The Finnish economy continued along its growth path in 1999,
improving the operating environment of the Finnish banking
industry. Organizational changes within the banking industry also
continued in 1999, and there have been important legislative
changes which have an impact on the industry. The purpose of this
article is to provide an overview of these changes in the market
and legislative environment.
MARKET OVERVIEW
The beginning of 1999 was characterized by the transition to
stage three of European Economic and Monetary Union, which took
effect as of January 1 1999. Reportedly, the transition to a single
monetary policy caused no significant problems, technically or
otherwise, for the Finnish banking industry.
A dominant feature in the Finnish capital markets throughout
1999 was the booming IPO activity. According to official
statistics, the number of IPOs reached 28, of which 16 were
technology-driven companies. According to market expectations in
the beginning of 2000, the number of IPOs would remain at the same
level. However, subsequent to recent instability in share prices
these estimates have generally been lowered.
The growth rate of the Finnish economy in 1999 slowed compared
to the previous year, remaining however above the EU average.
According to recent statistics and estimates for the year 2000,
growth is again expected to accelerate.
The volume of credits granted by Finnish banks to Finland has
continued to grow rapidly. The yearly increase has remained at over
10% which exceeds the EU average, eg the total amount of housing
loans increased by Fmk 50.2 billion ($8.1 billion) corresponding to
a relative increase of 15.8%. The main reasons for the increase in
credits is the favourable economic outlook and low market interest
rates. The interest rates for housing loans and long-term corporate
loans have increased to some extent. This has not, however,
affected the demand for such credits.
The results of the Finnish banks are mainly in line with the
above general trends. The balance sheet total of all the Finnish
banks increased to approximately euro 117 billion ($113 billion).
The interest margin decreased slightly compared to the previous
year, totalling approximately euro 2.3 billion. However, the
operating profit of almost all the bank groups increased.
The consolidation within the banking industry continued during
1999. The Finnish-Swedish bank alliance MeritaNorbanken (which was
formed in 1997 through a merger between the Finnish Merita Bank and
the Swedish Nordbanken) announced that Unidanmark of Denmark will
join the Nordic bank group. In addition, Merita has issued a bid
for the Norwegian Christiania Bank. The original offer period has
been extended several times.
The legal structure of MeritaNordbanken was streamlined by
transferring the Finnish listed holding company Merita under a
Swedish listed parent company Nordic Baltic Holding. This transfer
was effected through a share exchange offer directed to the
shareholders of the Finnish listed company. As a result of the
share exchange, the holdings in the Finnish company were
transformed into shares in the Swedish listed holding company
Nordic Baltic Holding, which now is the ultimate parent company of
the group. The shares of Nordic Baltic Holding are quoted on the
Helsinki Exchanges in the form of Finnish Depositary Receipts.
The emerging co-operation between the banking and insurance
industries reached a significant milestone when the largest Finnish
insurance company Sampo and the state-owned bank Leonia announced
in October 1999 their intention to merge. Sampo shareholders will
hold 57% of the consolidated group and the Finnish state 43%. The
merger is still to be approved by the Insurance Supervision
Authority.
In October 1999 Sampo acquired an approximately one-third voting
stake in Pohjola, the second largest Finnish insurer, from the
Swedish insurance company Skandia. The restructuring within the
insurance business is not completed and the future development in
Sampo-Leonia's Pohjola holding remains an open question.
The merger between Sampo and Leonia led to the termination of
the agreement between Leonia and Finnish Post regarding private
banking services in the offices of Finnish Post.
LEGISLATIVE CHANGES
New Act on Mortgage Banks
Under the new Act on Mortgage Banks, effective as of January 1
2000, mortgage banks may be set up for the purpose of giving loans
to the public secured by shares in a housing company or a real
estate company, by rights of residence or by real estate mortgages.
In addition, mortgage banks may grant credits to certain public
entities or against guarantees given by the same and be engaged in
related business within the limits set forth in the Credit
Institutions Act.
The financing of a mortgage bank may be made by way of bonds
issued to investors. The bonds would be secured by the loans
granted and securities pertaining to these loans. The security
interest would be registered in a separate register (by entering
the details on relevant loans and securities) into a separate
security register held by the mortgage bank and supervised by the
Finnish Financial Supervision Authority. Under the new act, only
mortgage banks are entitled to issue bonds which are secured by
loans as described above.
The new Act on Mortgage Banks moves towards diversifying the
Finnish securities market for institutional investors by
introducing a new investment object.
The right to receive customer deposits to be extended
A working group proposed in its interim report in April 2000 to
the Ministry of Finance that the right for a company to receive
deposits from its customers be extended. At present, only deposit
banks and certain type of financing institutions have such right.
