The structure of household debt is changing – new macroprudential instruments are needed

Releases number 9 Thursday 9 May 2019, 11:00 AM

Mortgages represent the largest share of household debt. However, consumer credit volumes and especially housing company loans have grown rapidly. The stock of housing company loans issued by banks has increased at an annual rate of over 10% practically throughout the 2010s. The economy's ability to withstand serious economic shocks is weakened when household debt reaches very high levels.

‘The tools currently available to authorities are inadequate for addressing the risks posed by the changing landscape of lending and debt,’ stated Bank of Finland Deputy Governor Marja Nykänen at the press briefing for the publication of the new issue of the journal Euro & talous. The existing set of macroprudential instruments applies to credit institutions’ capital adequacy requirements and lending for house purchase.

‘Finland's macroprudential toolkit needs to be replenished with new, more comprehensive instruments that limit the amount of total debt available to households based on their income levels, in other words placing a cap on debt-to-income ratios,’ added Deputy Governor Nykänen. When calculating the debt-to-income cap, a household's mortgage loan, housing company loan, and consumer credit should all be accounted for. This instrument would strengthen the households’ capacity to service their debt and hence enhance the economy's ability to recover from crisis.

The debt-to-income cap would be well complemented by maximum term lengths for housing loans and housing company loans, which would help promote sound lending standards. Introducing a cap on housing company loans, which are increasingly used to finance house purchase, would curb the impact these loans have on raising household debt levels.

The total volume of transactions on Finland's commercial property market has grown, as has the participation of international investors on this market. At the same time, urbanisation and digitalisation have lowered the demand for office and retail properties, especially in less central locations. The growing participation of international investors may amplify volatility on the commercial property market, as these investors may rapidly increase or decrease their holdings in peripheral markets as expected returns on investment change.

Nordea's redomiciliation further increased the Finnish banking sector's size, degree of concentration, and interconnectedness with the rest of the Nordic banking system. In a structurally vulnerable banking system, liquidity levels and capital adequacy must remain strong at all times.

‘The euro area’s financial architecture needs to be further reinforced. Pursuing the projects related to the Capital Markets Union more determinedly and finalising the Banking Union with a single deposit insurance scheme would disperse risks and support growth in the euro area,’ added Deputy Governor Nykänen.

For further information, please contact Marja Nykänen, Deputy Governor of the Bank of Finland, tel. +358 9 183 2007, or Paavo Miettinen, Head of Division, tel. +358 9 183 2330.