The debt crisis and uncertainty in the economy are detrimental for financial intermediation. Euro area banks have tightened their lending to non-financial corporations and households. In doing so, banks seek to prepare for potential market disruptions affecting their funding and to strengthen their capital adequacy. In Finland, banks have not yet restricted their lending, and the debt crisis has not stemmed the provision of credit to non-financial corporations. Non-financial corporations in Finland are now better prepared for a deterioration in financing conditions than prior to the escalation of the financial crisis in 2008. This is shown in the Bank of Finland’s Financial Market Report 2/2011.
European banks are meeting the current capital adequacy requirements laid down in law, but the debt crisis and economic uncertainty have increased concerns about the banks’ ability to withstand growing credit losses. At the end of October 2011, the EU countries reached an agreement on bank recapitalisation, the aim of which is to reduce the distrust towards the European banking sector. Investments by Finnish banks and insurance companies in debt instruments of euro area governments and financial institutions are very modest compared with their other cross-border exposures.
Going forward, global systemically important banks will be subject to more stringent capital adequacy requirements than those applied to other banks. In addition, their ability to weather crises will be strengthened by enhancing supervisory cooperation and giving the authorities powers for early intervention concerning the problem banks. The European Commission’s proposal published in July 2011 for harmonising banks’ capital adequacy requirements threatens to limit national authorities’ possibilities to respond to risks jeopardising financial stability.
Changes in the payments infrastructure have caused disturbances in the transmission of Finnish payments. These disruptions have mainly been reflected in later-than-normal entries in customer accounts. Looking ahead, it will be necessary to improve the reliability of payment systems.
The Financial Market Report also deals with the first public recommendation of the European Systemic Risk Board (ESRB), the rapid worldwide growth of the markets for exchange-traded funds, the tightening regulation of money market funds and the financial soundness indicators published by the International Monetary Fund (IMF). In addition, the report reveals how the production of payment services is generally not profitable for banks.
For further information, please contact:
Jyrki Haajanen, Economist, jyrki.haajanen(at), tel. +358 10 831 2059.
Financial Market Report 2/2011 (in Finnish)