Finnish household debt is now historically high. In addition to housing loans, household indebtedness has also been fuelled by loans taken out by housing companies to finance new-build construction or renovations. Easing of consumer credit standards and the proliferation of digital financial services have provided households with even more avenues to accumulate debt. Deeply indebted households, relative to their respective incomes and wealth, are particularly vulnerable to the effects of rising interest rates, economic difficulties and falling house prices.
Growing indebtedness not only poses a risk to households themselves, but also undermines the economy's ability to adapt to negative shocks. When faced by economic difficulties, Finnish households generally respond by reducing consumption and increasing savings, in anticipation of worse to come.This reduces aggregate demand and erodes the profitability of businesses.
‘High levels of household indebtedness can quickly lead the economy into a vicious circle when cyclical conditions deteriorate: reduced consumption erodes the corporate operating environment and increases bankruptcies, leaving banks in possession of defaulted corporate loans,’ stated Bank of Finland Board Member Marja Nykänen at the press briefing for the publication of the new issue of the journal Euro & talous. ‘These loan losses, in turn, weaken banks’ capital adequacy as well as their lending capacity. Reduced lending impacts on aggregate demand, restricting economic activity and deepening the recession further still,’ Ms Nykänen added.
‘More work needs to be done to mitigate the risks that stem from indebtedness,’ she stressed. Authorities should be provided with additional macroprudential tools to rein in household debt accumulation, such as an instrument that would introduce income-based loan caps on housing loans. The Bank of Finland welcomes the Ministry of Justice's preliminary survey into establishing a positive credit register. ‘All loans, ranging from housing loans to short payday loans, contribute to the overall debt servicing burden of households. A positive credit register would help issuers as well as recipients of credit to identify and manage risks associated with indebtedness,’ emphasised Ms Nykänen.
The overall risk-bearing capacity of Finland's financial system remains good, and the positive economic outlook will only add strength to the country's financial stability. Finland's banks are financially solid with profitability levels that outperform the EU average. In addition, loan losses have remained small. The relocation of Nordea's corporate headquarters will transform Finland's banking sector into one of Europe's largest relative to the size of the national economy. It will bring Nordea under the remit of the Banking Union, i.e. the Single Supervisory and Single Resolution Mechanisms. ‘Nordea's relocation demonstrates confidence in the Banking Union and will augment the pool of financial expertise in Finland; however, this comes at the expense of increased structural vulnerabilities as the banking sector becomes larger, more consolidated and with increased Nordic interconnectedness,’ assessed Ms Nykänen.