Finland: Financial System Stability Assessment
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International Monetary Fund. European Dept.
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Publication Date:
23 Jan 2023
eISBN:
9798400232176
ISBN:
9798400232176
Language:
English
Keywords:
FIN-FSA official; banking group; market share; FIN-FSA's activity; Board of the FIN-FSA; Commercial banks; Macroprudential policy; Stress testing
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Finland has further improved the regulation and supervision of its financial sector since the 2016 FSAP, in part driven by European legislation and institutions. The size of the banking sector increased significantly in 2018 with the redomicilation of Nordea. Finland weathered the COVID-19 pandemic well relative to other economies, with fiscal support and interventions from the authorities. However, Finland is now navigating a weaker economic outlook given the war in Ukraine and ensuing energy crisis, despite limited direct financial exposures to Russia.

Abstract

Finland has further improved the regulation and supervision of its financial sector since the 2016 FSAP, in part driven by European legislation and institutions. The size of the banking sector increased significantly in 2018 with the redomicilation of Nordea. Finland weathered the COVID-19 pandemic well relative to other economies, with fiscal support and interventions from the authorities. However, Finland is now navigating a weaker economic outlook given the war in Ukraine and ensuing energy crisis, despite limited direct financial exposures to Russia.

Background

A. Macrofinancial Developments

1. Before the COVID-19 pandemic, Finland had steady economic performance, and while financial conditions initially tightened sharply as the pandemic hit, monetary and fiscal measures cushioned its impact. In the aftermath of the GFC, Finland entered a long recession led by the decline of its ICT sector, but following structural reforms, competitiveness, growth, and employment improved. The pandemic disrupted economic activity, with the Finnish government responding swiftly in mid-March 2020. The economy recovered strongly, with GDP growing by 3.5 percent, and unemployment falling to 6.7 percent at end-2021, from a 7.6 percent a year prior.

2. Finland's GDP grew robustly in the first half of 2022, continuing strong growth from 2021, but the outlook has now deteriorated due to the energy crisis. The authorities expect that the energy crisis will lead to a slowdown in 2023, with it pushing up consumer prices, worsening consumer confidence, and weighing on private consumption and residential real estate. Prices and availability of electricity and gas are also a concern for corporates—with the cost increase also affecting company profitability. The war will weaken the economic outlook in Finland as inflation accelerates and raises expectations for more rapid tightening of monetary policy globally.

3. The war in Ukraine is also weakening the outlook in Finland through a reduction in trade with Russia. While the financial system's exposures to Russia are limited, the war increases financial stability and growth risks through indirect channels. While overall trade exposures have fallen since the 2014 invasion of Crimea, Russia is still an important market for Finnish companies (Table 2).1 Financing conditions are also tighter, and market-based funding is more expensive, while equity markets have fallen and become more volatile.

Table 2.

Finland: Business Vulnerabilities by Industry

article image
Note: The table presents vulnerabilities and credit risk indicators for each industry. Vulnerabilities from OECD value added statistics (2018); an X if trade with Russia is in the highest quartile. The credit risk columns use December 2021 credit institution data (Bank of Finland). Loans (in percent) refers to the industry's bank loans as a proportion of the total corporate loan stock, NPL (in percent) to the stock of non-performing loans as a proportion of the industry's loan stock, and Interest rate (in percent) as the weighted average interest rate on the industry's loan stock. Source: OECD and Bank of Finland.

B. Financial Sector Landscape

4. The Finnish financial system is large, highly concentrated and dominated by a few credit institutions. Total banking sector assets were close to 350 percent of GDP at end–2021 (Table 3), with Nordea's redomicilation in 2018 increasing them substantially.2 The banking system remains highly concentrated, with the three largest banks—Nordea Bank, OP Financial Group, and Municipality Finance—designated as significant institutions (SIs) and supervised by the Single Supervisory Mechanism (SSM) within the European Central Bank (ECB). Subsidiaries and branches of foreign banking groups in Finland amount to 44 percent of GDP.

5. PICs and fund managers are the most significant part of the NBFI sector, followed by insurance. Each industry is highly concentrated, and some have significant links to major banking groups. The top four providers in each NBFI sector typically have 80 percent market share, and 100 percent in the PIC market where only four providers now remain. Together, the banking sector, fund management, insurance, and pensions are 518 percent of GDP.

Table 3.

Finland: Financial System Assets: 2016 and 2021

article image
Source: FIN-FSA, Bank of Finland, Statistics Finland. Notes: Nordea is the largest bank in Finland by total assets (EUR 552 billion), and OP by market share (around 35 percent). Municipality Finance is a non-deposit taking credit institution jointly owned by the municipalities (total assets EUR 44 billion end-2020). In January 2022, the FInnish branch of Danske Bank was also designamed an SI.

6. The 2016 FSAP found that while Finland's banking system was well capitalized and profitable, there were some vulnerabilities. Despite the low interest environment, banks had maintained profitability by increasing trading income and reducing costs. However, it noted that the banking system remained reliant on external wholesale funding, with risks of systemic liquidity shortfalls. The FSAP highlighted the need to augment supervisory resources to address the challenges of the new regulatory environment introduced by the European Banking Union and strengthen enforcement; broaden the toolkit of macroprudential instruments; and expand regional coordination agreements.

7. Capital adequacy of the banking sector is well above the EU average, but banks' funding models are sources of vulnerability. The regulatory capital position of Finnish banks is strong at 21.2 percent (Figure 1), while the leverage ratio and the liquidity coverage ratio are 6.2 percent and 171 percent, respectively. Despite the pandemic, Finnish banks have gross interest margins of 47.6 percent, and remain profitable with return on assets and return on equity at 0.6 percent and 8.2 percent, respectively (Figure 1). However, they are reliant on wholesale funding (43 percent of total liabilities), making an increase in funding cost a major concern. Banks also retain significant derivatives exposure.

Figure 1.
Figure 1.

Finland: Banking Sector

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

C. Macrofinancial Challenges

8. The authorities have had to manage the impact of the war in Ukraine. The authorities continue to monitor closely the impact of geopolitical risks on the Finnish financial system. The current challenges in the European energy market have created additional liquidity needs for energy companies, including to meet margin calls. They have been provided with public liquidity guarantees and bridge financing to avoid risks spilling into the financial sector.

9. The Finnish population has been rapidly ageing. Prospects for growth in the medium term are not strong, given population ageing and low productivity trends. Combined with intermunicipal migration, there is the potential for declining bank profitability, and risks from the residential real estate market with a bifurcation in price increases between Helsinki and the capital region, and other parts of the country, which could affect smaller cooperative banks and amalgamations given their potential concentration in declining regions.

10. Finland has weathered the COVID-19 pandemic well, with a mild recession relative to its European counterparts. However, the impact of COVID-19 on the commercial real estate (CRE) sector remains uncertain at this stage as lifestyles and working patterns continue to evolve.

