FX.co ★ Sweden proposes fresh capital injection for its banks

Sweden proposes fresh capital injection for its banks

(RTTNews) - Tuesday, the Swedish government proposed fresh injection of capital to strengthen the capital base of banks and to enhance the availability of credit to households and businesses. This is the latest package announced by the Government since October 2008 to revive the financial sector.

"To get credit to function again is crucial to prevent the downturn from worsening. Therefore, we present further measures to improve credit," Finance Minister Anders Borg said.

The global turmoil had adversely affected the flow of credit to Swedish households and businesses. Big companies now look to Swedish banks for their burgeoning credit needs, pushing up the demand for loans. The main purpose of the capital injection program was to enhance banks' ability to provide their customers with the loans needed and on reasonable terms. The size of the injection was SEK 50 billion and would be financed by the Stability Fund set up last year. Previously, Sweden had put forward a financial rescue plan for SEK1.5 trillion and had created a SEK 15 billion Stability Fund.

The capital injection program was targeted at solvent banks and other Swedish credit institutions. These entities could access the capital either by applying for a capital injection from the government or by issuing shares to private investors or on conditions determined by the government. The increase in capital will be included in the core capital of the companies concerned. The government will take up to seventy percent of any private issue on the same terms as other investors in the market. However this limit may be exceeded based on certain conditions like protection of taxpayers' interests, assurance of a current yield for the government investment and the acquisition of a significant chunk of the companies' capital by the government.

The government also proposed to introduce a mandatory stability fee, which credit institutions, including those availing of the capital injection, would have to pay. Only half the fee would be charged in 2009 and 2010, while the full fees would have to be paid by institutions from 2011 onwards.

Other measures to ensure continued financial stability include extension of deposit insurance, guarantees of bank borrowings and a scheme to deal with insolvent institutions. The government would seek a formal approval from the European Commission for the capitalization program.

In view of the grim economic situation the government wanted the financial sector institutions to exercise moderation in remunerating top management. Senior management would have to forego bonuses, while restrictions on severance pay would end. Further wages and salaries would not be increased for a period of two years. With these measures the government hoped to make increased credit available for the smooth functioning of the economy.

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