The Norwegian Banks’ Guarantee Fund object and activities
The Norwegian Banks' Guarantee Fund was established following a merger of the Commercial Banks' Guarantee Fund and the Savings Banks' Guarantee Fund through a statutory amendment that entered into force on 1 July 2004. The Guarantee Fund's activities are now regulated by the Act on Financial Undertakings and Financial Groups which entered into force on1 January 2016, replacing the previous Act relating to Guarantee Schemes of 6 December, 1996 no. 75 (the Norwegian Guarantee Schemes Act).
Membership of the Guarantee Fund is mandatory for all banks headquartered in Norway. The Ministry may also decree that other financial institutions headquartered in Norway must join the Guarantee Fund. The Guarantee Fund had 125 ordinary members as of 31 December 2015.
Credit institutions headquartered in other EEA states who receive 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 afforded under Norwegian law. Membership requires the approval of the FSA. The Guarantee Fund had six branch members as of 31 December 2015.
The Guarantee Fund's objective is to secure the deposits in member banks up to NOK 2 million per depositor per bank.
The Fund is a separate legal entity. None of the members own any part of the Fund. The Fund cannot open bankruptcy or composition proceedings.
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 financial market regulations and contributes to depositor confidence and stable funding for banks. For branch members with a home-country guarantee of EUR 100,000 per depositor, the Guarantee Fund currently covers the excess over this amount up to NOK 2 million. As of 30 September 2015, total guaranteed deposits amounted to NOK 1,141 billion.
The Guarantee Fund has built up considerable funds over time to enable it to manage potential crisis situations. At the reporting date the Fund had total equity of NOK 30.5 billion, equating 2.66 per cent of total guaranteed deposits as of 30 September 2015. The Guarantee Fund's aggregate equity and subordinated loan capital is defined in Section 19-5 of the Act on Financial Undertakings and Financial Groups, at all times, as a minimum be equal to the sum of 1.5 per cent of aggregate guaranteed deposits held by members plus 0.5 per cent of the sum of the basis for calculation for the capital adequacy requirements for member institutions. Only guaranteed deposits are included in the calculation for branch members. The Norwegian Banks' Guarantee Fund satisfies the statutory requirements' governing size, with a surplus of NOK 3.6 billion as of 31 December 2015.
The Guarantee Fund has two units: The Unit for Analysis and Control of Banks, Emergency Planning and Crisis Resolution and the Unit for Control and Monitoring of Management (Middle Office).
The former is responsible for developing and maintaining routines for crisis management, 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. Middle Office is responsible for securing compliance with the board's adopted management strategy and instructions, monitoring the external index managers and custodian bank, and reporting results and adherence to established frameworks.
The Guarantee Fund's performance in 2015
The annual financial statements have been prepared in accordance with the going concern principle. The board confirms that the company fulfils all the prerequisites necessary to continue as a going concern.
The Guarantee Fund's holdings of securities and financial contracts are valued as a trading portfolio and are recognised in the financial statements based on market value.
The Guarantee Fund posted a NOK 1,954 million surplus in 2015, of which membership fees constituted NOK 1,553 million. The corresponding surplus for 2014 was NOK 2,133 million. The surplus for the year has been transferred to equity.
The result of asset management operations before costs and fees was NOK 436 million, representing a time-weighted return of 1.5 per cent.
Other operating revenues
Other operating revenues totalled NOK 1.8 million in 2015, compared with NOK 1.2 million in 2014. Revenue primarily relates to interest on bank deposits and income from seminar and conference activities.
Total operating expenses for 2015 amounted to NOK 37 million, compared with NOK 39 million in 2014. Both internal and external costs have fallen as a result of the change to passive management and the completion of other re-organisational measures. 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 annual result for 2015 and the change in liquidity during the year is primarily attributable to the reinvestment of investment returns.
The Guarantee Fund invests in low-risk assets with the required liquidity to be able to meet payment deadlines of one week as stipulated in§ 19-10 of the Act on Financial Undertakings and Financial Groups. Consequently, since March 2013 the Fund has only invested in foreign government bonds.
The fund management should track the benchmark closely, and the Fund's assets are currently managed externally by Legal & General Investment Management (LGIM). The bond index comprises liquid government bonds with 1 to 3 years maturity and AA or better credit rating.