11. Since the last FSAP, there have been major structural changes in the Finnish financial sector. Nordea changed its domicile from Sweden to Finland in October 2018 seeking the common multinational regulatory framework provided by the euro area (see IMF Country Report No. 19/8). This move increased the size of banking sector assets from 250 to 350 percent of GDP and deepened Finland's exposure to other Nordic countries, particularly to Sweden. As a result, the FIN-FSA and FFSA have increased their staffing resources.

12. Cyber risks to the financial sector are elevated, while climate risks are limited. Ongoing threats from cyber criminals and state actors pose risks to the Finnish financial system, particularly in the context of the war in Ukraine. The Finnish Government passed legislation in July 2022 further expanding the crisis management responsibilities of the FFSA and BoF to establish a backup system to maintain continuity of customers' daily banking payments. Both transition and physical climate risks are low, with Finland among the lowest risk countries in climate change vulnerability indices.

Systemic Risk Assessment

A. Systemic Risks and Vulnerabilities

uA001fig01

Finnish MFls' Euro-denominated Loans

(To Euro-area residents, in Million EUR)

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

Source: Bank of Finland

13. High indebtedness makes households vulnerable to interest rate shocks despite low DSTI ratios (Figure 2). As of August 2021, at least 93 percent of total loans to euro area households by Finnish banks were variable rate, making households vulnerable to increases in interest rates. However, rate collars purchased by many households generally mitigates the impact of higher interest rates on borrowers in the near term, as does the practice by most banks to stress DSTIs at origination.3 An increasing share of household debt is in the form of housing company loans (exposing them to mispriced risk; Article IV 2019). More than half of bank lending is to households as mortgages to households or to housing companies, and unsecured consumer lending.4

Figure 2.
Figure 2.

Finland: Household and Corporate Indebtedness

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

14. The authorities have recognized the risks posed by high household indebtedness. A working group reported on mitigating vulnerabilities in 2019. The Board of FIN-FSA subsequently recommended that housing loans be granted to applicants whose total loan-servicing costs are assessed to remain below 60 percent of their net income under stress conditions.

15. The Finnish banking sector is highly interconnected with the wider Nordic/Baltic region. This brings financial diversification, but also considerable contagion risk. Finnish banks' net foreign assets have gradually increased since the GFC and are 26.5 percent of GDP. The largest cross border exposures are to the Nordics and euro area. The banking sector is also exposed to indirect linkages from trade, with largest trade exposures to Germany, Sweden, the United States, and the Russian Federation (Figure 3).

Figure 3.
Figure 3.

Finland: Cross-Border Exposures and Sources of Funding

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

B. Banking Sector Resilience

16. A stress test was undertaken to assess the resilience of the banking sector using a baseline and adverse macroeconomic scenario. Seven banks were included in the exercise (95 percent of the banking system's total assets) and cross-border exposures at the bank level are explicitly considered. The baseline scenario is aligned with the October 2022 World Economic Outlook projections. The adverse scenario reflects the main risks in the risk assessment matrix (RAM, Appendix 2), with higher-than-expected inflation in the United States (U.S.) and advanced European economies, amid persistent geopolitical tensions and continued pandemic-related shortages. Sustained demand and increases in food and energy prices lead to Eurozone policy rates being increased to bring inflation back to target, resulting in a recession. Financial conditions tighten, confidence retracts, and risk premiums spike.

Figure 4.
Figure 4.

Finland: Macroeconomic Scenario1

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

1Year-average policy rate is the monetary policy rate in Finland (i.e., the ECB's refinancing rate). The risk-free rate is a 2-year sovereign risk-free bond yield.

Solvency Analysis

17. The top-down exercise shows that Finnish banks are well-capitalized and appear resilient to severe macro-financial shocks (Figure 5). In the adverse scenario, the aggregate CET1 capital ratio declines significantly by 7.4 percentage points to 12 percent at end-2025. While tighter monetary policy limits access to funding for households and corporates and results in higher non-performing loans, causing larger credit impairments, higher interest rates result in larger net interest margins, counterbalancing the impact on profitability.

Figure 5.
Figure 5.

Finland: Solvency Stress Test Results1, 2

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

Source: IMF staff calculations1 CET1: common equity tier 1 ratio, CR: capital ratio, CCoB: capital conservation buffer, OCI: other comprehensive income.2 Cross border credit losses have been estimated using the baseline and adverse scenarios of the respective countries.

18. Overall, capitalization is weakened in the adverse scenario due to deteriorating credit exposures. This drives an increase in risk-weighted assets (RWA), but the higher policy rate compensates through high net interest margins (NIM) despite reduced demand for credit. In the adverse scenario, the aggregate CET1 capital ratio declines by 7.4 percentage points to 12 percent at end-2025.

19. Credit risk significantly increases in the last two years of the adverse scenario and is the main driver of the adverse results. The main drivers of credit risk for both domestic and cross-border consumer and SME lending are increased unemployment, and a fall in property prices and investment. For wholesale credit, both domestic and cross-border, the main drivers are lower GDP growth, increases in the interbank rate, and the higher output gap. The highest rate of impairments is observed in unsecured household lending, followed by SME lending, secured household lending, and large corporate lending, respectively. Market risk losses are high during the first year. There is considerable heterogeneity in the drivers of capital depletion across banks.

20. Net interest margins increase (NIM) because of higher pass-through rates on lending than on deposits.5 The sharp increase in the policy rate in the adverse scenario allows banks to offset valuation losses and impairments through high net interest margins (NIM).

21. A lower path for interest rates in the adverse scenario would have worsened bank capital. A sensitivity analysis of interest rates (Figure 6) shows how the macroeconomic conditions in the adverse scenario transmit to bank capital and profitability. In the solvency stress test, Net Interest Income (NII) increases with interest rates. However, if interest rates in the adverse scenario were to remain as in the baseline, total capital adequacy ratios would drop to a low of 10.1 percent, as NII increase at a lower level than in the adverse scenario. CET1 ratios remain sufficient on average, but two banks would be unable to meet their minimum capital requirements in 2025.

Figure 6.
Figure 6.
Figure 6.

Finland: Sensitivity Analysis Results

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

Source: IMF staff calculations

Liquidity Analysis

22. Three top-down exercises were undertaken using regulatory data to assess liquidity risks. These were: an LCR stress test; a cashflow-based analysis; and a qualitative analysis underlining the banking funding position (NSFR) in euros. The LCR exercise measures banks' ability to cover 30-day liquidity needs (weighted net outflow) with their high-quality liquid assets; the cashflow analysis considers different maturities of cash inflows and cash outflows; the NSFR test evaluates longer-term funding capability of banks.

uA001fig02

Funding Sources for Finnish Banks

(excluding issuance and capital, in percent)

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

23. The liquidity analysis reveals significant vulnerabilities due to the reliance on short-term wholesale funding (Figure 7). Under the most severe liquidity stress scenarios, banks' high quality liquid assets (HQLA) prove to be insufficient, because the LCR falls well below the 100 percent threshold in the scenario with a rise in outflows. Other more adverse scenarios show even larger gaps. The qualitative NSFR test reveals the heavy reliance of banks on wholesale funding: by mid-2022, unsecured wholesale funding is 40 percent of total available funding, mostly sight deposits of corporate and financial institutions. The large share of short-term wholesale funding amplifies cash outflows at all maturity buckets, generating a large negative cumulative net funding gap.

