Financial System Stability Assessment Update

The Finnish financial sector has weathered during the global crisis. Banks’ capital buffers were sufficient, but liquidity and credit risks required monitoring. The study assessed that there is a need for strong crisis management framework. It is found that an evaluation of Deposit Guarantee Fund (DGF) using Core Principles for Effective Deposit Insurance Systems would support reform efforts. Banking supervision is robust, and follows relevant EU Directives and the Basel Core Principle (BCP) for Effective Banking Supervision closely. The Financial Supervisory Authority (FIN-FSA) has implemented the 2001 Financial Sector Assessment Program (FSAP) recommendations, but challenges remain.


The Finnish financial sector has weathered during the global crisis. Banks’ capital buffers were sufficient, but liquidity and credit risks required monitoring. The study assessed that there is a need for strong crisis management framework. It is found that an evaluation of Deposit Guarantee Fund (DGF) using Core Principles for Effective Deposit Insurance Systems would support reform efforts. Banking supervision is robust, and follows relevant EU Directives and the Basel Core Principle (BCP) for Effective Banking Supervision closely. The Financial Supervisory Authority (FIN-FSA) has implemented the 2001 Financial Sector Assessment Program (FSAP) recommendations, but challenges remain.

I. Background

1. Upcoming changes in the international regulatory landscape are likely to have a significant impact on the Finnish banking sector. The system is largely foreign-owned and concentrated, yet with a large number of small banks. These features, and its overwhelming reliance on variable-rate lending, are factors that will need to be carefully considered as regulatory and market developments play out.

A. Structure of the Financial System

2. A range of deposit-taking institutions (commercial, cooperative, and savings banks) stands at the core of Finland’s financial system. Total banking assets were around EUR 350 billion at end-2009 (equivalent to about 200 percent of GDP), up from 110 percent of GDP in 2003. There is a significant foreign penetration in the banking sector—assets of majority foreign-owned banks amount to around 70 percent of all banking system assets. Despite the large number (349) of credit institutions, the banking system is quite concentrated, with four banking groups accounting for over 90 percent of total assets; the largest two account for three quarters of lending. The high degree of concentration is related to the large number of small cooperative banks (263), most of which are part of the OP Pohjola group (Finland’s second largest banking group), and savings banks (35). Table 3 provides more detailed information on the financial sector structure.

Table 3.

Finland: Structure of the Financial System, 2003-09

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Source: FIN-FSA.

Balance sheet assets valued at historical cost. Does not include public sector funds.

3. Financial conglomerates figure prominently, with a strong Nordic cross-border dimension. The Nordic financial system is characterized by (a) high concentration, reflecting the consolidation of the industry and the drive for economies of scale; (b) links between banks and insurance, pension, and asset management firms, resulting from financial liberalization and increased demand for long-term savings products; and (c) cross-border linkages reflecting limited opportunities for domestic growth.1 Most groups operating in Finland comprise banks, insurance, securities, and other financial services companies. In addition, the insurance-centered Sampo Group increased its holdings in Nordea to over 20 percent and as a consequence Nordea Group (Sweden) became Sampo’s associated company. Given that Nordea Group owns the largest bank in Finland, this further increased the complexity of financial conglomerates in Finland.


Time/demand deposits ratio and interest rate

Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: Bank of Finland.

4. The turmoil in the global financial markets resulted in large dislocations of financial flows in Finland. Domestic corporate debt issue fell sharply in 2008 and was to a large extent replaced by bank credit; this was reversed in 2009 as market conditions normalized. Bank deposits grew as agents fled riskier asset classes. As interest rates on deposits fell, the ratio of term to demand deposits fell back to their 2006 level of around 0.3 from a peak of almost 0.6 in 2008: Q3. Recently, the popularity of term deposits with long maturities (greater than one year) has again increased. Despite the financial market uncertainty, bank lending continued to grow in response to historically low interest rates.


Corporate deposit interest rate by maturity


Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: FIN-FSA

Deposits with maturity longer than 1 year

(percent of total deposits)

Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: FIN-FSA

5. Capital markets suffered in 2008—corporate debt issues declined sharply and stock market capitalization fell dramatically. The corporate debt market, which traditionally plays an important role in Finland with outstanding debt equivalent to about 26 percent of bank lending in 2009, witnessed a sharp decline in new issues through February 2009, but recovered subsequently with new bond issues peaking at EUR 1 billion in 2009, up from EUR 287 million in 2008.2 Corporate financing needs during this period were met by banks as well as by direct lending from employee pension funds.3 The flight to safety brought about by the loss of confidence in the global financial markets led to a sharp fall in equity prices. By end-2009, market capitalization had recovered significantly to EUR 141 billion (equivalent to 82 percent of GDP) from EUR 116 billion at end 2008.

