3.3 Macroprudential policy strengthens financial stability

International cooperation and the management of climate change, geopolitical change and cyber risks are essential to the conduct of macroprudential policy. The Bank of Finland has drawn attention particularly to the adverse effects of excessive indebtedness on households and for financial stability. The risk indicators used for assessing the financial market are essential for enabling the Bank of Finland to fulfil its macroprudential role.

Macroprudential policy refers to measures that promote the stability of the financial system as a whole, reduce the risk of financial crises and strengthen the financial system’s resilience.

Macroprudential policy complements financial supervision, the primary objective of which is to ensure the stability of individual financial institutions and the financial market infrastructure.

The ultimate goal of macroprudential policy is to ensure the reliability and availability of financial services to households, private entities and the public sector.

The Bank of Finland participates actively in macroprudential policy preparation through support for the Board of the Financial Supervisory Authority (FIN-FSA) by providing it with analyses, recommendations for action, and by submitting opinions on planned macroprudential decisions.

In addition, the Bank of Finland reports to stakeholders on the financial market situation, assesses policy impacts and the impacts of decisions, and participates in the development of macroprudential policy.

Macroprudential policy ensured capital adequacy of banks

In Finland, decisions on macroprudential measures are taken by the FIN-FSA Board, which is chaired by Marja Nykänen. Nykänen has served as Bank of Finland Deputy Governor since 2018.

The FIN-FSA Board, as a rule, takes macroprudential decisions on a quarterly basis.

Due to regulatory changes previously implemented, Finnish banks had strong capital buffers at the outbreak of Russia’s war in Ukraine. This supported households’ and companies’ access to credit even though a new crisis emerged while the COVID-19 pandemic was still ongoing.

As the war was followed by an energy crisis and risk of recession, the banks made use of the capital buffers accumulated earlier to maintain their resilience to the weaker economic outlook and their ability to intermediate finance to the real economy.

Bank of Finland supported the decisions of the FIN-FSA Board

The FIN-FSA Board kept the countercyclical capital buffer (CCyB) rate at 0% throughout 2022. The CCyB requirement is higher than the other capital requirements and it targets cyclical stability risks. The CCyB rate was kept at 0% because there were no signs of overheating in the credit market.

Due to the consequences of Russia’s war in Ukraine, a systemic risk buffer (SyRB) requirement was not imposed on credit institutions even though it was considered that the structural systemic risks would have provided justification for setting the requirement. 

In June, the FIN-FSA Board decided to raise the additional capital requirements of two systemically important credit institutions (O-SII buffers). The adjusted requirements entered into force at the beginning of 2023. The maximum loan-to-collateral (LTC) ratio, i.e. the loan cap, was kept at the pre-pandemic level, at which it had been set by a decision taken in June 2021. As a result, the maximum amount of residential mortgage loans granted to other than first-home buyers is 85%, and to first-home buyers 95%, of the collateral.

Furthermore, the FIN-FSA Board issued a recommendation on a maximum debt-servicing burden for mortgage applicants’ loans and charges for common capital expenditures of housing company loans. According to the recommendation, the ‘stressed’ debt-service-to-income (DSTI) ratio of a prospective borrower should, as a rule, be no more than 60% of their net income. The stressed DSTI ratio should be calculated by taking extensively into account the applicant’s housing loans, other loans and all housing-related expenses. .

The Bank of Finland supported the above-mentioned decisions taken by the FIN-FSA Board.

Work continues on the development of macroprudential regulation

The Bank of Finland supports the development of macroprudential instruments, and for a long time now it has drawn attention to the adverse effects of excessive indebtedness on households and financial stability. It considers that the instruments should more effectively tackle risks and vulnerabilities in the financial system, including the non-banking sector, and enable equitable competition in the financial sector throughout the EU.

The development, maintenance and monitoring of risk indicators used for assessing the financial market are a key part of the Bank of Finland’s macroprudential role. Guidance on, for example, the indicators for setting countercyclical capital buffer rates is given in European Systemic Risk Board (ESRB) recommendation ESRB/2014/1.

In Finland, the risk indicators were partially renewed in 2022 because new research had suggested that some of the indicators ought to be amended. Other reasons were related to the ESRB’s recommendations and particular issues with the up-to-dateness of the data. Information on the risk indicators is published regularly on the Bank of Finland website.

Bank of Finland participated in legislative reform

The legislative reform on preventing excessive debt accumulation by households, which had been several years in preparation, resulted in a government proposal (in Finnish) to Parliament in 2022.

The Bank of Finland had been involved at all stages of the preparation and had submitted its opinion to the Ministry of Finance on the draft bill in March 2022. The draft bill included proposals welcomed by the Bank of Finland, but the Bank considered the draft insufficient as it did not include a debt-to-income cap, which the Bank would be in favour of. Parliament adopted the new law in January 2023 (in Finnish).

The Act on the Positive Credit Register (739/2022), which was long in the making, entered into force on 1 August 2022. The Bank of Finland participated in the preparatory work for this piece of legislation, too. Data on credit granted to private individuals by banks, credit institutions, finance companies and instant loan providers will in future be reported comprehensively for entry into the register.

The extensive use of the register will start in 2024. The Bank of Finland will use the register in its financial stability analyses.

Macroprudential management also encompasses international cooperation, cyber risks and the challenges posed by climate change

International cooperation on promoting financial stability continued in 2022. The Bank of Finland participated in the work of many committees and working groups, for example at the European Central Bank (ECB), the European Systemic Risk Board (ESRB), the OECD and within the context of Nordic-Baltic cooperation.

The Eurosystem and the ESRB are key international cooperation forums for the Bank of Finland.

The Bank of Finland is participating in the work to extend the macroprudential toolkit to non-banks, particularly to funds and the insurance sector.

Climate change brings risks to the financial industry by, for example, putting collateral at risk, endangering debtors’ solvency and increasing risks to non-life insurance companies. These risks are assessed and efforts made to mitigate them by increasing the sustainability of the financial system.

In 2022, cyber risks and the geopolitical environment became increasingly important in the contingency preparations for possible financial system crises.

The Finnish authorities responsible for financial stability, i.e. the Financial Stability Authority, the Financial Supervisory Authority, the Ministry of Finance and the Bank of Finland, have in recent years developed and refined their cooperation and division of tasks for crisis situations.

Since February 2022, cooperation between the authorities has intensified further and has involved, among other things, preparations for safeguarding everyday payments under all circumstances.

Strengthening the banking system and developing the capital markets union are increasingly important

The EU-wide banking union, which includes all the euro area countries, has a Single Supervisory Mechanism and a Single Resolution Mechanism. The banking union is still incomplete, because the common European Deposit Insurance Scheme (EDIS) has not yet been introduced. Instead, EU countries have in place national deposit guarantee arrangements.

The purpose of deposit protection is to protect depositors’ funds if a bank becomes insolvent. National deposit protection may, however, be problematic as banking becomes increasingly international.

The development of capital markets would help diversify Europe’s bank-centric financial system. In particular, it would improve companies’ access to finance and would diversify risks. Diversification of the markets for green finance by further developing the capital markets would, in turn, help achieve the EU’s climate targets.