Figure 7.
Figure 7.

Finland: Liquidity Analysis Results

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

Source: IMF staff calculations and COREP.

24. The analyses suggest the need for tighter liquidity regulation. Ideally, banks should adjust their funding structure but, because of the size of the financial system relative to the size of the economy, it is difficult to decrease the proportion of wholesale funding from the total funding availability in the near term. The authorities should direct Finnish banks to enhance liquidity buffers to cover a predetermined threshold of wholesale funding outflows over a five-day horizon, and restructure their wholesale funding over time, aiming to increase the proportion of longer-term and demand deposits, to the extent that is feasible. One step in this direction is the targets for minimum requirement of own funds and eligible liabilities (MREL) set by resolution authorities as only debt with maturity greater than one year can be used to meet the requirement. Furthermore, the authorities are recommended to run more frequent liquidity stress test exercises and should require banks to hold a higher stock of HQLA to withstand the stress test results.

Access to Funding Analysis

25. A second-round effect stress test was undertaken to measure the impact of the solvency stress test results on bank access to wholesale funding. The analysis estimated how banks' financial position, in combination with the macro-financial environment, affects their bond yields. It provides intuition on the interaction between solvency and liquidity, measuring how deterioration in banking solvency affects access to market funding.

26. The analysis shows that Finnish banks may face constraints to wholesale funding access during a stress period, when banking solvency decreases, and risk-free rates increase. 5-year bank bond yields at end-2021 were 0.5 percent and rose to 2.8 percent in Q2 2022. Over the stress scenario, there is a 11.3 percentage point increase in the five-year bond yield on average (Figure 8), of which a 5.4-percentage point increase is due to credit spreads, mainly from the last two years of the stress scenario. The analysis shows that main driver of the increase of the spreads is the deterioration of asset quality and increase in credit provisions. The bank-specific yield changes depend on their stress test performance.

Figure 8.
Figure 8.

Finland: Bond Yields and Spreads1,2

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

1 The analysis focusses on marginal funding cost only (i.e., the cost of a bank issuing new debt). These yields do not affect banks' NIM as they do not affect interest payable on existing debt. The average four-year change is the average estimated change in 5-year bond yields and spreads of every bank in the exercise that issues bonds. The weighted average four-year change is the overall change in the banking 5-year bond yields and spreads weighted by the total value of bonds issued from each bank in December 2021.2 Bank funding cost depends on profitability, asset quality, and liquidity. The semi-elasticities are -3.47, 0.95 and -0.004.

27. Finnish banks are very well capitalized and have large loss absorption capacity under stress. However, the analysis shows that a reduction in the quality of their portfolios may reduce access to funding (Figure 8). The results suggest the need to closely monitor banks' banking book quality, particularly for banks with a higher credit risk appetite. Smaller in-year stress test exercises could be introduced, focused on specific risks (e.g., credit risk, interest rate risk), with multiple scenarios and sensitivity analyses. These tests could highlight the specific impact of risks on bank funding access, which may not be observable in solvency stress testing due to banks' high level of capitalization.

Banking Sector Interconnectedness

28. Domestic interbank analysis reveals small domestic interbank contagion risks. Interbank positions are small compared to banks' capitalization. The results show no single failure of a domestic bank would trigger the failure of another bank in either scenario (no “cascade effect”). No bank is also undercapitalized relative to its regulatory minimum after a shock to one/several of its interbank exposures. All have low vulnerability to spillovers, despite some variability (Figure 9). The index of contagion (average percentage of loss of other banks due to the failure of a given bank) is also low.

Figure 9.
Figure 9.

Finland: Domestic Interbank Network and Contagion Analysis Results

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

Source: IMF staff calculations

29. Cross-border analysis reveals strong linkages with Nordic countries (Figure 10). 80 percent of cross-border exposures are to Denmark, Norway, and Sweden, and typically involve intragroup exposure. Among Finnish banks, Nordea holds 74 percent of its assets in these three countries. There are also significant exposures outside the Nordic region, particularly with the United Kingdom (derivatives at London Clearing House), Germany (debt securities, derivatives), and the United States (Federal Reserve).

Figure 10.
Figure 10.

Finland: Claims of Finnish Banks

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

Source: BIS Consolidated Banking Statistics Q1 2022

30. An economy-wide default in any Scandinavian country would imply a total loss of Finnish banks' capital. While the Finnish banking sector is most vulnerable to Sweden, the overall index of vulnerability through interbank exposures is very low at 6.6 percent (Figure 11, Scenario A). A default across all creditors in any Scandinavian country (Figure 11, Scenario B), would have a greater impact, implying a total loss of Finnish banks' capital. This is as expected, as nonbank claims in Scandinavian countries constitute most of the financial system's cross-border exposures.

Figure 11.
Figure 11.

Finland: Cross-Border Contagion Analysis Results1

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

Source: IMF staff calculations1 The index of vulnerability shows the probability of a bank/system to default due to a systemic event were the systemic event to be caused by the default of any of its peers, included in the analysis. The index of contagion measures how probable it is that a specific bank causes a systemic event if it defaults.

31. The authorities should lead a Nordic-wide stress test, as recommended in the 2016 FSAP, because of the degree of financial interconnectedness in the Nordic region. The authorities should consider a top-down exercise covering interlinkages and spillovers, liquidity-solvency interactions, and, over time, expand coverage to both banks and NBFIs. Specifically, the exercise should focus on cross-border interconnectedness analysis at an institutional level, instead of system level, as in the FSAP. It will provide a better mapping of cross border exposures, which will crystalize the vulnerabilities of the financial systems in the Nordic region. Such an exercise should complement, and not replicate, existing euro area stress tests undertaken by the European authorities, coordinating as appropriate.

C. Nonbank Financial Institutions

33. The NBFI sector faced fewer challenges during the COVID-19 pandemic and the war in Ukraine than during the GFC. This is partly attributed to improved risk management practices, lower customer withdrawals, and increased demand for savings products during the pandemic. It has also been helped by the recovery in financial markets after Q1 2020. This significantly boosted the capital of Insurers and PICs ahead of the negative shocks in H1 2022 (Figure 12).6

Figure 12.
Figure 12.

Finland: NBFI Assets and Solvency

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

33. Nevertheless, the COVID-19 pandemic caused fund suspensions, as did the war in Ukraine. Fund management companies were able to lead on temporary suspensions which are now permitted in regulation (a positive development relative to the GFC and 9/11, when FIN-FSA needed to order or approve suspensions). However, this led to some managers to gate funds when others did not.