6. Insurance companies and pension funds saw their investment income turn negative, but most of the losses were reversed in 2009. Total assets of these companies fell in 2008 owing to the steep drop in equity prices and increasing corporate bond interest rates. Earnings were also affected by a sharp slowdown in new insurance origination. Asset values, solvency, and profitability recovered in 2009. There are ongoing simulations in preparation for the implementation of Solvency II for insurance companies. Final parameters to calculate solvency have not yet been determined.

B. Recent Macroeconomic Developments and Outlook

7. The Finnish economy suffered a steep recession in 2009 that will continue to affect the financial sector in the near future. Real GDP fell by 7.8 percent as exports collapsed. The general government incurred an overall deficit—the first since 1997—of 2.4 percent of GDP, reflecting the weak economy and a discretionary stimulus adopted in early 2009 equivalent to 1.7 percent of GDP. The low debt ratio (44 percent of GDP at end-2009) provides a buffer to weather the present downturn. In addition, with a comprehensive social safety net, automatic stabilizers imply a large budget relaxation, estimated at 3-4 percent of GDP.

8. Economic activity is projected to rebound somewhat in 2010, but unemployment is expected to increase further. Growth is likely to remain subdued, with private consumption remaining weak in the face of decreased net worth and rising unemployment, which is expected to approach 9 percent in 2010. Investment is also expected to lag, owing to excess capacity and tighter lending conditions, as reflected in higher lending margins to corporates. Inflation is likely to decline given the sizable output gap.

9. Interest rates are likely to remain low for some time to support the economic recovery and maintain financial stability. In the medium term however, interest rate conditions are expected to normalize as the output gap narrows and monetary policy tightens to avoid upward inflation pressures.

Table 4.

Finland: Selected Economic Indicators, 2005-10

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Sources: Ministry of Finance, Bank of Finland; and staff projections.

A negative value indicates a level of potential output that is larger than actual GDP.

For 2009, data are for first ten months.

Based on relative normalized unit labor costs.

C. Household and Corporate Balance Sheets

10. Household balance sheets are recovering, but the build-up of variable rate debt that currently carries low interest rates poses latent credit risk for banks. Financial assets of households, including those linked to equity market performance such as pension funds, mutual funds, and unit-linked insurance products, have almost recovered to their pre-crisis level largely due to the rebound in equity markets in 2009. However, household indebtedness has continued to increase (to 110 percent of disposable income in 2008), and the proportion of loans with floating interest rates—in particular mortgage loans—is over 95 percent. Rising unemployment points to increased risk for debt service capacity, which is partly mitigated by limited mortgage insurance protection against unemployment and illness, as well as by interest rate caps on floating rate mortgages.


Household indebtness

(Percent of disposable income)

Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: Bank of Finland.

11. Firms entered the crisis with solid balance sheets, but are confronted with higher borrowing costs that reflect greater uncertainty about credit quality. The credit tightening of 2008 increased borrowing costs and shortened maturities, in particular for smaller firms, and corporates increasingly turned to banks and employee pension funds to meet their funding needs. The ratio of debt to total assets increased from less than 23 percent in 2007: Q3 to over 40 percent in 2009: Q1. With the improvement in global financial conditions in 2009, corporations have been able to return to the domestic capital market, and larger corporates have returned to the international loan and syndicated loan markets, allowing the stock of bank loans to slightly decrease during 2009. However, the recession has resulted in a rise in payment defaults and bankruptcies that are expected to rise further. Small enterprises have suffered most from tighter collateral requirements, turning increasingly to public funding sources, like Finnvera, which has seen its loans to SMEs increase from EUR 852 million in 2007 to EUR 1,031 million in 2009.

II. Banking Sector Vulnerabilities

A. Soundness and Resilience

12. Despite its concentration, the banking sector is highly competitive and efficient by international standards. Finnish banks compete fiercely in the domestic market both with each other and with other Nordic banks, both for funding (deposit rates on maturities have increased, likely in anticipation of changes in liquidity risk regulation) and for loans (on expectations of future cross-selling opportunities). As a result, net interest margins have narrowed significantly in recent years, and are indeed lower than in most neighboring countries. Cost efficiency ratios compare well with peer banking sectors for the large banking groups, but have deteriorated in the face of lower margins.


