Implementation of monetary policy and safeguarding the stability and viability of the financial system are core central bank tasks. These tasks involve financial risks, for which the Bank of Finland prepares by ensuring the strength of its balance sheet. In 2020, the risks associated with monetary policy increased.

Investment activities and monetary policy implementation involve risks

At the end of 2020, the Bank of Finland’s financial assets amounted to around EUR 10 billion. These consisted of gold holdings, foreign reserves, euro-denominated fixed income investments and investments in equities 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.

In January 2020, the Bank of Finland sold off the euro-denominated fixed-income investments portion of its financial assets. In order to mitigate the negative economic impacts of the COVID-19 pandemic, the Bank bought Finnish commercial papers, which again increased the value of its euro-denominated fixed income portfolio from March onwards.

A significant number of the Bank of Finland’s financial assets are debt securities purchased for monetary policy purposes and claims on banks resulting from monetary policy implementation.

The Eurosystem’s monetary policy measures are implemented on a decentralised basis among the different Member States and the ECB, and, to a large extent, the risks and returns are shared among the national central banks.

The risk relating to monetary policy assets corresponds, in principle, to each national central bank’s capital key share in the aggregate monetary policy assets of the national central banks. At the end of 2020, the Bank of Finland’s share was 1.837%. However, the risks associated with government debt instruments purchased under the public sector purchase programme (PSPP) and the pandemic emergency purchase programme (PEPP) are borne individually by each national central bank involved.

The volume of the Eurosystem’s monetary policy assets grew in 2020 by around EUR 2,200 billion, reaching approximately EUR 5,500 billion by the end of the year. The increase was mainly due to the purchases of debt instruments under the PEPP and the loans granted under TLTROs (targeted longer-term refinancing operations). Furthermore, net purchases under the asset purchase programme (APP), recommenced in 2019, continued in 2020, pushing up the volume of Eurosystem monetary policy assets.

The Bank of Finland’s share of monetary policy assets grew by around EUR 37 billion, reaching approximately EUR 90 billion by the end of the year. As a result of the increase in assets, the risks associated with them also increased during the year.

Table 7.
Bank of Finland’s financial assets and share of monetary policy assets 31 Dec 2020
EUR million
31 Dec 2019
EUR million
Financial assets 10,010 11,055
Gold 2,434 2,135
Foreign reserves 6,261 6,694
Euro-denominated fixed-income investments 61 1,017
Equity investments 1,135 1,082
Real estate investments 119 127
Share of monetary policy assets 90,022 52,741
Refinancing operations 32,939 11,395
Targeted longer-term refinancing operations1 32,423 11,169
Other refinancing operations1 515 225
Debt instruments under the asset purchase programme 43,842 40,524
Finnish government bonds and government-related bonds 29,822 28,630
Bonds of supranational institutions1 4,580 4,110
Covered bonds1 4,841 4,416
Corporate bonds1 4,600 3,368
Debt instruments under the pandemic emergency purchase programme2 12,747 -
Terminated programmes 494 822
Securities markets programme1 484 807
Covered bond purchase programme 10 15
Total 100,032 63,796
1) Capital key share (1.837% as of 1 Feb 2020) of aggregate claims by national central banks.
2) In the case of the pandemic emergency purchasing programme the table shows the amount on the Bank of Finland’s balance sheet.

In addition to the claims listed in Table 7, the Bank of Finland's assets included EUR 57 billion in intra-Eurosystem claims, consisting mainly of the Target2 balance. At the end of 2020, the Bank of Finland’s total assets (balance sheet total) was EUR 156 billion.

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 (see Notes on risk management).

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.

A neutral allocation of investments is determined by means of a strategic benchmark index. This, together with a highly detailed limits framework, acts as a guide to taking on interest rate and credit risks. In 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 with high credit ratings.

The Bank of Finland invests part of its own funds in a variety of instruments on the international stock and real estate markets. The investments are made through funds and diversify the other risks on the Bank’s balance sheet.

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

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

Structural interest rate risk

The Eurosystem sets the interest payable on deposits as a matter of policy. The interest rate decision has an immediate effect on the Bank of Finland’s interest expenses. Monetary policy assets, however, mainly carry a fixed interest rate. Thus, an increase in the deposit rate weakens the Bank’s net interest income. This difference in the interest rates applied to assets and liabilities on the balance sheet poses a structural interest rate risk for the Bank of Finland’s balance sheet.

Liquidity created via the purchase programmes and refinancing operations is reflected on the liabilities side of the balance sheet as growth in central bank deposits. The structural interest rate risk position decreases as the fixed-rate monetary policy investments mature.

As net purchases under the purchase programmes continue, the structural interest rate risk position increases. Furthermore, the reinvestment of principal payments from maturing bonds serve to maintain the structural risk position.

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

Total risk: increase in risk associated with monetary policy

There has been an increase in the risk associated with monetary policy over the past year, mainly as a result of the greater amount of monetary policy assets and the greater risks they involve. Much of this is due to monetary stimulus measures and general economic decline. At the same time, the risks associated with the Bank’s financial assets decreased slightly.

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 assets, 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 2020, 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 2.6 billion.

At the end of 2020, the Bank of Finland had revaluation accounts totalling EUR 0.7 billion and provisions totalling EUR 4.7 billion available to cover losses. The primary capital and reserve fund amounted to EUR 2.9 billion (Chart 23).

The risk buffers weakened in 2020, largely as a result of currency fluctuations.

The Bank of Finland’s capital adequacy is sufficient to cover the risks arising from the performance of its tasks (Chart 24).