Author: | Published: 2 Aug 2000
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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.


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.


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.

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