Net Interest Margin of Banks

(net interest income as a percentage of weighted total assets)

Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: IMF staff calculations based on BankScope data.1/ Total assets include the large increase in Nordea’s d erivatives in 2008, therefore it un derstates the ratio that year.

Cost to Income Ratio

Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: EU Banking Sector Stability Reports, staff calculations.

13. Asset quality has deteriorated only slightly despite the economic downturn. Exposure to toxic assets was minimal. The NPL rate increased to 0.7 percent in 2009 from a comparatively low 0.5 percent in 2008. Corporate loans have been the major source of credit risk for banks, while households have broadly been able to continue servicing debts thanks to low interest rates and the social safety net. Further increases in NPLs are expected for SMEs in 2010. Although banks tightened their lending conditions, the credit slowdown observed in 2009 was related to businesses regaining access to capital markets.


NPL Ratio


Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: GFSR.

14. Banks report solid capital adequacy. After declining slightly in 2008, the Tier 1 capital ratio improved in 2009 thanks to rights issues, a partial portfolio reallocation toward less risky assets, and the expiration of transitional additional capital requirements related to the implementation of Basel II. Smaller cooperative and savings banks have even larger capital buffers.


Asset composition of the 4 largest banks

Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: Bankscope and staff estimates

15. Low interest rates depressed earnings markedly. Net interest income decreased as the fall in interest received on the mostly variable rate asset portfolio was not offset by a commensurate decrease in interest paid on deposits—at current low policy rates, a large part of deposits is already unremunerated and hence cannot be further lowered. Rising loan losses related to the corporate credit portfolio further contributed to lower profits. Aiming to attract deposits, also with a view to improving the funding profile in anticipation of regulatory changes, banks offered more attractive rates that further decreased the margins of the banking system. The decline in net interest income was offset for the larger banks by an increase in non-interest income.


Finnish Banks’ Solvency Ratios

Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: FIN-FSA.
Table 5.

Finland: Financial Soundness Indicators of the Banking Sector, 2005-09

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Source: Finnish Financial Supervsory Authority.

Core and encouraged set of indicators

16. Overall, Finnish banks are quite dependent on wholesale funding—although less so than other Nordic banks—but access to markets has not been a concern. Liquidity ratios (e.g., cash and trading assets to total assets) are lower than in neighboring countries, but the main banking groups have good credit ratings and can easily access funding from the market, the parent banks, and/or the ECB.4 There is the potential for bank funding costs to be pushed wider by stricter liquidity rules, higher yields on bank bonds, and increasing sovereign spreads—the latter creates a potential channel of contagion from the sovereign to the banking sector.


Loan to Deposit Ratio


Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: GFSR.

Funding Structure, 2009 1/

(percent of total funding)

Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: FIN-FSA.1/ Excludes Nordea’sderivatives.

B. Stress Testing Results

17. Stress tests confirm that credit risk is the key source of risk. However, capital adequacy of the system would remain above the mandatory level under most stress scenarios given large capital buffers. Only an extreme increase in the rate of default—similar to that observed during the 1990s banking crisis—or a massive default of mortgage loans would bring capital adequacy below the regulatory norm. Finnish banks are vulnerable to concentration risk given banks’ exposure to their largest clients.

18. For the system as a whole, market risk seems relatively modest. Single-factor shocks for equity price and exchange rate risk suggest a relatively small impact on banks’ capital adequacy, mainly because banks trade mostly on customers’ behalf and hedge positions to maintain limited exposures in their books.5 The effects of residential real estate shocks are minor given the historically low default rate of mortgages. Although the increase in value of commercial property has been significant through 2009, the small proportion of lending by Finnish banks to that sector reduces the impact of a negative price shock.


Changes in commercial property capital values in selected euro area countries

Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: ECB Monthly Bulletin, February 2010.

Sectoral Distribution of Bank Credit

(percent of total credit to the private sector)

Citation: IMF Staff Country Reports 2010, 275; 10.5089/9781455207732.002.A001

Source: FIN-FSA.

