Kommuninvest, the Swedish local government debt office, is to receive SEK 2.6 bn in new capital contributions from its owners, Swedish municipalities and county councils. The capital increase is made in response to new EU regulation on leverage ratio, which enters into force in 2018.
– Our members are sending a clear message of support, well before the regulations enter into force. This strong signal will be of advantage to Kommuninvest in relation to authorities, rating agencies and other market participants, says Tomas Werngren, president of Kommuninvest Cooperative Society. By extension, we can continue to provide our member municipalities and regions with favourable loan terms.
The capital increase in Kommuninvest Cooperative Society, Kommuninvest’s owner organization, is voluntary. Out of a total 203 participating members, 160 will participate with the maximum possible amount, including Tomelilla Municipality and the County Council of Västmanland.
– If you want a well-functioning financial cooperation, every member must take responsibility. We decided to take our share of the capital increase on day one, says Leif Sandberg, Chairman of the Municipal Executive Board, Tomelilla Municipality.
– Västmanland County Council is facing major investments, including a new surgery facility costing nearly SEK 1.5 billion. For us it is important that the Kommuninvest cooperation is as strong as possible, says Denise Norström, Chairman of the Executive Board, County Council of Västmanland.
Tomas Werngren emphasizes that the capital measure is merely caused by the new regulations and that Kommuninvest’s business model, with a low risk profile and considerable capital margins, remains unchanged. However, Werngren has views on the design of the new EU regulations.
– The European Union wants banks and credit institutions to have stronger capital buffers. That’s a good thing, this is about preventing future financial crises. However, it risks hurting local government funding agencies like Kommuninvest and our peers. A one-for-all solution means we will be treated similarly to banks and financial institutions whose purpose is to generate profit through higher risk-taking. A public institution that finance welfare investments and is explicitly guaranteed should be less burdened in terms of leverage ratio and resolution levies.
The capital injection enables Kommuninvest, all things being equal and in combination with other planned capital measures, to reach a leverage ratio of just below 2 percent as of 30 September 2015. Capital contributions are to be paid by the end of the year.
In addition to preparing Kommuninvest for the future leverage ratio, the capital increase provides Kommuninvest with even larger buffers ahead of possible regulatory changes regarding Pillar 2 capital requirements for sovereign and municipal exposures.
About the future EU requirement on Leverage Ratio
Effective from 1 January 2018, a new capital requirement – the leverage ratio – will be introduced in the EU on the condition that the Council of the European Union (EU Council) and the European Parliament agree to this. A report is to be issued by the European Commission by 31 December 2016.
Leverage ratio is a non-risk-weighted measure expressing the relation between a credit institute’s primary capital and total exposures in assets and commitments. The levels have yet to be finalised but may, according to an announcement by the EU Council, be differentiated depending on the institutes’ business models
Kommuninvest’s planning is based on being able to achieve a leverage ratio of 1.5 percent, a level that has been discussed within the European cooperation mechanism for low-risk credit institutions. Should a higher leverage ratio than 1.5 percent be established for Kommuninvest, additional capital measures are required.
During 2014 and 2015, the members of Kommuninvest Cooperative Society have adopted new statutes for the association, including a new maximum level of member contribution per inhabitant. The statutes also include a voluntary possibility for members to inject one or several special capital contributions, in order to fulfill the mandatory requirements for contribution capital at a quicker pace. (See press release 16 April, 2015).
During the autumn, members have been asked how they would like to contribute in the capital build-up during 2015. The majority, 79 per cent of participating members, have responded that they want to increase their capital contribution to the highest possible level. 14 percent stated they want to participate up to 50 or 75 percent of the highest level. 4 percent of participating members will increase their capital contribution up to the minimum level and 3 percent injects a fixed amount, unrelated to a level.
The members who stated that they do not want to make any special contribution this year are primarily characterized by already having a share of contribution capital that is well above the minimum level. Some members want, for different reasons, to postpone their decision until next year, or has refrained from replying to the inquiry.
– Our members have demonstrated that they want to build up the capital that Kommuninvest needs through own contributions. This is exactly what is needed for Kommuninvest to be able to continue to provide the Swedish municipal sector with efficient and secure investment funding, says Tomas Werngren.