34. The insurance sector has strong solvency overall. COVID-19 reduced claims in the non-life sector, while strong asset returns in 2021 helped on the asset side, and rising interest rates in 2022 reduced insurers' liabilities even whilst asset markets fell. But while levels are healthy, insurers remain vulnerable to a sharp change in interest rates, further falls in equity markets, or a local real estate correction (which some market participants deem likely).

35. One issue that has not been investigated in the market and by the authorities is the potential for a domino effect triggered by the war in Ukraine. Portfolio diversification may appear to mitigate risks, but if potential linkages are not traced through a portfolio, standard modelling will not pick them up. For example, an NBFI could have indirect exposure to energy companies, banks with major loans to energy companies, construction companies focused on the energy sector, or energy-intensive firms.

36. FIN-FSA's overall macroprudential strategy includes the NBFI sector and the public would benefit from more published material on these issues. There is insightful internal analysis on key asset markets and the roles of different Finnish and external asset owners, which should be published proactively.

37. FIN-FSA could benefit from additional resources and expertise for NBFI supervision. The pace of new regulation for the sector, driven primarily by the EU, can create significant costs and uncertainty. Also, FIN-FSA should publish a detailed annual supervisory plan to help the industry prepare for the large number of regulatory changes and EU Common Supervisory Actions.

Pension Insurance Companies

38. The PICs are part of the mandatory social security system, with a role to invest assets to partly fund the system. As part of social security, PICs are not subject to the EU Occupational Pension Directive (IORPII), or the EU Insurance Directive (Solvency II). This gives the authorities significant domestic regulatory freedom.

39. PICs have performed well despite the shocks from the COVID-19 pandemic and war in Ukraine. Over the last 20 years, the sector has generated decent investment returns (Figure 13), with geographic and asset diversification to higher yielding illiquid asset classes like real estate, private equity, and higher quality hedge funds, consistent with the profile of long-term PIC liabilities. However, investment performance is lower than regional comparators, and is lower between 1998-2021 (and particularly 1998–2017) than the local government fund KEVA, which can invest through downturns without any pressure from short-term solvency rules.

Figure 13.
Figure 13.

Finland: PIC Returns and Portfolio Composition

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

40. Analysis shows a history of procyclical and herding behavior in the portfolio allocation of the PICs due to the impact of domestic solvency regulations on investment behavior. While public pension funds have been able to invest countercyclically, PICs have previously displayed pro-cyclical investment behavior because of short-term solvency requirements. Major PICs have acquired or sold listed equity in a highly correlated manner, and the correlation between them has surpassed 80 percent. As investment restrictions have been loosened (in 2014 and 2017), while retaining the quarterly and annual solvency focus, the PIC investment allocation has become closer to KEVA, with over 90 percent correlation since 2015. Overall, reforms in 2017 appear to have mitigated procyclicality; since 2010, cyclicality is estimated to have ranged between -0.01 to -0.15 for PICs.7

41. The post-2017 solvency regulations remain complex, costly in supervisory and PIC time and do not provide a full anchor on long-term performance. The October 2022 long-term pension projections by the Finnish Center for Pensions (ETK) highlight how real returns from PICs are increasingly important to the stability of the pension system. The PIC solvency regime should focus on stress testing governance, investment strategies, and long-term risk.8

42. The ability of employers to borrow past pension contributions from PICs should be limited or removed. This creates liquidity risk, even if PICs can technically refuse requests. While used during the GFC, it has not been utilized recently and should be removed. A liquidity regulation to ensure stability during extreme events could complement longer-term solvency rules.

43. The PICs are jointly liable for all their pension payments and the authorities should run crisis simulation exercises of a large PIC failure. While smaller PICs have been amalgamated, a 'failure' of a major PIC has not happened. The crisis simulation should cover the policy response, impact on financial markets, the required funding response, as well as operational implications.

44. Like for the rest of the NBFI sector, the FIN-FSA has limited resources for PIC supervision. The PICs need regular on-site and off-site supervision of governance, investments, and operations given their size. There are opportunities to reallocate resources, if a new solvency regime results in lower frequency solvency calculations, or by taking resources away from small non-PIC Pension Funds.

Financial Sector Oversight

45. Financial sector oversight requires more resources. Increased resources, especially for the FIN-FSA, could be achieved through the reallocation of resources from other areas of work, efficiency gains (e.g., suptech), or through a larger financial envelope for financial oversight via increased fees and/or increased public financing.

A. Bank Oversight

46. For the banking sector, the authorities have made progress on the implementation of the recommendations of the 2016 BCP assessment. Loan-level data collection has been improved by the introduction of a regulatory report on new household mortgage loans in 2016. The legal process to establish the Positive Credit Register that will cover data on all personal loans is about to be completed (Spring 2024).9

47. There remain important outstanding issues, including strengthening operational independence of the FIN-FSA and the legal protection of its staff. Third parties may take legal action directly against FIN-FSA officials and staff. In this case, there is no dedicated provision to protect FIN-FSA officials and staff against the costs of defending their actions and/or omissions made while discharging their duties in good faith.

48. The independence of the FIN-FSA should be further enhanced:

  • For banking oversight, the Board of the FIN-FSA should not include the Ministry of Finance (MoF) or the Ministry of Social Affairs and Health (MoSAH). As stated in previous FSAPs, including officials from MoF or the MoSAH on the board is not consistent with international standards, exposing the authorities to charges of lack of independence and conflicts of interest between the FIN-FSA's mandate and the agenda of Ministries. The independence of the FIN-FSA should be further enhanced by requiring board members with more diverse backgrounds and experience.

  • The FIN-FSA is led by a Director General (DG) whose term of office is five years with an opportunity to be appointed again. The Parliamentary Council appoints and dismisses the Director General, upon proposal by the Board. No specific justification for removal is required, although there has never been a situation where the Parliamentary Council has removed the DG. There should be a statement of the reasons for the dismissal of the Director General, and the ineligibility criteria for the Director General should be defined clearly in law, and publicly disclosed if a dismissal occurs.

49. The availability of resources for banking supervision is a challenge for the FIN-FSA. Under the SSM arrangements, although the ECB directly supervises SIs, a significant share of supervisory resources come from the FIN-FSA.10 The SSM LSI methodology, derived from the SI methodology, is significantly more comprehensive that the FIN-FSA's pre-SSM approach. Furthermore, new risks are emerging that require new skills to meet challenges of cyber resilience, opportunities from fintech (see Box 1), increasing sophistication of criminal activity (money laundering and terrorist financing, ML/TF), and climate and energy-related risks on banking. However, the FIN-FSA's activities are mainly financed by supervision fees: there is a risk (from 2024) that fees calculated with the current schedule may not cover expenses. It is important to increase resources to recruit and retain quality staff across a full range of skills and experience in both traditional and emerging risks.

