantee Fund as a basis for payment of guaranteed deposits in crisis situations. In addition, detailed bank analyses and bank visits are performed during the year. The visits focus on the most exposed banks. A total of six banks were visited in 2014.
New framework conditions for the guarantee fund scheme and crisis management in the EU
The Deposit Guarantee Fund Scheme (DGSD) – and the Bank Recovery and Resolution Directive (BRRD) –were adopted by the European Parliament on 15 April and by the European Council on 6 May 2014. Both directives were published in the Official Journal on 12 June 2014. The directives are based on the exercise of supranational authority through EBA (the European Banking Authority).
Following last autumn’s agreement between the Finance Ministers of the EEA EFTA and EU on principles for adapting the schemes of the three European financial authorities of the EEA, negotiations are currently ongoing between EEA EFTA countries and the EU on terms for incorporating these schemes into the EEA agreement. Pending the completion of this work, it is currently unclear when the Deposit Guarantee Scheme and Bank Recovery and Resolution Directives will be incorporated into the EEA agreement.
The Deposit Guarantee Scheme Directive (DGSD)
The deposit guarantee cover amount in the EU is EUR 100,000. Norway has been working to adapt the text of the Directive to make it possible to maintain a coverage level of NOK 2 million per depositor per bank. With this Directive text now in place, Norway will not be able to continue a level of cover that is higher than the EU limit indefinitely. The Directive has an option for a transitional period for guarantee schemes with guarantee amounts of more than EUR 100,000 (until the end of 2018).
In accordance with the Directive text, special deposits of more than EUR 100,000 (for example deposits in connection with private property transactions and particular life events such as marriage, divorce, retirement, redundancy, invalidity etc.) will be protected. There is also an option for member countries to maintain or introduce schemes that protect pension funds in excess of EUR 100,000. The extent to which Norway will implement these exception conditions has not yet been clarified.
The scope of depositors included by the cover in accordance with the new EU Directive dovetails neatly with current Norwegian legislation. All individuals and businesses outside the financial sector are covered, while all financial companies are excluded. Nonetheless, one important difference is that all public authorities, including local authorities, are exempted from the cover.
According to the Directive, the Fund must be built up through annual payments corresponding to at least 0.8 per cent of guaranteed deposits within ten years of the Directive entering into force.
The Directive allows the deposit guarantee fund to be used for early intervention, if this would be expected to result in lower costs for the Fund than by compensating the depositors in cases where a bank is to be placed under public administration (normal bankruptcy). This is very similar to the current Norwegian regulatory framework.
The Bank Recovery and Resolution Directive
The Bank Recovery and Resolution Directive is intended to ensure that banks can be wound up without a threat to financial stability, that secured deposits and public funds (taxpayers) are protected, and that bank functions that are deemed to be critical for society are continued. The bank’s investors and creditors –shareholders, bondholders and major depositors – will be the primary bearers of losses in restructuring and recapitalisation, or if applicable on winding up. Key to the Directive is the principle of bailing-in the bank’s liabilities. This means that the relevant authorities can convert parts of the liabilities to equity subject to more detailed guidelines and/or write-down parts of the bank’s obligations if a bank encounters financial difficulties. Bail-in can be used as a tool in both winding up and recapitalisation of a bank. A depositor-preference principle is to be introduced that will apply regardless of whether the bank is restructured or wound up in accordance with ordinary insolvency arrangements, so that guaranteed deposits (and the deposit guarantee scheme) have first-ranking priority. Other deposits from ordinary customers will be ranked second, with all other unsecured creditors ranking third, ahead of subordinated loans etc.
The introduction of bail-in and depositor-preference is expected to impact the bank’s financing costs, choice of capital structure, strategy for the transfer of mortgage companies, deposit margins and access to major deposit customers etc.
The Directive requires the establishment of national crisis management authorities and a national crisis management fund, which will be used to guarantee the failed bank’s assets and liabilities and extend loans to the failed institution. As a minimum the crisis solution funds must correspond to at least one per cent of guaranteed deposits (within ten years). National authorities can elect to set a higher target level. In order to achieve the target the institutions have to pay annual fees to the Fund. The fee is calculated based on the institution’s liabilities (excluding subordinated capital and secured deposits), adjusted for the institution’s risk profile. There is an option for 30 per cent of the contributions to be in the form of payment obligations.
Guarantee Fund fee in 2015
Following the amendment to § 2–7 first para of the Norwegian Guarantee Schemes Act, member banks shall pay an annual fee to the Guarantee Fund. The fee for 2015 has been calculated as NOK 1,540 million, which is slightly up on the fee for 2014. The fee will be collected during the second half of 2015.
Changes in the membership
At the end of 2014 the Guarantee Fund had 132 members, 125 of whom were headquartered in Norway and seven were branch members. This is one fewer than at the previous year-end. ¨
Sparebanken Pluss and Sparebanken Sør merged on 1 January 2014. OBOS was removed from the membership on 7 July 2014, when all deposit activities were transferred to OBOS-banken AS (existing member).
Komplett Bank ASA was established in 2014 and immediately joined the Guarantee Fund.
Autumn Conference 2014
The annual Autumn Conference was held at Clarion Hotel & Congress Oslo Airport, Gardermoen on 8 and 9 September, and was attended by a record 285 participants. The 2014 Conference was the 51st consecutive such event and mainly focused on the consequences of the new framework conditions for the banks.
The Guarantee Fund’s investment portfolios currently comprise government bonds with high credit ratings and terms of up to three years. The portfolio performance will be contingent on changes in this market segment, which is itself extensively impacted by the central banks’ monetary policy. We expect global growth to increase slightly in 2015, albeit with major differences in growth expectations between the various regions in which the Guarantee Fund is invested. The largest differences are expected between the USA and the eurozone. We expect to see a normalisation of monetary policy in the USA and thus prospects of increased interest rates. Expectations of low growth and low inflation in the eurozone have resulted in further measures from the European Central Bank. The programme to buy back government bonds launched by the Central Bank in January 2015 has triggered a further fall in interest rates, and a rising share of national debts in the eurozone countries is now being traded at negative interest rates. The Fund’s return is impacted by Norwegian interest rate levels due to the fact that the Guarantee Fund’s investments are hedged in NOK. Following recent falls in the oil price the outlook for the Norwegian economy has weakened, and interest rates have fallen. In overall terms we expect a positive, though low, return from the Guarantee Fund’s investments in 2015.
The board of the Guarantee Fund comprises six men and one woman. The board is fully aware of society’s expectations with regard to promoting gender equality in the board and in the management of the Fund. The Fund’s Manager is the Managing Director of Finance Norway, Idar Kreutzer. The offices of the Guarantee Fund are located at Hansteens gate 2 in Oslo. At the end of the year the Fund employed 12 administrative staff, eight of whom were women. The Guarantee Fund runs an occupational health service. Sickness absence in 2014 totalled 20 days, or 0.71 per cent. The Guarantee Fund’s activities have no impact on the external environment, be it in the form of noise or emissions, and the working environment is considered to be satisfactory. No injuries or accidents in the workplace were reported during the course of the year.
The Board of Directors
Oslo, 5 March 2015