NEW YORK WHOLESALE

June 20 - The reliance on wholesale funding by large Nordic banks is not a major threat to their credit quality, says Fitch Ratings. Instead, it reflects a structural shortage of deposits driven by households' preferences for pension and investment products in Scandinavia, and to a lesser extent in Finland.

Too great a reliance on wholesale funding has contributed to bank failures across the globe during the current crisis. But we believe it would be incorrect to view Nordic wholesale funding in the same light.

The major Nordic banks fund roughly half their assets with customer deposits and half through the domestic and international interbank and debt capital markets. These banks benefit from the recycling of retail savings which are driven by tax incentives and a culture of financial investment to domestic pension funds and insurance companies. These institutional investors, as well as domestic financial institutions, need to invest in local currency assets to match their liabilities. The relatively low level of government bonds in Scandinavia leaves bank paper as one of a few investment options.

Nordic banks are reliant on international investors to varying degrees. Market sentiment towards Nordic banks remains generally positive, underpinned by the high liquidity buffers needed to maintain investor confidence.

We see deep and efficient covered-bond markets in Sweden and Denmark as further reducing funding risk. Danish mortgage bonds, in particular, have a very long history and no default. In Norway, the covered bond product is relatively recent but has taken off well. Issuance of covered bonds in Finland has remained modest.

High levels of covered-bond issuance have been accompanied by greater attention to encumbrance. We asked over 250 credit market participants at recent seminars in the Nordic region to express their views on the level at which the encumbrance of banks' balance sheet becomes a concern. Opinion on this controversial issue varied widely: 29% believe encumbrance is largely irrelevant; 30% are concerned at 10%-30% encumbrance; 24% are concerned at 30%-50%, and 17% at over 50%. We think that at current levels, senior unsecured debt ratings for the major Nordic banks are not negatively affected by structural subordination.

The outlook for Nordic banks was one of the topics discussed on Fitch Ratings' Viking tour. A multimedia summary of the tour can be found on www.fitchratings.com.