19. Interest rate risk of banks also seems modest, but the indirect effects on credit risk should be monitored carefully, especially since house prices have surged. The direct effects of interest rate shocks are small given the minimal maturity mismatch of the balance sheet. However, the predominance of variable interest rate lending means borrowers that have taken out mortgage loans at the low rates available in the last two years would see their debt service increase sharply when market rates return to historical averages. Credit risks are exacerbated by the fact that house prices have risen rapidly recently with the growth of mortgage lending. These risks are partly compensated by the use of loan insurance, interest rate caps on mortgage loans, as well as the use of mortgages with a fixed monthly payment amount. These risk-mitigating practices vary widely across banks, with resulting different incidences of interest rate increases on households, banks, and insurance companies. Banks also indicated that clients’ debt-service capacity is stress tested to interest rate levels of 6 percent, and that current debt service-to-income ratios are quite low. FIN-FSA should monitor bank mortgage lending practices (including pricing and LTV ratios) and household debt service capacity regularly, and ensure banks follow the recently issued guidance on LTV (with a maximum of 90 percent).

20. Low liquidity buffers and reliance on wholesale funding expose banks to significant liquidity risk. Liquidity stress tests were performed on the four largest banking groups, by simulating deposit outflows of both households and corporates as well as a contraction in the interbank market, and measuring the effect on liquid assets. Two alternative definitions of liquid assets were used, one narrower (including only the most liquid assets), and a second including all securities eligible for ECB refinancing. Haircuts were applied to take into account drops in market value. Results suggest that liquidity buffers are low, especially for one of the banks. However, a broader definition of liquid assets suggests a lower risk because of banks’ large holdings of securities eligible as collateral for ECB refinancing. Moreover, foreign-owned banks’ liquidity is managed by the group treasury, which can distribute liquidity within the group.

21. Contagion risk is significant owing to the high degree of concentration in the banking sector. The methodology is based on the construction of contagion maps between banks using all balance sheet interrelations, and simulating multiple-rounds of cascading defaults. The analysis shows that some of the largest banks act as liquidity hubs for the whole system. A smaller hub is also evident, based on cooperation agreements between cooperative and savings banks. Banks acting as hubs would become immediate channels of contagion in the event of a major crisis.

22. Stress tests suggest that the banking system is resilient to combined shocks. A multi-factor scenario including a sharp increase in NPLs and a decline in interest rate and asset prices would decrease capital significantly for some small banks. The four largest banking groups, however, would maintain sufficient capital adequacy. A “loss of confidence” scenario combining both adverse effects in the domestic economy and adverse global market developments that would sharply reduce external demand, replicating the 2008-09 crisis, leaves capital adequacy well above the regulatory norm. FIN-FSA conducted additional stress tests after the mission’s departure in the context of an EU-level exercise; the results were broadly in line with the findings reported here.

23. A number of recommendations arise from the stress testing exercise. The authorities regularly perform a battery of stress tests that explore various risk dimensions of the financial system. These stress tests would benefit from further improvements, especially in methodology. The model linking macro-financial variables to NPLs on a bank-by-bank basis would need to be enhanced to obtain more detailed insights into vulnerabilities.6 Also, as part of the banking risk analysis, it would be useful to develop a model for projecting key items of the banks’ profit and loss account on a bank-by-bank basis to obtain a more accurate picture of how banks’ earnings and capital will evolve during a full business cycle. In developing these models, greater synergies can be achieved between the BOF’s Research and Financial Stability Analysis Divisions and the FIN-FSA. In this context, it is critical that the offsite supervision and financial stability departments have ready-access to bank and sectoral level data and use them in their offsite monitoring and scenario analysis. While preserving confidentiality, these data should be readily available for analytical work. Transparency could be increased by publishing the results of stress testing in the English version of the Financial Stability Report or other publication. Quarterly dissemination of a table of core financial soundness indicators using the existing data dissemination practices would be useful.7

Table 6.

Summary Results: Stress Test Results for Banks

(Based on end-December 2009 data)

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Sources: FIN-FSA, Bank of Finland; and IMF staff estimates.

The maximum is 44.6 percent, excluding an outlier of 144 percent. For the exercise 77 banks of the smallest banks are grouped togethe

Assumes 50 percent provisioning, except for mortgage loans at 25 percent.

The highest sectoral credit growth in 2008 was in manufacturing, commercial real state, and energy.

Assumes 50 percent provisioning. Eight relevant banks participated in the exercise.

Using the Aino model.