50. The supervisory approach and tools of the FIN-FSA have improved, but there is room for further improvement. The authorities rolled-out the ECB/SSM approach to the Supervisory Review and Evaluation Program (SREP) to all LSIs in 2019–20. FIN-FSA's SREP assessments are comprehensive and reflect a thorough analysis of LSI's risk profiles and capital requirements. However, further strengthening is recommended by: (i) increasing the number and scope of on-site inspections (especially on-site inspections on corporate governance and risk management frameworks); (ii) meeting banks' board of directors and bilaterally with independent board members and external auditors at least once a year for high-impact LSIs; and (iii) including an assessment regarding board and senior management competence, collective suitability of the boards and overall group structure and risks stemming from related parties in SREP reports. Furthermore, amalgamation institutions should be assessed as a group from a supervisory perspective.11

51. The corporate governance framework for credit institutions could be further strengthened. There were some important enhancements in the governance framework with Law 233/2021 that amends the Act on Credit Institutions (ACI). However, the board of directors of all banks should include enough independent members meeting clearly determined independency criteria, especially for central institutions of amalgamations. The FIN-FSA also needs to complete the necessary work for supervisory boards to be covered by the regulatory and supervisory framework: central institutions' supervisory boards of amalgamations are given some of the tasks of board of directors, but members of the supervisory boards have not yet been subject to fit and proper assessments, nor has the FIN-FSA assessed the collective suitability of supervisory boards.12,13

52. The supervisory approach could further be improved by conducting analysis on banks' IFRS-9 implementation. In particular, the analysis should focus on the staging of exposures and functioning of expected credit loss models. It would be useful to have a regular dialogue with credit institutions, bilateral meetings with credit institutions' external auditors, benchmarking and peer review analysis, and targeted on-site inspections.

Fintech in Finland

53. Finland is the second most digitalized of EU Member States.14 There are around 200 fintech companies with 1.2 billion EUR total revenues, mainly in fintech platform financing, payments, investments, and financial software. The biggest are in payments, and technology and solutions for large banks. Given their overall footprint, prudential oversight is adequate (Box 1).

54. It is important that the BoF and FIN-FSA ensure comprehensive data collection on lending by platforms/institutions that are not supervised by the FIN-FSA. Household consumer credit,15 at end-Q1 2022, is estimated to be around 24 billion EUR, 40 percent of which lent by digital banks (local and cross-border) and lending platforms (peer to peer consumer lending platforms and pay-day lenders). However, credit to households via digital platforms has declined because of the 20 percent interest rate ceiling on consumer loans introduced in 2019. This has led lenders to redesign their business models and apply for banking licenses or focus on corporate lending.

Fintech Landscape in Finland

Digitalization is high in Finland, with all residents over 15 years old having an account at a financial institution, and 65 percent holding a credit card.1 Banks are increasingly using digital channels to provide financial services to customers. While physical identification is required to first generate a digital ID, it can then be used for many purposes. Credit institutions' cooperation with fintech is mainly in outsourcing or subcontracting payment services.

A survey on financial institutions from 2021 showed that banking and pensions are most advanced in the use of new technologies. Supervised entities are furthest in the use of big data and analytics, followed by regtech and cloud services. New technology is most used in support functions. In banking, large banks use regtech for risk management and regulatory reporting, with automated credit decisions taken mainly for uncollateralized consumer loans.

There are 15 digital-only banks in Finland, one domestic, operating under a banking license. Their market share is only 0.6 percent of total banking assets and 1.3 percent in household lending. Banks from other Nordic countries are active in household lending in Finland through digital platforms, accounting for 3-5 billion EUR of consumer loans. They are monitored with ad-hoc data collection from public interim reports and data sharing with other Nordic central banks.

There are around 50 non-bank digital lenders (peer-to-peer lenders and pay-day lenders) in Finland. Their market share is estimated at about 2.5 percent by the BoF. While they are registered with the Regional State Administrative Agency for Southern Finland, there is a law in progress to give the FIN-FSA supervision powers over them.

There are 19 authorized payment institutions, including three e-money institutions. Card schemes dominate retail payment volumes, with mobile payments on the rise. The FIN-FSA has a tool to evaluate the risk level of specific institutions. Supervision is risk-based, and resources are mainly put in AML/CFT related issues. Few virtual-currency service providers subject to registration with the FIN-FSA operate in the country. Equity and business-to-business loan crowdfunding activities are required to be registered (and from November 2022 subject to authorization) and there are 10 service providers. Mortgage credit intermediary services is another area where registration at the FIN-FSA is required.

1 World Bank, The Global Findex Database, 2021.

B. Macroprudential Policy Framework

55. Since the 2016 FSAP, the authorities have made steady progress in improving the macroprudential policy framework. The macroprudential policy toolkit has been expanded, with an SyRB and minimum risk weight for mortgage loans, and the development of the positive credit register. These data are useful for the analysis of household indebtedness and calibration of macroprudential tools. Cooperation with other Nordic countries has been expanded with an updated Memorandum of Understanding (MoU) to promote financial stability, including common procedures for information sharing and coordination.

Institutional Framework

56. The institutional framework for macroprudential policy in Finland, formalized in 2014, is in line with IMF guidance for effective macroprudential policymaking. The FIN-FSA is the designated macroprudential authority, and its Board has decision-making powers, including to issue, amend, revoke, and implement certain macroprudential policy instruments. The BoF has an important role in providing analysis to support macroprudential policy, and the Deputy Governor of the BoF is Chair of the FIN-FSA Board. The authorities have recently revised the macroprudential strategy by stating the possibility of releasing macroprudential buffers in times of stress to support bank lending, which is commendable and timely. The authorities use various tools to ensure accountability and transparency through communication of macroprudential policy.

57. Strengthening the willingness and the ability to act in the macroprudential policy framework requires additional legislation. Defining a clear mandate of macroprudential policy for the FIN-FSA could foster willingness to act by enhancing the legitimacy of its policy actions. For example, the objective of the FIN-FSA could be explicitly stated as “maintaining the stability of the financial system as a whole” in Chapter 1, Article 1 of the Act on the FIN-FSA. In addition, the authorities could formalize the practice that the FIN-FSA Board is chaired by a representative from the BoF to harness the central bank's expertise in systemic risk identification and shield macroprudential policymaking from potential political interference.

58. Consideration should be given to providing the Board of the FIN-FSA with power to make regulations to achieve macroprudential objectives. The hard power of the Board of the FIN-FSA is restricted to specific instruments outlined in the ACI and CRR. If this is infeasible, the Board should be given semi-hard powers to issue recommendations on a “comply or explain” basis. This would strengthen the ability to act, ensuring that the Board has various policy options to contain systemic risks, as the legislative process can take considerable time to create new tools.

59. Changing the composition of the Board of FIN-FSA to enhance its independence as a banking supervisor would require a change in governance of macroprudential policy. The current governance structure for macroprudential policy has worked well, and in line with best practice has a key role for the BoF, as well as for the MoF given the need for legislative action to change the macroprudential toolkit or the regulatory perimeter.16 However, removing Board officials appointed by MoF and MoSAH, to avoid the appearance of lack of independence (¶48), would conflict with its role as macroprudential policy authority. To resolve this conflict, options include: (i) separate Board committees for macroprudential and microprudential oversight; or (ii) a financial stability council outside the FIN-FSA but with same composition and macroprudential powers as the current Board, with FIN-FSA as the secretariat.

