3.1 Risks to financial stability increased in 2022
The risks to financial stability increased in 2022. The energy crisis pushed up costs for households and companies, the economy weakened and interest rates on loans rose rapidly. Borrowers’ repayment capacity nevertheless remained mostly good.
The Bank of Finland regularly assesses the stability of the financial system and the risks and vulnerabilities which threaten that stability. Such assessments support the work and decision-making of the Bank of Finland Board and the Board of the Financial Supervisory Authority (FIN-FSA).
If risks to, for example, lending and debt accumulation materialise extensively, this could jeopardise financial stability and have adverse effects on banks and the economy for a long period of time. Work done at the Bank of Finland helps to identify in a timely manner risks to financial stability, and to find ways to mitigate and prevent them.
Finnish financial system remained stable
Russia’s war in Ukraine and the energy crisis triggered by it in Europe posed a challenge to the Finnish economy and financial system in 2022. Finland’s financial system nevertheless remained stable, according to the Bank of Finland’s assessment.
Longer term risks to financial stability increased during the year, however, both in Finland and around the world.
Inflation rose, the economic outlook weakened and financing from banks and from the market became more expensive. Growth in unavoidable expenses squeezed the finances of many households and businesses.
The financial system’s key vulnerabilities in Finland relate to the record high level of household debt. The risks are also increased by the banking sector’s size, concentration and international linkages.
Finnish banks have a good capacity to bear credit risks
The Bank of Finland and the FIN-FSA jointly carried out a stress test on the Finnish banking sector in 2022.
The stress test involved a hypothetical crisis scenario in which the economies and housing markets of the Nordic countries were shaken by disruptions in the international economy and financial markets.
Based on the outcome of the stress test, the Finnish banking sector could successfully withstand the disruptions outlined in the scenario. Credit losses would increase notably, but the banking sector’s capital position would remain sound.
However, based on the Bank of Finland’s assessment, the resilience of banks and borrowers should be strengthened to ensure the stability of the financial system in disruptions and crisis situations of different kinds in the future, too.
For example, banks should take more determined action to prepare for financial sector cyber risks. In addition, authorities need more effective measures for curbing excessive household indebtedness.
Interest rates on loans rose rapidly
Interest rates on new loans to households and businesses rose rapidly in the second half of 2022 (Chart 13). The majority of loans in Finland are tied to Euribor rates, which already entered positive territory in the spring and rose rapidly after that.
Some mortgage borrowers have a fixed rate loan or a loan with interest rate hedging. Over time, the rise in market interest rates will nevertheless also pass through to the interest rates on most existing loans.
The Bank of Finland estimated the impact of rising interest rates on new mortgage borrowers. The calculations were based on data collected from the banks on new mortgages and on mortgage borrowers’ income.
Rising interest rates have the greatest impact on borrowers who have a large variable rate loan in relation to their income and whose loan-servicing burden is already substantial.
Energy crisis increased corporate borrowing
The Bank of Finland estimated the impacts of Russia’s war in Ukraine, and of the consequences of it, on Finnish companies. The direct impacts were initially felt by companies that had operations in or trade with Russia.
The indirect impacts on companies in Finland and in other European countries are, however, significantly more extensive due to, for example, higher prices of energy and raw materials and availability problems.
In 2022, the volume of new loans taken out by companies was exceptionally large. This was due especially to the financing needs of energy and manufacturing companies. Electricity-generating companies needed more financing due to the increase in the amount of collateral that they were having to submit to the energy derivatives exchange.
Housing market slowed towards the end of the year
In 2022, the Bank of Finland paid particular attention to housing market and property investment risks both in Finland and Nordic countries in the other. Housing transactions and mortgage lending slowed towards the end of the year, and housing prices declined.
In early 2022, Finland and certain other countries received an assessment from the European Systemic Risk Board (ESRB) concerning risks in the residential real estate market and the policy responses introduced by national authorities for mitigating the risks. The ESRB oversees and promotes the stability of the financial system in Europe.
The ESRB assessed that risks in the European residential real estate market have increased further, and that Finland and certain other countries should therefore continue to develop their macroprudential tools and related legislation.
Consumer lending increasingly digital
The Bank of Finland also monitored and closely analysed consumer lending by credit institutions and other financial institutions.
In 2022, the use of overdrafts and credit card credit in particular increased as the COVID-19 pandemic subsided and consumers had more opportunities to purchase services.
The volume of consumer credit and the number of lenders granting consumer credit has grown in recent years. Credit can be sought via various online services, in a fully digital form.
According to a Bank of Finland survey, digital channels are used most commonly in the sale of unsecured consumer credit.
Uncertainty in international markets
The Bank of Finland also regularly assesses the stability and risks of the international financial system and their impacts on Finland.
In 2022, uncertainty on the international financial markets was high, due to the energy crisis, soaring inflation, the weak economy and rising financing costs.
These factors increased concerns over the financial position of households, businesses and governments and their ability to repay their debts. However, the growth in credit risks was contained for the time being. The ability of banks to provide credit remained good in the major economies, which is important for the real economy.
The most acute risks related to the weakening of liquidity in the financial markets, particularly towards the end of the year. Investors’ appetite for risk taking and trading on the international securities markets diminished.
The markets occasionally witnessed a shortage of high-quality collateral, and bond issuances by high-risk companies, for example, decreased significantly from previous years.
The Bank of Finland also noted the risks to financial stability caused by climate change and biodiversity loss. For instance, investments in the reduction of carbon dioxide emissions also require major financing.