Bank of New York Mellon (BNYM) is the Fund's global custodian bank. BNYM is also responsible for independent valuation of all the Fund's investments. The Guarantee Fund's Middle Office monitors the asset 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 objectives, 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 hedged to currency.
Crisis management and crisis prevention measures
The Guarantee Fund was not involved in any crisis management activities in 2015.
In recent years, the Guarantee Fund has paid extra attention to contingency planning and crisis management. This is reflected in the Guarantee Fund's resource allocation and higher awareness of the Guarantee Fund's operational risk. Analytical and contingency skills are given a high priority in recruitment. Efficiency improvements and digitalization of processes will be required to adapt the business to the changes introduced by the EU Deposit Guarantee Scheme and Bank Recovery and Resolution directives and the Guarantee Fund's future statutory frameworks.
The Guarantee Fund develops and updates contingency routines on an ongoing basis each year. In 2014 and 2015, the Guarantee Fund carried out a project related to development, efficiency improvement and digitalisation of the payment procedures using BankiD to identify depositors. This to ensure that the payment of depositors happens within the time restriction of one week. The FSA together with the Guarantee Fund has carried out an inspection of four banks concerning compliance with the "Regulation on requirements for data systems for members of the Guarantee Fund." The requirements laid down in the regulation are intended to ensure that the banks will be able to transmit quality-assured data files to the Guarantee Fund as a basis for payment of guaranteed deposits in crisis situations. In May 2015, the Guarantee Fund issued guidance, including supplementary comments on the regulation's requirements. In the opinion of the Guarantee Fund, the guidance and FSAs comments on the regulation and guidance in the latest risk and vulnerability analysis, have contributed to improved results of the inspection compared with 2014.
An internal contingency exercise was carried out in the spring of 2015 together with Finance Norway in order to gain experience of cooperating with the latter organisation's support resources, with a particular emphasis on media and customer management in a banking crisis. The exercise provided useful input for future development of crisis contingency planning.
The Guarantee Fund continually carries out detailed bank analyses based on quarterly reporting from the member banks. Key and normative figures are distributed to the member banks and analysts each quarter. Inspections are also carried out at exposed banks. The selection is risk-based and focuses on the most vulnerable smaller banks. A total of five banks were visited in 2015.
In 2015, the IMF assessed Norway's financial systems and proposed measures to strengthen national and international financial systems, including measures affecting the Guarantee Fund. As part of the assessment a meeting was arranged between IMF representatives and the Guarantee Fund. The IMF's report was published on 9 September 2015.
New framework conditions for the guarantee fund scheme and crisis management in the EU
The EU's Deposit Guarantee Scheme Directive (DGSD) and Bank Recovery and Resolution Directive (BRRD) entered into force on 1 January 2015. Both directives are based on the EBA (the European Banking Authority) being granted supranational authority which will present constitutional challenges for some countries, including Norway.
It is proposed that EFTA's monitoring body (ESA) will be authorised to adopt legally binding resolutions for national supervisory authorities and some institutions in Norway, Liechtenstein and Iceland. Once an agreement is in place, the government will draw up a separate Proposal to the Storting (Norwegian Parliament) on the matter. Adoption of the proposal by a three-quarters majority would allow the EBA regulation to be incorporated into the EEA Agreement. It would also facilitate incorporation of both the Deposit Guarantee Scheme and the Bank Recovery and Resolution directives in the EEA Agreement in the usual manner. The timing of the above is yet to be clarified.
The Deposit Guarantee Scheme Directive (DGSD)
The deposit guarantee in the EU is EUR 100,000. Norway has previously sought to amend to the Directive's text to permit retention of a guarantee level of NOK 2 million per depositor per bank. The Directive allows a transitional period until the end of 2018 for guarantee funds with guarantee level of more than EUR 100 000 (in practice only relevant for Norway).
In accordance with the text of the Directive, member states must make exceptions for the threshold of EUR 100,000 for a period of up to 12 months for temporary high deposits relating to individual particular life situations (marriage, divorce, invalidity, serious illness and similar) and deposits relating to property transactions. It has not yet been clarified how Norway will incorporate these exception regulations into Norwegian law.