Facts on contribution capital
The established maximum level of member contributions amounts to SEK 900 per inhabitant for members who are municipalities and SEK 180 per inhabitant for members who are county councils/regions. As of 30 June 2015, the 280 members of the Kommuninvest Cooperative Society had contributed a combined SEK 2.7 billion in contribution capital. Based on the current number of members and the size of the Swedish population, an increase in capital contributions to the maximum level means a capital increase equivalent of SEK 4.1 billion.
Today it is announced that members have committed to inject SEK 2.6 billion in additional capital contribution during the remainder of 2015. This leaves SEK 1.5 billion for future committed capital contributions. This amount will be adjusted according to the future development in the number of members of the Kommuninvest Cooperative Society and Sweden’s population development.
Provided that payments totaling SEK 2.6 billion have been received on 31 December 31 2015, the entire amount can be credited Kommuninvest Cooperative Society in the financial statements for 2015. For the credit market company Kommuninvest i Sverige AB, the capital increase will be delayed, for administrative reasons. It is estimated that approx. SEK 1.2 billion will be booked as new share capital in Kommuninvest i Sverige AB until 31 December 2015. The remaining portion is expected to be credited to Kommuninvest i Sverige AB throughout early 2016.
Key figures – leverage ratio
As of 30 September 2015, Kommuninvest Cooperative Society had a statutory leverage ratio of 0.90 percent; for Kommuninvest i Sverige AB the statutory leverage ratio was 0.87 percent.
Including the capital injection of SEK 2.6 billion and the SEK 1 billion subordinated loan issued in 2010 to members of Kommuninvest Cooperative Society, the leverage ratio as of 30 September 2015 amounted to 1.96 percent for Kommuninvest Cooperative Society and to 1.93 percent for Kommuninvest i Sverige AB.
About sovereign and municipal exposures
Kommuninvest is well capitalized relative to total capital requirements, both in relation to Pillar 1 (statutory requirement) and Pillar 2 (internal capital adequacy assessment).
Based on the work conducted at the international level, the Swedish FSA (Finansinspektionen) is expected to publish instructions regarding how risks related to sovereign and municipal exposures should be treated for the purpose of calculating Pillar 2 capital requirements. Given the very low historical loss levels for such exposures, the requirements should not be significant.
Kommuninvest already allocates capital for sovereign exposures in Pillar 2, excluding exposures to the Swedish sovereign in Swedish kronor. On 30 June 2015 the calculated capital requirement for sovereign exposures amounted to SEK 186.5 million.
The increase of SEK 2.6 billion in contribution capital to Kommuninvest Cooperative Society reinforces the capital situation. There is an adequate margin for managing possible new capital requirements for sovereign and municipal exposures.
Kommuninvest is a municipal cooperation for efficient and sustainable financing of housing, infrastructure, schools, hospitals etc. Together, we get better loan terms than each one individually. Since its inception in 1986, the Kommuninvest collaboration has helped lower the local government sector’s borrowing costs by many billion kronor. Currently, 272 municipalities and 8 counties/regions are members of this voluntary cooperation. With total assets of around SEK 350 billion, Kommuninvest is the largest lender to the local government sector and the sixth largest credit institution in Sweden. The head office is located in Örebro.
For further information
Tomas Werngren, President of Kommuninvest Cooperative Society, tel: +46 (0)10 470 87 10, email: email@example.com
Thomas Åkelius, Secretary to the Board of Kommuninvest Cooperative Society, tel: +46 (0)70 645 50 07, email: firstname.lastname@example.org
Björn Bergstrand, Head of Media Relations, Kommuninvest I Sverige AB, tel: +46 (0)70-886 94 76, email: email@example.com
 Latest reporting date.
 Latest reporting date.
 The loan terms for the subordinated loans are such that they are not eligible for inclusion as Tier 1 capital according to EU capital requirements. Kommuninvest intends to replace the existing subordinated loans with a new one or with other capital forms eligible for inclusion as Tier 1 capital well in advance of year-end 2017.