Implementing monetary policy and safeguarding the stability and functioning of the financial system are core central bank tasks. They involve financial risks, for which the Bank of Finland prepares by ensuring the strength of its balance sheet. In 2022, there was an increase in the risks associated with monetary policy and financial assets.

Risks arise in investment activities and in the implementation of monetary policy

At the end of 2022, the Bank of Finland’s financial assets amounted to about EUR 11 billion. These consisted of gold holdings, foreign reserves and equity and real estate fund investments. The financial assets do not include items connected with the implementation of monetary policy, such as monetary policy loans to banks or securities acquired in monetary policy operations.

Foreign reserves include liquid fixed-term investments. The amount of foreign reserves has been scaled to a level required in order for the Bank of Finland to perform its central banking tasks.

A significant proportion 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, but the risks and returns are largely 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 2022, the Bank of Finland’s share was 1.837%.

However, the risks associated with government debt instruments and government-related 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.

Decrease in the volume of monetary policy assets

The volume of Eurosystem monetary policy assets decreased in 2022 by around EUR 700 billion and was approximately EUR 6.3 trillion at the end of the year. The decrease was due particularly to the early repayments of funding from the targeted longer-term refinancing operations (TLTROs).

Net purchases under the asset purchase programme (APP) and the PEPP were discontinued in the first half of 2022. Maturing principal payments from securities purchased under these programmes will be reinvested even after the end of 2022.

The Bank of Finland’s share of monetary policy assets declined by around EUR 13 billion and was approximately EUR 106 billion at the end of the year.

Table 9.
Bank of Finland’s financial assets and share of monetary policy assets 31 Dec 2022EUR million 31 Dec 2021EUR million
Financial assets 11,037 10,946
Gold 2,690 2,537
Foreign reserves 6,864 6,720
Euro-denominated fixed-income investments 0 0
Equity fund investments 1,328 1,513
Real estate fund investments 156 176
Share of monetary policy assets 106,168 118,748
Refinancing operations 24,327 40,446
Targeted longer-term refinancing operations1 24,203 40,375
Other refinancing operations1 123 70
Debt instruments under the asset purchase programme 53,757 50,121
Finnish government bonds and government-related bonds 37,295 34,554
Bonds of supranational institutions1 5,056 4,859
Covered bonds1 5,085 5,019
Corporate bonds1 6,321 5,688
Debt instruments under the pandemic emergency purchase programme2 28,046 28,070
Terminated programmes 39 111
Securities markets programme1 39 101
Covered bond purchase programme 0 10
Total 117,206 129,694
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 9, the Bank of Finland’s assets included EUR 48 billion in intra-Eurosystem claims, consisting mainly of the TARGET2 balance. At the end of 2022, the Bank of Finland’s balance sheet total was EUR 190 billion.

Bank of Finland manages its risks through diversification

The Bank of Finland’s financial risks consist of market, credit and liquidity risks. Market risk refers to the possibility of financial loss as a result of variation in, for example, exchange rates, interest rates and stock prices.

Exchange rate risk is the source of most 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. The exchange rate risk is also diversified with investment in the Chinese yuan, since the Bank of Finland has receivables from the International Monetary Fund (IMF).

The strategic allocation of investments is determined by means of a 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 some of its own funds in a variety of instruments on the international equity and real estate markets. The investments are made through funds and diversify the other risks on the Bank’s balance sheet.

In the implementation of monetary policy purchase programmes, the Bank of Finland, in the same way as the other central banks, complies with the Eurosystem eligibility criteria and other risk-management rules.

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

Structural interest rate risk on Bank of Finland balance sheet

Liquidity created via the purchase programmes and refinancing operations is reflected on the liabilities side of the Bank of Finland balance sheet as growth in central bank deposits.

The Eurosystem sets, on monetary policy grounds, the interest payable on the central bank deposits made by commercial banks. 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 Bank’s balance sheet poses a structural interest rate risk for the balance sheet.

The Bank’s purchases of fixed-rate bonds in connection with monetary policy implementation in the past few years have been at a low yield level. In the second half of 2022, the Eurosystem’s policy interest rates were raised, including the interest rate banks receive for depositing money with the central bank. Based on the interest rate expectations prevailing at the end of 2022, this financing cost will push the Bank of Finland’s profit into negative territory in the immediate years ahead.

The structural interest rate risk will decrease as the fixed-rate debt instruments acquired for monetary policy reasons mature. However, the reinvestment of principal payments from maturing bonds serves, at the same time, to maintain the structural interest rate risk position.

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

Increased risks associated with Bank of Finland’s monetary policy and financial assets in 2022

The Bank of Finland’s financial risks increased in 2022 in comparison with the previous year. The increased uncertainty regarding market interest rates increased market risk. Moreover, the deterioration of the market situation increased the credit risk associated with debt instruments.

The Bank of Finland measures total risk exposure on the balance sheet using well established statistical methods. In measuring the credit risk arising 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 an estimate of total risk, the Bank of Finland uses a figure representing the loss that would occur in the following year with a probability of 1% (expected shortfall at a 99% confidence level). The risk estimate is supplemented with stress tests that assess losses which could be incurred under possible, though improbable, scenarios.

At the end of 2022, the total risk estimate was EUR 3.2 billion. This figure does not include the gold price risk, as the gold revaluation account covers a significant decline in value. If the gold price risk is included, the total risk estimate is the same, at EUR 3.2 billion.

At the end of 2022, the Bank of Finland had revaluation accounts totalling EUR 1.2 billion and provisions totalling EUR 4.5 billion available to cover losses. The primary capital and reserve fund amounted to EUR 2.9 billion (Chart 21).

Risk buffers weakened during 2022 as fixed-income and equity investments declined in value.

The Bank of Finland’s capital adequacy is sufficient to cover the risks arising from the performance of its tasks (Chart 22).