Implementation of monetary policy and safeguarding the stability and functioning of the financial system are core central bank tasks. These tasks involve financial risks, of which exchange rate risk was in 2019 still the most significant. The Bank of Finland prepares for risks by ensuring the strength of its balance sheet. The Bank’s capital adequacy is sufficient to cover the risks arising from the performance of its tasks.

Investment activities and monetary policy implementation involve risks

At the end of 2019, the Bank of Finland’s financial assets amounted to around EUR 11 billion. These consisted of gold holdings, foreign reserves, euro-denominated fixed income investments and investments in equity and real estate. The amount of foreign reserves has been set to a level required in order for the Bank of Finland to perform its central banking tasks.

The Bank of Finland reduced its euro-denominated fixed-income investments in 2019. The scaling up of investment in equity and real estate was continued in accordance with the Bank’s long-term investment plan. These changes had only a minor impact on the risks to the Bank’s financial assets.

A significant portion of the Bank of Finland's financial assets comprise debt securities purchased for monetary policy purposes and claims on banks resulting from monetary policy implementation. The Eurosystem’s monetary policy operations are implemented on a decentralised basis, but, as a rule, the risks and returns are shared jointly. The risk relating to claims on monetary policy operations equals, as a rule, each national central bank’s capital key share in the aggregate claims of the national central banks.

In 2019, the Bank of Finland’s share was 1.825%. The risks relating to government debt instruments purchased under the public sector purchase programme (PSPP) are borne individually by each national central bank involved.

The volume of the Eurosystem’s monetary policy operations decreased in 2019 by around EUR 128 billion, reflecting mainly the early repayment of funds borrowed in the TLTROs and the maturing of securities acquired under the securities markets programme (SMP).

Net purchases under the expanded asset purchase programme (APP) ended at the end of 2018. The purchases were recommenced at the end of 2019. The Bank of Finland’s share of claims on monetary policy operations decreased by about EUR 1.5 billion. The risk level of monetary policy operations did not change significantly in 2019.

Table 7.
Bank of Finland's assets and share of claims
on monetary policy operations
EUR billion
EUR billion
Financial assets 11,055 11,553
Gold 2,135 1,767
Foreign reserves 6,694 5,942
Euro-denominated fixed-income investments 1,017 3,011
Equity investments 1,082 727
Real estate investments 127 106
Share of claims on monetary policy operations 52,741 54,201
Refinancing operations 11,395 13,108
Targeted longer-term refinancing operations1 11,169 12,830
Other refinancing operations1 225 277
Debt instruments under the expanded asset purchase programme 40,524 39,789
Finnish government bonds and government-related bonds 28,630 28,308
Bonds of supranational institutions1 4,110 4,007
Covered bonds1 4,416 4,295
Corporate bonds1 3,368 3,178
Terminated programmes 822 1,305
Securities markets programme1 807 1,208
Covered bond purchase programme 15 97
Total 63,796 65,754
1) Capital key share (1.825% 31.12.2019; 1,785% 31.12.2018) in aggregate claims by national central banks.

In addition to the claims listed in Table 7, the Bank of Finland's assets included EUR 63 billion in intra-Eurosystem claims. At the end of 2019, the Bank of Finland’s total assets amounted to EUR 126 billion (pdf).

Diversification as a risk management tool

The Bank of Finland’s financial risks consist of market, credit and liquidity risks. Market risks include adverse movements in exchange rates, interest rates and stock prices.

Exchange rate risk is the source of the most significant volatility in the value of the financial assets. The Bank of Finland diversifies its exchange rate risk by investing in the US dollar, the Pound sterling and the Japanese yen. Through the Bank of Finland’s receivables from the IMF, exchange rate risk is also diversified into the Chinese yuan.

In taking on interest rate and credit risks, the Bank of Finland is guided by a strategic benchmark index and a highly detailed limits framework. This way the Bank ensures that the investments are highly liquid and are adequately diversified across various asset classes, countries, maturities and issuers. The Bank’s investment focus is on debt securities of high credit ratings.

In accordance with its balance sheet management framework, the Bank of Finland invests part of its own funds in a variety of instruments in the international stock and real estate markets. The investments are made in the form of indirect investments, and they diversify the other risks on the Bank’s balance sheet.

In implementing monetary policy purchase programmes, central banks adhere to the common eligibility criteria for collateral and counterparties and other risk management rules pertaining to the whole Eurosystem.

Responsible, reliable and financially sound counterparties

The Bank of Finland manages its financial assets in a responsible manner. Counterparties accepted in direct fixed-income investments are limited using specific responsibility criteria. Assessments of service providers’ responsibility and reliability are also essential in the Bank’s indirect investment activities.

In 2019, the Bank of Finland signed the UN Principles for Responsible Investment (PRI), and in signing the Principles it commits to recognising environmental, social and corporate governance (ESG) issues in its investment practices.

Structural interest rate risk

The Eurosystem’s non-standard monetary policy operations have created a structural interest rate risk on the Bank of Finland’s balance sheet. Liquidity created via the expanded asset purchase programme (APP) and the targeted longer-term refinancing operations (TLTROs) is reflected on the liabilities side of the balance sheet as growth in central bank deposits. Chart 25 shows developments in Eurosystem balance sheet items.

The Eurosystem sets the interest payable on the deposits as a matter of policy. The interest rate decision has an immediate effect on the Bank of Finland’s interest expenses. Claims on monetary policy operations, in turn, mainly carry a fixed interest rate. Therefore, an increase in the deposit rate weakens the Bank’s net interest income.

The structural interest rate risk position decreases as the fixed-rate monetary policy investments mature. However, net purchases and reinvestment of principal payments from maturing bonds maintain the risk position.

Quarterly updates on financial risk figures are available at, under the section risk management and control.

No significant change in estimated total risks

The Bank of Finland measures total risk exposure on the balance sheet using well-established statistical methods. The risk estimate is supplemented with stress tests which assess losses that could be incurred under possible, but improbable scenarios. In estimating credit risk resulting from monetary policy operations, the Bank of Finland uses internal risk reporting produced by the ECB, which is subject to ongoing development by the Eurosystem’s Risk Management Committee.

As the total risk estimate, the Bank of Finland uses a loss that would occur in the following year with a probability of 1% (expected shortfall). At the end of 2019, the total risk estimate was EUR 2.2 billion. This figure does not include gold price risk, as the gold revaluation accounts cover a significant decline in value. Including gold price risk, the total risk estimate is EUR 2.5 billion.

The risk estimate rose slightly from the previous year, due mainly to the increase in foreign reserves and equity investment.

At the end of 2019, the Bank of Finland had revaluation accounts totalling EUR 1.4 billion and provisions totalling EUR 4.2 billion available to cover losses. The primary capital and reserve fund amounted to EUR 2.7 billion (Chart 26).

The risk buffers strengthened in 2019 as a result of increases in provisions and a rise in the value of foreign reserves. The Bank of Finland’s capital adequacy is sufficient to cover the risks arising from the performance of its tasks (Chart 27).

Next article

Management of climate risks