8.4.1 Material scope of the guarantee

The (material) scope of the guarantee concerns the question which securities are covered by the guarantee. As a general principle, the scope of the guarantee should be limited to the form of financing that is experiencing the greatest problems at that moment.

As a general rule, the Commission notes positively that existing debt is not covered but only newly issued debt.1 However, there are some guarantee schemes under which a guarantee for existing debt is possible. The Latvian guarantee scheme is such a scheme. However, the decision points out that the Latvian State will only guarantee existing debt in exceptional cases; for instance, when a government guarantee is needed to avoid the bank’s immediate bankruptcy.2 The scheme contained the commitment that banks whose existing liabilities were guaranteed, have to present a restructuring plan.3

As a general rule, the Commission notes positively that subordinated debt is excluded from the scope of the guarantee scheme.4 However, there are exceptions, as is illustrated by the Irish guarantee scheme. This scheme also included subordinated debt (Lower Tier-2).5 The Commission observed that the extended scope of the Irish scheme made Ireland an exception (compared to the guarantee schemes of the other Member States).6 In the decision on the scheme, the Commission held that although the inclusion of subordinated debt was remarkable, it was nonetheless justified.7 Firstly, the inclusion was necessary to ensure revolving of existing subordinated debt. Secondly, the scheme introduced a safeguard to mitigate the concerns that the inclusion of subordinated debt could raise. This safeguard consisted of the requirement that banks benefiting from the guarantee on subordinated debt had to maintain at least the solvency ratio initially obtained when this financing took place during the whole duration of the guarantee period.

There are three guarantee schemes that included covered bonds: the Finnish, German and Swedish scheme.8 The Commission did not consider this to be problematic, because of the following reasons. In the first place, a premium was charged. The Commission took the view that the level of remuneration would ensure that the guarantee would only exceptionally be called for covered bonds.9 In the second place, the covered bonds were an integral part of the Swedish financial system and the Danish experience had shown that the exclusion of covered bonds form the guarantee would lead to the drying up of the market.