24. Insurance companies and pension funds are also able to withstand a battery of stress tests. Various interest rate shocks (up to 400 basis points in either direction on both assets and liabilities), shocks to equity prices (with decreases up to 70 percent), to real estate prices, and to exchange rates (up to 30 percent in either direction) were performed. Balance sheets of these companies are much more sensitive to market risk, but maintain acceptable levels of solvency except for some life insurance companies, which would become insolvent under the most extreme equity price scenario due to their large equity portfolio (around 20 percent of assets).

III. Supervisory Challenges

25. Finland faces critical regulatory and supervisory challenges stemming from both domestic and international developments. Most demanding of these will be the need to dovetail major upcoming changes in the EU supervisory framework to the Finnish financial system, covering prudential regulation and supervision (including for cross-border activities) and systemic oversight. Good progress has been made in implementing the recommendations of the 2001 FSAP, and the authorities have implemented the EU capital requirements directive, which leaves them well placed to meet these tests.

Reform of prudential regulation

26. As in other countries, the new regulatory measures being developed by the Basel Committee would likely have significant impact. In many respects, the Finnish banking sector appears better positioned than other European countries to adopt these measures, especially since the system as a whole already maintains a high Core Tier 1 capital ratio. However, some individual institutions may be more affected than others, in particular with respect to the proposed capital deductions, which would affect most those groups having cooperative structures with mutual shareholdings. The proposed new requirements with respect to liquidity risk, in particular the Net Stable Funding Ratio (NFSR), would also affect those banks that rely significantly on short-term wholesale funding and, as discussed earlier, push-up funding costs. However, concerns on this front are mitigated by the likelihood that these measures would be introduced gradually to provide banks with sufficient time to adjust.

Cross-border supervision

27. The significant presence of foreign banks in Finland puts a premium on effective cross-border supervision. Arrangements for home-host supervisory cooperation, especially at the regional level, have been overall satisfactory (see below). Plans—currently on hold—by Nordea and Danske Bank, two pan-Nordic financial groups whose Finnish subsidiaries are among the largest banks in the country, to convert their operations from subsidiaries into branches have raised some concerns by the authorities, and effective supervision by FIN-FSA will require enhanced efforts at home-host cooperation, including in terms of timely and relevant information sharing, and effective cross-border crisis management planning. Ongoing EU-level and international initiatives to strengthen the operation of supervisory colleges and enhance cooperation in cross-border crisis management should be helpful in this respect.

28. At a minimum, the authorities should pursue improvements in the cross-border supervisory framework pending EU decisions in this area. These should build on the good Nordic supervisory cooperation, and include (a) more explicit information exchange; (b) clear understanding on burden sharing; (c) increased harmonization of how international standards are applied to improve joint monitoring of main risks; and (d) a common supervisory approach and a common reporting system.

Dealing with systemic risk

29. The BOF and FIN-FSA regularly monitor systemic and contagion risks in light of the concentration of the banking system, but this monitoring framework could usefully be broadened through closer cross-border cooperation. The framework captures systemic interconnectedness and vulnerabilities in the banking sector. However, the sizeable nonbanking component of the country’s financial sector and the existing cross-border linkages are important reasons to include both the insurance sector and all major cross-border connections, which are currently only partially captured. Use of more detailed information available to FIN-FSA and through enhanced cross-border supervisory cooperation would make the framework more comprehensive. Also, the payment system simulator operated by the BOF to analyze possible infrastructure problems could also be integrated in the regular systemic risk analysis. The results from the monitoring should also be reflected in adjustments to supervisory tools to limit systemic risk exposure, and in contingency planning.

30. With several cross-border institutions of systemic importance, measures to deal with the moral hazard posed by institutions that may be considered too important to fail will pose significant challenges. While initiatives are under discussion at the international (including EU) level, further efforts by Finnish authorities to develop a systemic stability framework would be useful in this respect. This would require a more integrated approach by Nordic countries, including possibly adopting on a regional basis the Swedish “stability fee” levied on bank liabilities, to ensure a level playing field in the region.

Improvements in supervisory practices

31. Banking supervision in Finland is robust and in broad compliance with relevant EU Directives and the BCPs. As a member of the EU, Finland has implemented the Capital Requirement Directive, which closely follows the Basel II Capital Framework. The regulatory framework has also undergone recent structural changes: the Financial Supervision Authority has been combined with the Insurance Supervision Authority to create the new FIN-FSA, which started its activities on January 1, 2009. FIN-FSA has promulgated various regulations, building on the efforts that its predecessor since 2005. FIN-FSA cooperates with the BOF in the field of financial stability. FIN-FSA also closely cooperates with its Nordic peers in the context of the supervision of the pan-Nordic financial groups that are active in Finland: (a) memoranda of understanding (MOUs) on supervisory cooperation are in place; (b) there are cross-border institution-specific MOUs for Nordea and Sampo Group describing detailed requirements for the supervision of the respective groups; and (c) there is a specific crisis management MOU signed by all Nordic central banks.