Systemic Risk Monitoring

60. Systemic risk monitoring for the household sector, the primary source of financial vulnerabilities, is effective and timely. The FIN-FSA and BoF conduct systemic risk monitoring by analyzing a broad set of indicators and using multiple quantitative methods, conducting institution-level analysis with bilateral exposures data, and through stress test exercises. They jointly prepare vulnerability analyses and preliminary macroprudential policy proposals for the FIN-FSA Board. Policy recommendations and staff level discussions are summarized in a bi-annual macroprudential report, and the Bank of Finland Bulletin summarizes financial stability issues once a year.

61. The rapid increase of residential housing loans is of systemic concern. While house prices have not increased in Finland as much as in other Nordic countries, household debt reached its highest level in 2021 (Figure 14), and the average maturity of loans has also risen. With 95 percent of housing loans linked to variable rates (and only 28 percent hedged to fixed rates through the use of interest rate collars), a rise in interest rates could jeopardize household debt repayments.

62. Systemic risk monitoring should be enhanced through more granular data analysis and by addressing data gaps. The positive credit register will provide microdata on household indebtedness and income, but it would be useful to also collect data on collateral values and on housing company loans.17 The data will be useful to analyze vulnerabilities, calibrate policy, and understand distributional consequences. Microdata analysis takes time and expertise, necessitating greater staff capacity.

63. Corporate sector vulnerability analysis should be as developed as that of the household sector. Although the authorities have been developing the corporate sector analysis, the COVID-19 pandemic and war in Ukraine highlight the importance of monitoring a more comprehensive set of indicators. The use of firm-level data would also help develop indicators of credit quality and of the riskiness of aggregate credit allocation. Developing a systemic risk monitoring framework using firm micro-data will be helpful to assess financial vulnerabilities in a forward-looking manner. Moreover, it would be beneficial to address remaining data gaps. Ongoing work by Statistics Finland to create a comprehensive CRE price index is a step in the right direction.

Borrower-Based Measures

64. Given heightened vulnerabilities in the household sector, the authorities have activated borrower-based measures to contain systemic risks. These include: (i) a maximum loan-to-value (LTV) ratio for housing loans of 85 percent, except for first-time home buyers; (ii) proposals to set the maximum maturity of housing loans; (iii) a nonbinding recommendation to lend only if borrowers can keep DSTI ratios below 60 percent in stressed conditions.

65. To contain vulnerabilities from housing loans, the authorities should include caps on DTI or DSTI in the toolkit. This will require changes to the ACI. The MoF working group on financial indebtedness proposed a maximum upper limit on DTI ratios in 2019. The government abandoned proposals to legislate on a DTI due to concerns about its distributional impact, particularly on younger individuals. Analytical work undertaken during the FSAP finds that introducing a DTI is beneficial, even on distributional grounds (see TN on Macroprudential Policy, and forthcoming IMF working paper).

66. If DTI or DSTI caps are not feasible, a sectoral SyRB could be used to increase capital requirements on banks who lend to high-DTI/DSTI customers. However, DTI or DSTI caps are preferred to a sectoral SyRB because they have a direct effect on borrowers, protecting them from potential future negative shocks, and prevent leakages to other sectors.

Capital-Based Measures

67. The board of the FIN-FSA significantly relaxed macroprudential capital requirements during the COVID-19 pandemic. It released all SyRB requirements on credit institutions in April 2020. The Other Systemically Important Institutions (O-SII) buffer for OP Financial Group was lowered by 1 percent. The Board of FIN-FSA decided in June 2022 not to re-introduce the SyRB given the potential impact of the war in Ukraine.18 Finland has never activated the CCyB.

68. The authorities should reactivate the SyRB once circumstances allow and introduce a positive rate of CCyB in a standard risk environment (positive cycle-neutral CCyB). The SyRB should be reintroduced at the earliest opportunity to address structural risks from high household indebtedness and interconnectedness in the Nordic financial system once uncertainty and headwinds from the war in Ukraine abate. The COVID-19 pandemic showed that an unexpected contraction in credit is possible even without signs of excessive credit buildup. A positive cycle-neutral CCyB can be used as a releasable buffer in this circumstance but will require legislative change.

69. An estimated positive cycle-neutral CCyB for a representative Finnish bank is around 0.75 percent of RWA. The bank stress testing exercise is one way to calibrate a CCyB, as the solvency stress test sets the required level of macroprudential buffers and the necessary level of the SyRB to meet macro-financial risks from household debt. Taking the Capital Conservation Buffer and O-SII buffers as given to be used to cover the capital loss, for the typical bank, the positive cycle-neutral CCyB and SyRB are estimated at around 0.75 percent and 2.0 percent, respectively. The positive cycle-neutral CCyB is a residual after deducting CCyB, SyRB, and O-SII buffers, assuming that all exposures are domestic. However, banks have foreign exposures, and their capital requirements also depend on reciprocity mechanisms for CCyB. Also, the size of the buffer depends on the severity of the stress test, which hinges on the authorities' views on how large the shocks banks need to be prepared for (see TN on Macroprudential Policy).

Figure 14.
Figure 14.

Finland: Vulnerabilities from the Housing Sector and the Configuration of Capital

Citation: IMF Staff Country Reports 2023, 039; 10.5089/9798400232176.002.A001

Source: Statistics Finland, International House Price Database, IMF staff calculation.Note: Household indebtedness ratio (Figure 2) is higher because OECD data define indebtedness including “other accounts payable.”

C. Climate Risk

70. Financial institutions and supervisors need to increase their capacity on climate risk oversight, particularly to comply with forthcoming regulations. The EU's Sustainable Finance Disclosure Regulation sets out ESG disclosure requirements for financial market participants to strengthen protection of end-investors. Market participants note that compliance costs are significant, and data are not as robust as needed. Some financial institutions have established in-house databases on ESG-related risks. The authorities should build on progress to date by enhancing their analysis, extending the disclosure of climate risks, and aligning their practices with supervisory expectations. However, quarterly meetings with LSIs on ESG-related risks should be complemented by supervisory climate stress tests.

Financial Safety Net and Crisis Management

71. The Finnish financial safety net and crisis management arrangements rest on sound statutory foundations. The EU Banking Recovery and Resolution Directive (BRRD) established a comprehensive statutory regime for supervisory early intervention, crisis management and resolution in Finland.

72. As Finland is part of the European Union and the Euro Area, the management of distressed financial institutions takes place within a European framework. Under that framework, the Single Resolution Board (SRB) has primary responsibility for decisions relating to the resolution of larger and cross-border institutions. The FFSA is responsible, under the SRB's oversight, for the resolution of other smaller banks. The FFSA has sole responsibility for executing resolution measures for all Finnish banks—both SIs and LSIs.