The EU has introduced requirements for pre-financed national deposit guarantee funds of at least 0.8 per cent of guaranteed deposits. There will be a transitional period of ten years before this requirement has to be fulfilled. The Norwegian deposit guarantee fund already comfortably exceeds this requirement.
If a bank (branch) headquartered in another country experiences payment problems, the guarantee scheme in the host country will be responsible for paying out deposits to the branch depositors, meaning that the depositor in a country only needs to utilise the host country's scheme. Deposits paid out on behalf of another country's scheme are pre-funded through the home country's scheme.
The Banking Law Commission has been given a mandate to draw up proposed statutory regulations to implement expected EEA rules corresponding to the Deposit Guarantee Scheme Directive in Norwegian law.
The Bank Recovery and Resolution Directive (BRRD)
The purpose of the Directive is to provide banks and other credit institutions, and the authorities, with a tool for preventing and managing incipient crises. The purpose of the Bank Recovery and Resolution Directive is to limit tax payers' cost as a result of a crisis in an institution and avoid a crisis in institutions of systemic importance.
The Directive stresses the importance of shareholders and creditors carrying their share of costs when an institution is in systemic crisis. Deposits covered by deposit guarantee schemes should normally be insulated from losses.
The Directive introduces requirements for the establishment of national resolution authorities and a resolution fund, which can be used to guarantee a failed bank's assets and liabilities and to extend loans to failed institutions. The resolution funds shall as a minimum correspond to one per cent of secured deposits (within 10 years). National authorities can adopt a higher target level. In order to achieve the target, the institutions have to pay an annual fee to the Fund.
The Banking Law Commission has been given a mandate to draft a new legislation implementing expected EEA rules corresponding to the Bank Recovery and Resolution Directive in Norwegian law, including proposals concerning the appointment of a resolution authority.
Guarantee Fund fee in 2016
The fee for 2016 is NOK 1,583 million, compared to NOK 1,553 million in 2015. The fee will be collected during the first quarter of 2016.
Changes in the membership
At the end of 2015, the Guarantee Fund had 131 members, of whom 125 were headquartered in Norway and six were branch members. These figures were unchanged from the end of 2014. Askim Sparebank and Spydeberg Sparebank merged on 7 April 2015. DNB Bank ASA changed status from a savings bank to a commercial bank when the Savings Bank Foundation's shareholding was reduced below 10 per cent due to divestments. Skandiabanken changed status from branch member to ordinary member on 5 October 2015. Monobank ASA was established in 2015 and at the same time joined the Guarantee Fund as an ordinary member.
Autumn Conference 2015
The annual Autumn Conference was held at the Clarion Hotel & Congress Oslo Airport, Gardermoen on 21-22 September, attracting a total of 280 participants. The 2015 Conference was the 52nd in a row, and the headline topic was the consequences of the new framework conditions for the banks.
The Guarantee Fund's investment portfolio currently comprise government bonds with high credit ratings and terms of up to three years. An increase in the value of the portfolio will be contingent on developments in this market segment, which is significantly influenced by the central banks' monetary policy. The regions in which the Guarantee Fund is invested are expected to generate modest economic growth. The European Central Bank (ECB) is prepared to implement further measures in the Eurozone to boost growth, which could also push up inflation. Bonds issued by countries in the Eurozone whose terms are included in the Guarantee Fund's Index are subject to negative interest rates. In December last year the US Central Bank raised the key interest rate for the first time in nine years, thereby ending a seven-year period of close-to zero interest rates. The economic outlook is more mixed than in autumn last year. The fact that the Guarantee Fund's investments are hedged in NOK means that Norwegian interest rates are important for the Fund's return. The slump in the oil price has weakened the outlook for the Norwegian economy, and interest rates have fallen. In general terms we expect this to result in a positive, albeit low return on the Guarantee Fund's investments in 2016.
The board of the Guarantee Fund comprises six men and one woman. The Fund's Manager is the CEO 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 11 staff, six of whom were women. The Guarantee Fund has an occupational health service. Sickness absence in 2015 amounted to 3.69 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 deemed to be satisfactory. No injuries or accidents in the work-place were reported during the year.