The Finnish financial system has remained stable despite the weakness of the economy. Risks related to lending, debt accumulation and asset price developments are not directly threatening. ‘The stability of the financial system is not facing imminent threats. Even so, stability needs to be fostered. Interconnectedness and concentration make the financial sector vulnerable. The weak cyclical situation also needs to be monitored,’ 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.
The already high level of household debt relative to disposable income has continued to rise. The pace of indebtedness has, however, slowed, and relative housing prices have declined close to their long-term averages.
Financial system participants have strengthened their capital positions, thereby improving their ability to lend and absorb losses. However, the low level of interest rates and the weak economic situation, should it prove prolonged, will put a strain on the profitability of banks and insurance companies.
In Finland, a few large market participants hold significant market shares in banking and in non-life and earnings-related pension insurance sectors. The financial markets in Finland are, in fact, more concentrated than elsewhere in the euro area. ‘It is necessary to ensure that there is a sufficient degree of competition in banking, insurance and pension insurance. The competitive situation will be changing with the entry into the banking sector, in particular, of new market participants making use of the opportunities offered by digitalisation,’ said Deputy Governor Hakkarainen.
The size of the banking sector relative to the economy is considerable. Dependence on market-based funding exposes banks to disruptions on international financial markets. Banks in Finland are also closely interlinked with other Nordic countries, where financial and housing market problems would rapidly spill over to Finland. ‘Close monitoring, including of the other Nordic countries, is required to preserve the stability of the financial markets,’ stated Deputy Governor Hakkarainen.
Macroprudential policy, on which the Board of the Financial Supervisory Authority decides, serves to strengthen the stability of the Finnish financial system. The tools applicable in this new sphere of economic policy include countercyclical capital buffer requirements and the loan-to-value cap. However, in international comparison, there are still shortcomings in the macroprudential instruments available in Finland. ‘The financial markets are seamlessly integrated. It is important for the Finnish macroprudential toolkit to be comparable with those of other Nordic countries and the Baltic States,’ emphasised Deputy Governor Hakkarainen. Macroprudential measures must be timed with due consideration to the weak cyclical environment.
Financial Stability Report will be published in English on 31 May 2016 at www.bofbulletin.fi.