According to preliminary guidelines presented in the report, the
monies in the customer accounts could be used for cash withdrawals
or payment for the goods or services provided by the company that
administers the account or companies belonging to the same group of
companies. According to the proposal there should, however, be a
certain upper limit for the amount of deposits in each customer
account.
Although by virtue of the amendment other companies than deposit
banks would be entitled to carry out a function that has
traditionally been regarded as a monopoly for deposit banks, the
working group acknowledges that in order to safeguard the stability
of the financial system, the receiving of deposits for the purpose
of financing intermediation should remain the sole right of deposit
banks. Further, according to the report, the right to receive
deposits that are governed by the deposit protection legislation
should be available to deposit banks only.
New legislation on guarantees and collaterals
The Act on Guarantees and Third Party Collateral was enacted in
March 1999, with effect from October 1 1999. The new act will
replace the present general provisions on guarantees set forth in
the Commercial Code and the Decree on Guarantees. For a large part
the new act expressly stipulates the principles that have
previously been established in the legal doctrine and rulings of
the Finnish courts. As importantly, the new act, among other
things, aims at protecting the individual person acting as a
guarantor or pledgor and thereby to some extent diminishes the
value of guarantees and pledges to creditors. As a result, the new
act was subject to some criticism from the banking industry in its
preparation phase.
The new act is twofold as in respect to individual persons
acting as guarantors or pledgors the provisions are for the most
part mandatory by their nature (and therefore cannot be deviated
from to the detriment of such party) but otherwise non-mandatory.
The new act recognizes the secondary nature of guarantees, ie that
the creditor is under the general rule entitled to collect from the
guarantor only after the exhaustion of collection measures against
the debtor, unless otherwise agreed. With respect to housing loans
a private individual guarantor is, however, always liable to the
creditor only for the amount which is not recovered by means of
realization of the housing object which has been pledged as a
security for and financed by the loan.
The new act also introduces a specific provision allowing for
mitigation of the liability under the guarantee given by a private
individual. A guarantee liability may be mitigated, eg where the
principal debt in respect to the guarantor's financial position may
be deemed unreasonable and the creditor knew, or ought to have
known, about this circumstance when the guarantee obligation was
given. The mitigation provision is not applicable to third party
collaterals.
Finnish book-entry securities system to be
centralized
A government proposal concerning the organization of the Finnish
book-entry system was recently submitted to parliament with the
proposed effective date of October 16 2000. Under the proposal the
decentralized registration system consisting of five book-entry
registers operated by different commercial registrars would be
combined into one single book-entry register to be operated by the
Finnish Central Securities Depositary (FCSD). Entries into the
consolidated register would be made by the present registrars and
other authorized market participants. In addition, the present
system where the securities can be held free of charge in the
register maintained by the FCSD, would be limited to
individuals.
The revision of the book-entry system mainly aims at improving
the effectiveness and reliability of the securities trade clearing
system as well as accomplishing economies of scale in data
processing and thereby seeks to respond to challenges posed by the
increasing internalization of the securities trade. In practice
under the present system, the clearing function is not fully able
to keep up with further increases in the volume of the securities
trade.
Disclosure of nominee registration
An amendment to the Act on Book-Entry System which took effect
on January 1 1999 increased the Finnish Financial Supervision
Authority's (FFS) powers to obtain details of the holders of
nominee registered book-entries (ie book-entries that are
registered in the name of a custodian instead of the actual
owner).
Originally, the custodian of the nominee-registered book-entries
was obliged to disclose to the FFS upon request to this effect, the
name of the actual owner and number of book-entries held by the
actual owner, provided that such information is available to the
custodian. By virtue of the amendment, this obligation was extended
so that where the custodian does not have said information on the
actual holder, the custodian is obliged to give corresponding
information regarding the person acting as nominee for the actual
holder, as well as to provide the FFS with a warranty issued by
this nominee stating that the actual holder of the book-entries is
not a Finnish entity or person (Finnish entities and persons are
not entitled to hold nominee-registered book-entries in
Finland).
The amendment was motivated by the Finnish authorities'
frequently expressed concerns that nominee registration may enable
or be used as a vehicle for insider trading, tax evasion or money
laundering. The amendment enables further information to be
obtained from the custodians of nominee-registered book-entries.
Regardless of the extended powers of the Finnish authorities to
obtain information on nominee-registered book-entries, it is
acknowledged that nominee registration is an internationally used
vehicle and its use may be expected to increase in the future.
Roschier-Holmberg & Waselius
Keskuskatu 7 A
00100 Helsinki
Tel: +358 9 228 551
Fax: +358 9 664 303
Email:
firstname.surname@rhw.fi
Website: www.rhw.fi