32. FIN-FSA has materially addressed the 2001 FSAP recommendations, but some challenges remain. Firstly, a further reinforcement of FIN-FSA’s powers in the context of early intervention would be beneficial. The authorities may want to investigate whether the usability of certain formal powers contained in the Act on the FSA can be improved, for example the framework for administrative fines and penalty payments, by extending its coverage beyond the current securities markets scope, and by increasing the maximum amount of such fines and penalties.

33. Since its creation in 2009, FIN-FSA has made significant efforts on integrating best practices of the former supervisory authorities and realizing synergies in the execution of its supervisory program. The effectiveness of its supervisory program can be improved by further dovetailing procedures and practices of banking and insurance supervision. Especially in the context of the FIN-FSA’s supervision of the large and complex groups that carry out both banking and insurance activities on the Finnish markets, increased cross-fertilization can greatly enhance FIN-FSA’s understanding of the (consolidated) risk profile. In this context, it is recommended that FIN-FSA reach international agreements with relevant home supervisors on the deepening of cross-sectoral supervisory cooperation.8

34. A detailed review of selected banking supervision core principles highlights a number of other areas that can be enhanced: (a) FIN-FSA should ensure that liquidity risks receive greater coverage in its risk assessments; (b) FIN-FSA should improve the granularity of its standards on liquidity risk management (in progress), and analyze in greater detail banks’ funding profiles with a view to discussing possible structural changes, to prepare for the upcoming changes in regulation of liquidity risk; and (c) the authorities should pursue clear agreements on specific information to be distributed on a regular basis by home supervisors (above and beyond what is provided by supervisory colleges and through other cross-border arrangements), to overcome obstacles to obtaining a sufficient insight in the solidity of foreign groups that are active in Finland.

35. Insurance supervision is in line with international standards and earlier FSAP recommendations have been implemented. FIN-FSA is in the process of reviewing some of its supervisory processes (e.g., risk assessment and onsite inspection programs), to combine the best practices of the previously separate supervisory authorities and to create a consistent and comprehensive supervisory framework for banking and insurance supervision. The legal framework for insurance supervision was revised in 2008 and as a result, FIN-FSA closely follows the relevant principles regarding insurance supervision. Recommendations from the 2001 FSAP were implemented to (a) add independent experts to the board; (b) obtain a legal basis for the early intervention mechanism; and (c) enhance investment and derivatives expertise.

36. The securities market legal framework has undergone many changes since the 2001 FSAP.9 These revisions were in large part triggered by changes in the EU legal framework, including the Markets in Financial and Instruments Directive (MiFID). The authorities are working to further update the Securities Markets Act. FIN-FSA investigates suspicions of market abuse, which is more challenging now that securities markets have become more international and trade fragmented, particularly with regard to information collection. In line with EU developments, FIN-FSA is in the process of implementing a transaction reporting system that should help provide more comprehensive information on the trading of listed securities and derivatives. Further improvements to this system (e.g., capabilities to monitor over-the-counter trading of derivates and linking individual trades to individual investors via standardized ID’s) would result in a further improvement of its effectiveness.

37. Market infrastructure is undergoing major changes.10 The separate laws regulating various areas of the payment systems were replaced by the new Payment Services Act and Payment Institution Act that entered into force on May 1, 2010. As a member of the European System of Central Banks (ESCB), the BOF is responsible for oversight of payment systems in Finland, and should “participate in maintaining the reliability and efficiency of the payment system and overall financial system and participate in their development.” During the recent past, all three major payment systems have been assessed, and fulfilled the relevant requirements. In the securities settlement area, Euroclear Finland (EFi) is working on the migration to Euroclear’s Single Platform in 2012-13.11 In mid-November 2009, mandatory CCP-clearing was introduced for large and mid-cap cash equities traded on Nasdaq OMX Helsinki. CCP-services for the Finnish market are provided by the European Multilateral Clearing Facility (EMCF), which offers similar services to other Nordic exchanges. The BOF and FIN-FSA have signed a multilateral MOU with the Dutch, Danish, Icelandic and Swedish counterparties on the cooperation in the supervision and oversight of the EMCF.