73. Cooperation has resulted in improvements in the resolvability of Finnish banks, including with respect to their compliance with Minimum Requirement for Own Funds and Eligible Liabilities (“MREL”). At a national level, the Finnish authorities have also improved internal and inter-authority crisis preparedness. In reflection of the interconnectedness across Nordic-Baltic region, in 2018, the Finnish authorities signed an updated MoU with Nordic-Baltic authorities focused on improving coordination with respect to managing crisis in the regional financial system.

74. Recent developments reinforce the need for full operational readiness in the Finnish authorities' crisis management arrangements. The authorities have made good progress in developing crisis management capabilities and procedures and gathering practical experience. However, work remains to fully operationalize the new crisis management framework and ensure that resolution tools can be used at speed and with confidence to protect national and regional financial stability. This is particularly the case for the FFSA and BoF given their responsibilities for implementing resolution actions and as lenders of last resort under the preferred resolution strategy for Finnish SIs and LSIs.

75. The authorities should increase the centralization of cross-authority crisis cooperation and coordination in the Crisis Management Cooperation Group. It should have responsibilities for coordinating cross-authority preparations for, and management of, future crises (but not decision making). There is a high level of interdependence related to the sequencing of the respective independent actions that each authority needs to take as firms begin to experience stress or fail. As a result, the new crisis management cooperation group should also play a role in coordinating the authorities' work to formalize respective internal crisis management practices so that they best support coordinated authority action under agreed crisis management plans. It should undertake regular monitoring to ensure that resources dedicated to crisis management are commensurate with specific statutory functions.

76. Under SRB guidelines, SIs and LSIs are expected to have removed remaining barriers to resolvability by January 1, 2024. This includes valuation and funding in resolution reporting capabilities. The FFSA has defined expectations for firms to comply based on Single Resolution Board (SRB) and European Banking Authority (EBA) resolvability policy and a requirement to self-assess compliance. Based on the experience gathered with SIs, FFSA applies the SRB's heatmap methodology assessing LSI resolvability. To support consistent evaluation of firm-specific actions to improve resolvability, the FFSA should develop a resolvability scoring framework (or adopt one if developed by the Single Resolution Board) for Finnish LSIs ahead of 2024. Such a framework should capture examples of good and bad practice in firm's implementation of resolvability expectations. It will also support the prioritization of FFSA verification of firm-specific capabilities and on-going maintenance. The FFSA should ensure that the resolution plans for SIs and LSI with an amalgamation structure can be implemented at speed, and with certainty, over the resolution weekend while ensuring SRM resolvability expectations are tailored to take account of their legal entity structure.

77. The FFSA should develop and publish its resolution mechanics to use the resolution tools, prioritizing the bail-in tool initially. This published bail-in mechanic should define the FFSA's approach to key policy choices related to valuation timelines, treatment of resolved bank shares, issuance of new shares or interim instruments, and approach to ensuring compliance with change in control and other regulatory requirements under the European prospectus directive. The FFSA should explain to host authorities of Finnish headquartered banks how the existing crisis management and resolution framework interacts with the new tools as failure to do so may trigger a fragmented crisis response or incentivize pre-emptive host actions in a crisis.

78. The FFSA should consider publishing its approach to assessing the impact on depositors and the financial system of LSI liquidation. This is because the FFSA has determined that a significant proportion of its LSI population will enter resolution rather than liquidation in the event of failure and given its importance for assessing the public interest test and its approach to setting resolution strategies for LSIs. Publishing would enable the wider European approach for LSIs to benefit from the methods developed in Finland and ensure they remain fit for purpose.

79. The BoF should ensure that its Emergency Liquidity Assistance (ELA) and funding in resolution lending capabilities are fully operational. Building on existing internal ELA policies and procedures, the BoF should further develop its internal preparedness to support lending to failed banks whose solvency and viability has been restored through the application of resolution tools and the development of a credible restructuring plan.19 This preparedness should include defining internal collateral haircuts and pricing assumptions for crisis lending as well as regularly testing its ELA lending arrangements with its counterparties. With the FFSA, the BoF should formalize a non-firm specific approach to addressing liquidity needs for Finnish banks in resolution should they arise so that reporting and operational issues can be identified as part of planning.

80. On deposit guarantee arrangements, the FSSA Deposit Guarantee Fund (DGF) should ensure that it has sufficient funds under its direct control to ensure its financial autonomy and minimize its dependency on borrowing from banks to support a payout. A well-funded and backstopped DGF is important both to support rapid payout of covered deposits if required but also given its role in contributing to the cost of resolution actions. Ensuring the DGF can deploy its funds to support resolution costs is particularly important for situations where banks are not able to issue MREL due to prolonged loss of access to wholesale markets or for firms that do not have sufficient MREL resources. The FFSA should outline how the counterfactual insolvency valuation analysis as a basis for assessing the amount of DGF funds that it could contribute would be done. The FFSA should take a prudent approach and ensure that its prefunded DGF, and its policy advice on the appropriate target level ensures it is sufficient for a range of crisis scenarios (e.g., deposit payouts in the case of a concurrent failure of several mid-size LSIs).

Financial Integrity

81. An assessment by the Financial Action Task Force (FATF) identified areas of Finland's AML/CFT regime where major improvements are needed, importantly in AML/CFT supervision. Although the 2019 FATF assessment rated AML/CFT effectiveness of Finland's international cooperation, national coordination, financial intelligence and money laundering investigation and prosecution as substantial,20 major improvements are needed in other 7 out of 11 assessed outcomes. Importantly, the effectiveness of AML/CFT supervision was assessed as low, with fundamental improvements needed in the supervisors' ML/TF risk understanding, implementation of a risk-based AML/CFT supervisory model, guidance to obliged entities and sanctioning for AML/CFT non-compliance by financial institutions.

82. Since the FATF assessment, Finland's AML/CFT supervisory framework has been strengthened. The supervisor (FIN-FSA) has increased resources in line with the FATF's Recommended Actions and progress is being made in relation to the understanding of ML/TF risks and development of risk-based AML/CFT supervision. In addition, guidance to supervised entities on reporting of suspicious transactions has been issued. Finland has also made progress in addressing some of the technical compliance deficiencies identified in the FATF assessment, receiving upgrades in ratings for three FATF Recommendations, remaining partially compliant with 7 Recommendations.21

83. Further measures are needed to improve the effectiveness of AML/CFT supervision. A banking sector risk assessment, which the FIN-FSA is in the process of developing, will be instrumental in developing further the ML/TF supervisors' risk understanding and can inform a risk-based approach to ML/TF supervision. In particular, the variety and quality of the sources of information used to inform ML/TF risk assessments of institutions can be improved and additional focus on the residual risk of financial institutions to better focus its supervisory resources. A particular focus on cross-border transactions and non-resident risks, including collection and incorporation of payments data and refining approach to the geographic ML/TF risk is recommended against the backdrop of increased cross-border payments activity since the Nordea headquarters' move to Finland and growing financial flows with offshore financial centers (as in the IMF's past Offshore Financial Center Assessment Program).

