3.2 Development of regulation supported financial stability

In 2021, the Bank of Finland participated actively in in the development of financial market regulation. It promoted domestic financial stability particularly by measures targeted at curbing excessive debt accumulation.

Financial stability policy refers to measures targeted at promoting the stability and functioning of the financial system.

Financial stability policy includes the preparation and development of macroprudential policy, i.e. measures monitoring extensively the entire financial system, and exercising influence on financial market regulation.

Macroprudential policy curbed excessive indebtedness

Macroprudential policy contributed to supporting the operation of the banking sector. On the back of the regulatory changes already implemented, the banks were equipped with strong capital buffers and a solid liquidity position on the outbreak of the COVID-19 pandemic. The larger capital buffers and the possibility to use them improved banks’ resilience to the weaker economic outlook and enabled them to continue lending to businesses and households.

The Bank of Finland participates actively in macroprudential policy preparation by delivering opinions on macroprudential decisions, analysing the operational environment, assessing policy impacts and the impacts of decisions, and by participating in the development of macroprudential policy.

In Finland, decisions on macroprudential measures are taken by the Board of the Financial Supervisory Authority (FIN-FSA), chaired by Bank of Finland Deputy Governor Marja Nykänen.

In 2021, the FIN-FSA Board decided quarterly on the level of the countercyclical capital buffer (CCyB) and kept the rate at 0%.

In its opinion, the Bank of Finland supported the decisions as, despite the rapid increase in housing finance, there were no signs of an overheating in the credit market. The other additional capital requirements for credit institutions were also left unchanged.

The housing market recovered rapidly from the shock caused by the COVID-19 pandemic. New-mortgage borrowers’ total debt relative to income continued to increase in 2021, which further highlighted the importance of curbing household debt accumulation.

As a result, the FIN-FSA Board restored the maximum loan-to-collateral ratio (LTC), i.e. the loan cap, to the pre-pandemic level. The loan cap for residential mortgage loans other than first-home loans was lowered by five percentage points, to 85%. As a result, the maximum amount of residential mortgage loans granted to other than first-home buyers is 85% of collateral and 95% in the case of first-home buyers.

The Bank of Finland considered the decision to lower the maximum loan-to-collateral ratio to be justified.

The purpose of the decision that entered into force on 1 October 2021 was to respond to concerns that the high level of household indebtedness is structural.

The FIN-FSA Board urged lenders to exercise restraint in granting loans that are very large in relation to the applicant’s income and have a longer maximum repayment period than usual.

The group of credit institutions significant for the Finnish financial system (other systemically important institutions, O-SIIs) and their additional capital requirements (O-SII buffers) remained unchanged, in accordance with the FIN-FSA Board decision taken in June. The Bank of Finland considered the decision justified.

Nordic decisions entered into force

The Board of the FIN-FSA decided in 2021 to adopt the decisions on risk weights taken by the competent authorities of Sweden and Norway. The decisions apply to credit institutions registered in Finland.

Swedish Finansinspektionen decided to extend the measure that entails a 25% minimum level for the average risk weight on residential mortgage loans of credit institutions that have adopted the Internal Ratings Based Approach. In the Internal Ratings Based Approach, banks use their own credit loss parameters in the calculations of risk weights and the regulatory capital requirement.

Norway’s macroprudential authority set average risk weight floors for Norwegian residential real estate exposures (20%) and commercial real estate exposures (35%).

Work continues on the development of macroprudential regulation

The Bank of Finland has stressed for a long time now the adverse effects of excessive indebtedness on households and financial stability.

In 2021, Bank of Finland experts continued work to support the development of tools aimed at curbing excessive household indebtedness.

The Bank's experts have prepared legislative proposals on instruments curbing excessive household indebtedness, based on recommendations by the Ministry of Finance working group.

The European Commission has launched a public consultation on improving the macroprudential framework. In the EU’s reform of macroprudential regulation, the Bank of Finland supports the use of more effective macroprudential instruments. It considers that the instruments should better tackle the risks and vulnerabilities of the financial system, including the non-banking sector, and enable an equitable competitive environment for the financial sector throughout the EU.

The Bank has participated in the preparations for a positive credit register. The register will increase transparency of risks related to indebtedness and, once finalised, will enhance the use of borrower-based macroprudential instruments. 

The Bank of Finland participates in the work to extend the macroprudential toolkit outside the banking sector, particularly to funds and the insurance sector. The Bank of Finland participated in the reform of regulation on investment funds in the European Systemic Risk Board (ESRB).

The Bank of Finland participates in the development of legislation

The Bank of Finland participated actively in various initiatives on financial market legislation by supporting, for example, domestic legislative preparations and legislative reform in international working groups and by issuing opinions.

Firstly, the European Commission issued a proposal for implementing into EU legislation the outstanding elements of the Basel Committee for Banking Supervision's (BCBS) Basel III reform. The Basel III standards address the capital requirements for banks.

In its opinion, the Bank of Finland stressed the benefits of the implementation of the Basel III standards and the importance of the globally uniform application of the reform for safeguarding financial stability. The proposed elements would increase the reliability and comparability of banks’ capital ratios and would provide a more level playing field between banks.

The Commission's proposal also involves regulations on supervision and sustainable finance.

Secondly, the European Commission published in July a Strategy for Financing the Transition to a Sustainable Economy. The objective of the strategy is to promote the financing of the transition to a sustainable economy.

The purpose is to mitigate climate change also by increasing the sustainability of the financial system. The Bank of Finland assessed the prerequisites for a transition to a sustainable economy also from the perspective of financial stability.

Thirdly, the Commission issued a legislative proposal for a review of the solvency regulation of life and non-life insurance companies (Solvency II) and a legislative proposal for a new Insurance Recovery and Resolution Directive.

The European Commission started work on the legislative reform of bank recovery and resolution and depositor protection by launching a public consultation, on which also the Bank of Finland issued an opinion.

Bank of Finland experts also issued opinions to, for example, Parliamentary Committees on other issues related to financial regulation. These include for example, the common backstop for the Single Resolution Fund, the Commission's new action plan for the Capital Markets Union and supplementing the regulation on European crowdfunding service providers for business.

The Bank of Finland has also participated in the preparations for legislative initiatives on the prevention of money laundering and the regulation of insurance companies.

The Bank of Finland has also participated actively in the development of crisis management capabilities of the financial market authorities. Domestic authorities have cooperated closely to clarify the allocation of crisis management responsibilities and tasks. The Bank of Finland has cooperated also with the Eurosystem and the Nordic authorities.

A new Memorandum of Understanding (in Finnish) (MoU) between the Bank of Finland and the Financial Stability Authority was published in October.

An updated version of the Memorandum of Understanding (in Finnish) between the Bank of Finland, the Financial Supervisory Authority, the Financial Stability Authority, the Ministry of Social Affairs and Health and the Ministry of Finance on crisis management of the financial system was published in December.

Strengthening the banking system and development of the Capital Markets Union increasingly important

The COVID-19 crisis has highlighted the need to further develop and strengthen the European banking system. Key to this work is the completion of the European Banking Union, the discussions on which are still in progress.

An important missing part of the deepening of the Banking Union is the common European Deposit Insurance Scheme (EDIS). The purpose of deposit protection is to provide protection to depositors’ funds if a bank becomes permanently insolvent. Currently, EU countries have in place national deposit guarantee arrangements.

Development of the capital markets would contribute to the diversification of the European financial system, which is very bank-centred. It would improve, in particular, companies’ access to finance and diversify risks.

The supporting and diversification of the markets for green finance would also help achieve the EU's climate targets.