IV. Safety Net and Crisis Management

38. The Finnish safety net and crisis management framework faces several important challenges. Although important lessons have been learned from the 1990s banking crisis, the recent global financial crisis has surfaced areas that will require further enhancement, including (a) the identification and monitoring of systemic risk; (b) the bank resolution framework, for both domestic and cross-border institutions; and (c) the operation of the deposit insurance fund. Frameworks for crisis preparedness and management and for emergency liquidity assistance (ELA) are in place. Among these issues, the cross-border dimension stands out as particularly challenging, despite the current high degree of cross-border cooperation with home supervisors in ongoing supervision and crisis management.

A. Bank Resolution Framework

Cross-border bank resolution framework

39. An effective cross-border resolution framework is a necessary complement to strong cross-border supervision. Enhancing supervisory cooperation for large systemic cross-border institutions before distress occurs is necessary but not sufficient to simultaneously pursue the goals of financial stability and market discipline and needs to be tied to a robust and credible cross-border crisis management framework.

40. Finland has accumulated significant regional experience with crisis management. The recent MOUs with Nordic and Baltic countries are a significant step up in regional crisis readiness, and may address the weaknesses identified during the Nordic Financial Crisis Exercise carried out in 2007. At the same time, the authorities are well aware of the challenges ahead of them, including (a) seeking international coordination at an early stage; (b) communicating effectively with the public through the media; (c) avoiding ring-fencing and immediate application of domestic resolution options; (d) ensuring domestic coordination; and (e) analyzing the legal and burden-sharing implications of joint decisions to recapitalize. In light of these, the effectiveness of the agreements needs to be periodically tested and reviewed, especially with regard to the provisions on burden sharing. Initiatives under discussion at the EU level may help move the policy agenda forward in some of these areas.

Domestic bank resolution framework

41. There is significant room for improvement in the domestic bank resolution regime. The absence of a specific insolvency framework for banks implies that deposit institutions are subject to the same liquidation proceedings as any other company. This reduces the effectiveness of bank resolution and is likely to increase its cost. It can also lead to delays in depositors payouts, as recently observed in the case of the failure of a small institution.

42. The law establishes two mechanisms for bank intervention, both of which have limitations. The first (Act on the Temporary Interruption of the Operations of a Deposit Bank (1509/2001)) is mainly designed to manage a sudden bank run and entails freezing temporarily a bank’s operation—at the risk of further undermining confidence, with potential systemic consequences. The second (Act on the Government Guarantee Fund (379/1992)) entails a state participation in the bank’s capital and is hence subject to EU approval. On the other hand, the Act on Credit Institutions, while not providing precise power and intervention criteria, does allow the supervisory authority some degree of freedom to shape possible actions. The Kaupthing branch intervention is an example where action was taken based on a flexible interpretation of the banking law, as no precise power at this regard is defined.

43. International evidence illustrates the benefits of a special resolution regime for banks and financial groups to support orderly and least-cost resolution, and the authorities should consider steps in this direction. This would enhance the toolbox available to intervene promptly in case of rapidly deteriorating conditions that threaten financial stability or depositors. Key features of a special resolution regime that merit consideration include authority for: mandatory debt restructuring, purchase (of assets) and assumption (of liabilities) transactions, use of bridge banks to maintain the going concern value, temporary public ownership, merger with other banks, and liquidation.

44. A special resolution regime may entail the “official administration” of a troubled institution. Because of possible budgetary implications, any such decision should involve the fiscal authorities, acting on a proposal from the FIN-FSA. The special regime should provide for a mechanism to override shareholder rights in case the public interest requires it—as opposed to exercising the threat of liquidation the authorities have at their disposal currently. The administration would be designed in such a way to allow a timely adoption of mandatory restructuring measures that would enable burden sharing across debt holders—as opposed to providing a bail-out of all creditors when the government takes over the bank. Compulsory liquidation in order to minimize the cost of the crisis and reduce possible contagion effects would remain an option. To facilitate dissolution of group structures, the regime might also include features such as: (a) having multiple insolvency proceedings rather than a single proceeding for a group, thus respecting the separate legal personalities of group entities; and (b) not creating a legal requirement of the parent company to satisfy subsidiaries’ obligations (or vice versa). Constitutional constraints to set up a bank insolvency regime may need to be overcome.

