News Release - Finland : Financial System Stability Assessment
Notwithstanding the three-year recession, Finland’s banking system remains well capitalized and profitable.
While low interest rates have squeezed net interest income, banks have increased income from trading and insurance, and reduced cost-income ratios, helping to maintain profitability. Nonperforming loans have remained low and capitalization ratios are well above requirements, though buffers may be exaggerated by the aggressive use of risk weights. The Net Stable Funding Ratio suggests that vulnerabilities from maturity mismatches are limited in aggregate.
Nevertheless, previously identified vulnerabilities remain and some have increased. The banking system remains largely reliant on external wholesale funding. Social safety nets have helped protect disposable income in recent years, and thus the financial sector through households’ debt servicing capacity. Fiscal buffers, however, have been eroded, and households’ rising debt levels make them more vulnerable to income and interest shocks. Keys macrofinancial risks include a lackluster recovery from the domestic recession, adverse macroeconomic or financial shocks in a Nordic country, and a sharp growth slowdown in advanced economies, in particular the euro area.
Stress tests suggest that banks are largely resilient to solvency shocks but exposed to liquidity shocks. While risk-weighted capital ratios would remain above regulatory minima under a severe macroeconomic stress scenario, unweighted leverage ratios would fall below the hurdle rate. A severe disruption in external wholesale funding or in the covered bond market could lead to systemic liquidity shortfalls.
The authorities are encouraged to ensure that adequate bank capital and liquidity cushions are maintained. The Finnish authorities should pursue their plan to set risk weight floors for mortgages and the ECB should proceed with its comprehensive review of banks’ internal risk models, and reinforce their ongoing monitoring. In case of emerging imbalances, the authorities should ensure adequate liquidity cushions are maintained.
Supervisory financial and human resources need to be augmented and the regulatory authorities adequately empowered to be up to the challenges of the new regulatory environment. Bank and non-bank supervision, macroprudential policy making and contingency planning have become more intense, intrusive, and resource-intensive. This has stretched the supervisory resources of the Finnish Financial Supervisory Authority (FIN-FSA) and the Finnish Financial Stability Authority (FFSA), which will also need to keep pace with the demands of the broader global regulatory reforms. In addition, the FIN-FSA needs to be granted the powers to credibly enforce supervisory action. Moreover, the legal and operational framework for legal protection of officials, staff, and agents of the agencies should be strengthened.
In light of Nordea Finland’s likely conversion to a branch, the authorities should conclude the multilateral supervisory MoU under negotiation with the Sweden’s Financial Supervision Agency and other supervisors in the region. This should provide a basis within existing EU regulations to strengthen the role of host supervisors of systemically important bank branches. Nordea will remain systemically important in Finland even after its Finnish banking subsidiary is converted into a branch, with nearly one third of domestic deposits. The ease with which liquidity can be transferred across borders within banking groups poses a particular concern for Finland. While the Finnish authorities (and ECB) will remain members of the supervisory college, direct supervision of the Finnish banking operations of Nordea will be transferred to Sweden.
When a branch is of systemic importance in a host country (i.e., the disorderly failure of the bank would be expected to have systemic repercussions on the host country’s financial system and financial stability), consideration should be given in future revisions of CRD IV to provide for enhanced supervisory powers for the host country supervisors, in close coordination with the home country supervisor. The objective of such revisions would be to facilitate the host country’s understanding of the risks posed by the branch and to enable it to take actions to promote the resilience and resolvability of the branch.
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