The International Monetary Fund’s (IMF) extensive assessment of Finland’s financial system reviewed areas such as banking supervision, macroprudential policy and the ability to identify various risks to the financial system and to manage crises.

The IMF conducts a financial system stability assessment on a regular basis under the Financial Sector Assessment Program (FSAP) for countries and regions it has deemed to have a systemically important financial sector. For Finland, the assessment is mandatory once every five years.

The assessment involves the IMF conducting a comprehensive review of the financial stability and risks of the country in question. According to this latest assessment completed by the IMF, Finland’s financial system is stable, but risks to financial stability emanate from several factors, including the presence of a large and concentrated banking sector that is strongly interconnected with other financial systems in the Nordic region. The IMF also considers the high level of household indebtedness, which rose further during the COVID-19 pandemic, a risk that makes borrowers vulnerable to the negative impacts of rising interest rates.

The IMF also submitted to the Finnish authorities a comprehensive list of areas in which improvements could be made. The assessment serves as an input for the IMF’s Article IV Consultation, in which it assesses Finland’s economy and its structures more extensively.

Wide-ranging assessment required input from financial stability authorities

Finland’s FSAP process started in autumn 2021 and was completed in early 2023. The Bank of Finland was responsible for the coordination and arrangements related to the assessment process.

The process included three visits, two of which had to be arranged in virtual form due to the COVID-19 pandemic. In addition, the Finnish authorities involved, i.e. the Bank of Finland, the Financial Supervisory Authority, the Financial Stability Authority and the Ministry of Finance, responded to various IMF information requests, surveys and self-assessments.

Finland’s FSAP assessment consists of five parallel work streams defined by the IMF:

1) banking supervision and regulation of small and medium-sized institutions, i.e. LSI banks (less significant institution)
2) macroprudential policy
3) stress test exercises and systemic risk analysis
4) non-bank financial system, particularly pension insurance sector
5) crisis management and resolution.

Financial technology (fintech) and financial sector cyber resilience were discussed as part of the work stream on banking supervision, and climate risks and sustainability issues were discussed in the work streams on banking supervision and the pension insurance sector.

In connection with online inspections and the mission to Helsinki, IMF staff had a total of about 170 meetings with various authorities, banks, pension insurers, insurance companies, trustees, asset managers and financial intermediaries.

The main mission in the context of the FSAP process, with six members of IMF staff, took place in September 2022 in Helsinki. At the same time, two IMF experts conducted a systemic risk analysis and stress testing exercises in the premises of the European Central Bank (ECB) in Frankfurt.

The Executive Board of the IMF discussed Finland’s FSAP assessment in January 2023, after which the IMF published its assessment and recommendations on Finland’s financial system.

IMF’s FSAP assessment identified progress but also risks

According to the IMF, Finland has improved the regulation and supervision of its financial sector since the 2016 FSAP assessment. Progress has been achieved particularly in the cooperation with Nordic and Baltic authorities, in the introduction of a systemic risk buffer (SyRB) in macroprudential legislation, and in preparations to establish a positive credit register.

Risks to Finland’s financial stability emanate from a large and concentrated banking sector with tight interconnections in the Nordic region. The IMF also considers high household indebtedness a significant risk. 

In the non-bank financial system, pension insurance companies have a significant role, and the IMF considers their investment behaviour to be procyclical.

The stress tests conducted by the IMF indicated that the Finnish banking system’s solvency provides resilience to even severe macro-financial shocks. However, Finland’s banking system remains vulnerable to liquidity shocks due to its reliance on short-term wholesale funding. According to the IMF, banks’ access to funding may deteriorate significantly in a possible crisis situation.

The banking sector interconnectedness analysis revealed a significant risk that due to financial system interconnectedness, any problems in the other Nordic countries could spill over to Finland – and vice versa.

The IMF’s assessment of the stability and risks of Finland’s financial system is broadly consistent with previous assessments by the Bank of Finland.

IMF submitted a comprehensive list of recommendations to Finnish authorities

Based on the FSAP assessment, the IMF issued to Finnish authorities a number of recommendations that focus on, for example, governance and resourcing for supervision and regulation, enhancing the macroprudential toolkit, regulation in the pension insurance sector, the operationalization of crisis management arrangements, and AML/CFT supervision (anti-money laundering/combating the financing of terrorism).

In terms of the Bank of Finland’s tasks, the key recommendations relate to macroprudential policy. The IMF considers that the macroprudential toolkit should be expanded to include caps on debt-to-income (DTI) or debt-service-to-income (DSTI) ratios.

In addition, the IMF recommends that the FIN-FSA Board should be provided with hard powers to issue regulations on macroprudential policy and/or semihard powers to issue macroprudential policy recommendations on a comply or explain basis.

According to the IMF, the authorities should also consider introducing a positive rate for the countercyclical capital buffer (CCyB) in the standard risk environment. Moreover, the monitoring of systemic risk should be enhanced by, for example, addressing existing data gaps and strengthening the disaggregated data analysis.

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