B. Deposit Insurance Guarantee

45. The ongoing EU-level reform of deposit insurance regimes will require important operational changes in Finland’s DGF. The Finnish scheme, which is mandated by law and managed by contributing banks, is pre-funded and collects risk-based premiums, and has assets under management amounting to EUR 629 million at end-2009, corresponding to 1.1 percent of the system’s deposits by households and nonfinancial corporation. In 2008, the level of coverage was increased from EUR 25,000 to EUR 50,000; by end-2010 it will be further increased to EUR 100,000, in line with the amended DGS Directive 94/19/EC. The authorities also intend to shorten substantially the payout period (from 3 months, extendable up to 3 times to 1 year, to 20 working days, extendable 10 more days)—though this falls short of current EU proposals to ensure payouts within 1 week. These are substantive reforms and the authorities will need to ensure that the operational resources of the DGF enable it to carry out its new mandate. The recent failure of a small domestic bank provides an opportunity to test the performance of the scheme.

46. Authorities should also consider carrying out an evaluation of the DGF. The Core Principles for Effective Deposit Insurance Systems were issued by the Basel Committee on Banking Supervision and the International Association of Deposit Insurers in 2009 and an assessment methodology is under preparation. An assessment of the DGF against those principles would support efforts to reform the DGF, also in the context of the ongoing EU initiatives to harmonize and enhance existing schemes.

C. Emergency Liquidity Assistance

47. The existing framework for ELA seems solid but may need to be supplemented by additional clarity on cross-border access to ELA. The first line of defense against liquidity emergencies is provided by the ECB refinancing framework, which has shown to have the flexibility to meet even a systemic liquidity crisis. The BOF has developed a contingency plan to provide short-term collateralized financing in case a solvent systemically important supervised entity faces a liquidity crisis. The process foresees collaboration with the FIN-FSA, including for determining eligibility and adequacy of collateral. Arrangements with other central banks, through crisis management MOUs, also exist, but do not cover certain operational cross-border dimensions, e.g., on explicit listing of possible collateral from another jurisdiction eligible for ELA.


See Financial Integration in the Nordic-Baltic Region—Challenges for Financial Policies, IMF, 2007.


Multinational firms also re-entered the international capital market in 2009.


Companies are allowed to borrow from their employee pension fund up to the amount of their contributions and up to a maximum fraction of assets of the fund. These loans must carry a bank guarantee or other collateral.


Nordea Bank Finland Group and OP Pohjola Group are Aa2 while Sampo Bank Group and Aktia are A1.


It should be noted that Nordea Bank Finland is the booking center for all derivative transactions of the Nordea Group.


This will require first to construct longer time series of individual bank data using observations available since 1996.


Some financial soundness indicators such as NPL ratios are published quarterly in the FIN-FSA website, but there is no single table of core financial soundness indicators.


FIN-FSA already has cross-border cross-sectoral cooperation arrangements in place to discuss banking and insurance supervisory issues for two financial groups. It has also developed internal processes to integrate the supervision of these groups.


Since the 2001 FSAP, the Helsinki Stock Exchange (HEX) has been acquired by NASDAQ OMX and subsequently renamed into NASDAQ OMX Helsinki (NASDAQ). The primary responsibility for supervision of the securities markets in Finland resides with FIN-FSA, in which the Markets Supervision Department is responsible for the supervision of NASDAQ, the clearing corporation and the central securities depositary, as well as for supervising information disclosure and financial reporting of publicly quoted companies. Stock and derivative exchanges, clearing houses, central counterparty clearing houses (CCPs) and the central securities depository (CSD) are authorized by the Finnish Ministry of Finance (MOF).


There are three major payment systems operating in Finland (a) BOF TARGET2 component system (TARGET2-Suomen Pankki system); (b) the POPS inter-bank system for express transfers and checks (POPS); and (c) the PMJ system for retail payments (PMJ). Furthermore, in December 2008 a license for payment transmission was granted to ACH Finland Plc (ACHF). Replacement of the POPS and PMJ systems in the next few years with the Euro Banking Association STEP2 system (which is subject to Eurosystem oversight) for the processing of national payments is currently under consideration.


Securities settlement is performed by the EFi (Euroclear Finland, formerly Finnish Central Securities Depository, (APK) Securities Settlement System, comprising of the APK settlement system for equity rated securities (OM) and the APK settlement system for non equity rated securities (RM). Both OM and RM operate on a continuous and real-time basis.

Finland: Financial System Stability Assessment Update
Author: International Monetary Fund