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Research Sweden

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The government presents the new bank stability plan

Mon, Oct 20 2008, 16:00 GMT
by Marcus Söderberg

Danske Bank A/S

• • The plan consists of two main initiatives: a compulsory stability fund aimed at recapitalising troubled banks, and a voluntary guarantee facility where the government guarantees against default risk when banks/mortgage institutes refinance maturing debts. In return, the SNDO will charge a case-by-case fee. In this publication we focus on the guarantee facility as we see it as the most interesting part from a market perspective. 

• • The guarantee facility will be active until April 30, 2009, but could be extended until December 31, 2009. However, the guaranteed instruments are insured until maturity, which can not exceed five years. The volume of insured funding is currently capped at SEK1,500bn. The guarantee facility is only open to solvent banks (primary capital > 6%, capital adequacy ratio > 9%) and will be operated by the SNDO. The guaranteed instruments will receive a risk weight of 0 in capital requirement calculations. Covered bonds are, contrary to what has been the case in other European countries, included in the facility. Structured products are, however, not included. The guarantee facility imposes no restrictions on dividends. 

• • The fees for participating will be set on a case-by-case basis, but the government's intent is to set the fees in a way that issuers have an incentive to participate. Pricing is the key issue and so far we only know that the SNDO will act as guarantor in return for a fee that will be based on the current market spreads and a normal spread (bank debts over government debt) and that the fee will imply a spread somewhere in between. 

• • For instance, let us assume that a mortgage institute wants to refinance a maturing loan and decides to issue a two-year bond. The current two-year covered bonds spread over government bonds is near 150bp. Moreover, we assume that the spread is considered to be 20bp in a normal market situation. The fee for using the guarantee facility will in this case be somewhere between 0 and 130bp in this particular type of debt. Let us suppose that the fee is set at 60bp. Consequently, the market spread between the guaranteed bond and government bonds must not exceed 90bp for the facility to be of any interest in terms of costs. 

• • There are, however, large uncertainties when it comes to pricing of bank papers with an explicit government guarantee. Danish senior unsecured debt with an explicit government guarantee still trades way above the swap curve. It is therefore very difficult to set the fee structure in advance.

• • Moreover, there are other factors than costs to consider before participating: there may be a negative signal effect in participating in the facility, even though the government promotes participation. This may be enough to keep some market participants well away from the facility. But if it proves impossible to find funding in the market in a normal fashion, the facility should at least greatly improve the odds of finding emergency funding.

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Published on  Mon, Oct 20 2008, 16:00 GMT

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Lessons from Swedish bank crisis management1

Tue, Sep 30 2008, 17:00 GMT
by Pär Magnusson

Danske Bank A/S

• This paper is a brief guide on how the Swedish bank crisis in the early 1990s was handled. It is an interesting precedent to the current predicament of the US financial sector, and there are many relevant parallels. 

• The bank crisis management must be said to have been successful. The bank sector was stabilised quickly once the tools were in place, and the assets bought and seized were liquidated much faster than expected. 

• The total direct cost incurred by the state is estimated at some 2% of GDP at 1997 levels. No doubt the opportunity cost of not acting firmly would have been much greater.

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Published on  Tue, Sep 30 2008, 17:00 GMT

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Home Precious Home

Wed, Jul 9 2008, 16:13 GMT
by Pär Magnusson

Danske Bank A/S

• • The one-off effect of the transition from an accommodative, high inflation and high interest rate monetary policy regime prior to the early 1990s to the current inflation-targeting low interest rate regime had a huge .discount factor. effect on the real estate market that has now come to an end.

• • High loan-to-value ratios among first-time buyers and higher interest rates combined with negative real income growth is a poisonous cocktail for the housing market. Swedish home prices could be headed for a fall! 

• • A discontinuation of home price increases, or even a price decline, will reduce home equity withdrawal among Swedish homeowners. This may have a significant effect on consumption and construction investment in the Swedish economy.

• • Lower house prices would, ceteris paribus, be a negative factor for mortgage bonds, as the collateral pool would deteriorate. However, we must also point out that Swedish covered bonds have already suffered significantly during this financial crisis and are fundamentally undervalued.

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Published on  Wed, Jul 9 2008, 16:13 GMT