There are no immediate threats to the stability of the Finnish financial system. Capital adequacy and profitability have remained at good levels within the banking sector. The expansion of Finland's banking system and a significant level of household indebtedness do, however, increase structural risks.
The size of the banking sector is set to expand as Nordea's corporate headquarters relocate to Finland. Following this, Finland's banking sector will be one of the largest in Europe relative to the size of the economy. This change will have a significant impact on the authorities tasked with banking supervision and potential crisis resolution. Considerable regulatory and supervisory reforms have been implemented in Europe since the financial crisis. 'The regulatory reforms already implemented and Finland's participation in Banking Union will mitigate the risks associated with the expansion of the banking sector,' says Marja Nykänen, Member of the Board of the Bank of Finland.
Yet, despite regulatory reforms and enhancements in banking supervision and resolution, it remains distinctly possible that financial crises may still result in large social costs in the future. 'Banking Union needs to be complemented with a common European Deposit Insurance Scheme, once the banking sector's legacy risks from the financial crisis have been reduced,' adds Ms Nykänen. A common deposit insurance scheme would increase confidence in the banking system, especially in the event of financial crises, and would ease the resolution of international banks. The scheme would be particularly important for countries whose banking sectors are concentrated and large in proportion to their national economies.
The level of debt among Finnish households has been increasing for many years, and this debt is concentrated on only some households. Household indebtedness is also significant in the other Nordic countries, and over the long term it has grown more quickly than disposable income. As a result, the Nordic financial and economic system is susceptible in many ways to housing loan and housing market risks.
Macroprudential policy measures have been applied in recent years in the Nordic countries to reduce financial system risks arising from household indebtedness. A number of policies have been implemented to reign in the increase in indebtedness – for instance, imposing more stringent loan terms. 'It is essential that Finnish authorities have adequate macroprudential tools at their disposal to manage the stability of the financial system,' stresses Ms Nykänen. Beginning in 2018, a systemic risk buffer based on the structural vulnerability of the financial system will be added to the macroprudential policy toolbox. However, Finnish macroprudential authorities still lack tools that take into account the borrowers' income. Regulation and digitalisation are set to transform the financial sector and usher in a wave of new market participants. Looking to the future, it is essential that macroprudential tools are available to address both established and new market participants alike to ensure consistency in regulation and competition.
Marja Nykänen, Member of the Board, tel. +358 9 183 2007; Paavo Miettinen, Head of Division, tel. +358 9 183 2330.
- Bank of Finland's stability article (in Finnish)