Finland’s financial system has remained stable despite the lack of improvement in the macroeconomic situation. The most significant risks to financial stability relate to both domestic and international developments. Low market interest rates, growing search for yield and abundant market liquidity give rise to risks that could also affect Finland. Moreover, weak developments in the Finnish economy could expose the financial system to risks. ‘The stable functioning of the financial system is essential to supporting the balanced development of the Finnish economy,’ pointed out Bank of Finland Deputy Governor Pentti Hakkarainen today at the press briefing for the publication of the new issue of the journal Euro & talous.
Household indebtedness has doubled since the turn of the millennium, albeit the pace of growth has slowed in recent years. The high level and concentrated nature of debt among households has made them vulnerable. ‘Half of housing debt is borne by the most indebted 10% of all households. In the current situation of prolonged low interest rates, it is particularly important to manage one’s own finances and interest rate risk,’ said Deputy Governor Hakkarainen.
Current monetary policy in the euro area, with low interest rates, is in harmony with the economic cycle in Finland. ‘Prolonged low interest rates could lead to an excessive growth in mortgage lending and overheating on the housing market. The authorities should be ready to address such developments with macroprudential tools. These must be sufficient, and the ability and powers to deploy them must be created in good time,’ underlined Mr Hakkarainen.
In Finland, banks play a major role in financial intermediation. Hence, a sufficiently competitive banking sector is important for both customers and the economy as a whole. The Finnish banking system is both profitable and well-capitalised, but it is structurally vulnerable. It is concentrated, dependent on funding from abroad and highly interlinked with the banking systems of the other Nordic countries. The consequences of banking crises could therefore be exceptionally severe in Finland.
The potential effects of these structural vulnerabilities can be reduced by further reinforcing banks’ ability to bear risk. ‘Financial intermediation plays a key role, and to fulfil this role banks’ capital adequacy and liquidity must remain strong under all circumstances. To ensure this, the authorities must be equipped with internationally comparable tools, such as a systemic risk buffer requirement,’ said Deputy Governor Hakkarainen.
The operational reliability of payment and settlement systems helps to underpin financial stability. Their international nature does, however, involve new vulnerabilities. The financial sector’s national preparedness and the maintenance of cyber security are a fundamental component of ensuring operational reliability.
- Kotitalouksien velka ja pankkijärjestelmän keskittyneisyys tuovat riskejä Suomelle (in Finnish)
- Editorial: Exceptional state of economy and financial markets poses unforeseen risks
- Euro & talous publication website (in Finnish)
- Slides (PDF)
- Slides (PPT)
Financial Stability Report will be published in English on 4 June 2015 at www.bofbulletin.fi