Authorities' Views

84. The Finnish authorities welcomed the FSAP and appreciated the insightful and useful discussions during the FSAP missions. They valued the IMF's extensive work and engagement with a wide range of stakeholders and the insights provided by an external assessment of the financial sector's resilience and the overall framework for financial sector oversight in Finland. The authorities consider the FSAP to be an important tool in assessing financial stability and risks.

85. The authorities broadly agreed with the IMF team's assessment and recommendations. They welcomed the IMF's endorsement of Finland's continued progress in strengthening regulation, supervision, and the financial oversight framework since the last FSAP in 2016. They noted that the financial sector remained resilient through the shocks stemming from the pandemic and Russia's war in Ukraine, but given the war and subsequent energy crisis, the economic and inflation outlook turned gloomier during the FSAP process.

86. The authorities agreed with the IMF's assessment that structural risks and vulnerabilities regarding Finland's financial stability emanate from a large and concentrated banking sector, household indebtedness, and interconnections in the Nordic-Baltic region. They also shared the IMF's view that the Finnish banking system's solvency provides resilience to severe macrofinancial shocks, but that there are vulnerabilities relating to the funding structure. Regarding banking regulation and supervision, the authorities welcomed the IMF's assessment that the oversight framework is sound and has been further enhanced since the previous FSAP, and they agreed that further improvements can be made.

87. While the authorities' experiences with the current institutional framework for macroprudential policy have been positive, they agreed with the IMF on the need to enhance Finland's macroprudential toolkit. They welcomed the IMF's recommendation that new borrower-based macroprudential tools be introduced to address household vulnerabilities and that a positive cycle-neutral countercyclical capital buffer be considered, while also acknowledging that compliance with these would require legislative changes. The authorities were committed to continuing to enhance their systemic risk monitoring framework, for instance by addressing the existing data gaps and strengthening the analysis of disaggregated data. They expect the positive credit register, which is to be operational in 2024, to improve the quality of data used for macroprudential analysis and policymaking.

88. Regarding regulation and supervision of pension insurance companies, the authorities noted that the regulatory changes made in 2017 and thereafter have already reduced the procyclical nature of the system. They noted that although there is always room for improvement, the robust solvency regulation is essential for pension system stability and in safeguarding earnings-related pension benefits.

89. Regarding crisis management and resolution for the banking sector, the authorities agreed that the crisis management arrangements in Finland have been significantly enhanced since the 2016 FSAP and rest on sound foundations. They saw merit in further enhancing cooperation and collaboration between the authorities while keeping in mind the responsibilities and mandates of each authority. They agreed with the IMF in recognizing a need to improve the framework for liquidity in resolution, though acknowledging that possible European-level solutions will need to be accounted for in this.

Table 4.

Finland: Selected Economic Indicators

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Sources: Bank of Finland, BIS, International Financial Statistics, IMF Institute, Ministry of Finance, Statistics Finland, and IMF staff calculations.

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

Fiscal projections include measures as specified in the General Government Fiscal Plan.

Adjusted for interest expenditures and receipts.

Not adjusted for COVID-related one-off measures.

Adjusted for interest expenditures and receipts. Not adjusted for COVID-related one-off measures.

Defined as the negative of net financial worth (i.e., debt minus assets).

Table 5.

Finland: Financial Soundness Indicators

(In Percent)

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Sources: Bank of Finland, BIS, EBA, ECB, FIN-FSA, and Financial Soundness Indicators.

Break in series in 2017.

Table 6.

Finland: Financial Sector Structure

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Appendix I. Status of Key Recommendations of 2016 FSAP

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C = continuous; I (immediate) = within one year; NT (near term) = 1-3 years; MT (medium term) = 3-5 years.

Appendix II. Risk Assessment Matrix

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Appendix III. Stress Testing Matrix

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1

Under 0.1 percent of banking sector assets, and 0.3 percent of total assets of insurance companies, are direct exposures to Russia.

2

For more details see IMF, Finland: Selected Issues, 2019.

3

Banks are recommended to stress test the DSTI of mortgage applications using an interest rate of 6 percent and banks seem to follow this recommendation.

4

Loans to housing corporations are 40 percent of total non-financial corporate (NFC) debt but to some extent they represent household liabilities.

5

The pass-through rates from the effective interest rates are a) retail lending: 50.7 percent, b) corporate lending: 65.9 percent, c) interbank lending: 46.8 percent, d) term deposits: 35 percent, and e) overnight deposits: 29.4. The pass-through rate from the risk-free rate to effective interest rate of debt securities in the banking book is 78.2 percent, and in the effective interest rate of debt liabilities is 60.6 and 49.4 for unsecured and secured debt, respectively.

6

The four PICs are ELO, Ilmarinen, Varma and Veritas.

7

Cyclicality is calculated as the correlation between net acquisition of listed shares with their valuation changes, both expressed as share of stock of shares at the end of previous quarter.

8

The long run fiscal sustainability of the Finnish Pension system is beyond the scope of this FSAP, which is focused on financial stability.

9

The register aims to give a comprehensive picture of a person's indebtedness and will contain virtually all personal loans that carry interest (law § 6, second bullet): HE 22/2022 vp (eduskunta.fi).

10

The 2018 Euro Area FSAP stated that around 1/4 of supervision resources come from the ECB and rest from the NCAs.

11

See the Technical Note on Banking Regulation and Supervision for the definition of an amalgamation of deposit banks as set out in the Banking Supervision Deposit Bank Amalgamation Act (599/2010).

12

According to the Co-operative Act, a co-operative shall have a board of directors. It may also have a Managing Director and a Supervisory Board

13

The FIN-FSA plans to complete these assessments by 2022 year-end.

14

European Commission Digital Economy and Society Index, 2021.

15

Excluding mortgages.

17

Housing company loans represent a significant fraction of debt in Finland, and a large share of these loans is on the household's responsibility to amortize. However, the debtor of these loans is the housing company, and they are not included in the initial definition of the credit register.

18

For the O-SII buffers, it has been announced that the FIN-FSA will increase Nordea's and OP Financial Group's buffers by 0.5 percentage points on January 1, 2023. The transposition of Capital Requirements Directive (CRD) V into Finnish law also means that the next time that a SyRB is implemented by the authorities, it will be additive to an O-SII buffer.

19

This is derived and consistent with the Eurosystem agreement on emergency liquidity assistance, November 2020.

20

Effectiveness ratings can be either a High, Substantial (considered sufficient), Moderate, or Low level of effectiveness (considered insufficient, and subject to follow-up procedures).

21

Technical compliance ratings for the FATF 40 Recommendations can be either compliant, largely compliant (considered sufficient), partially compliant or non-compliant (considered insufficient, and subject to follow-up.

Other IMF Content

Other Publishers

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Cover IMF Staff Country Reports
Finland: Financial System Stability Assessment
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2023: Issue 039
Publisher:
International Monetary Fund
ISBN:
9798400232176
ISSN:
1934-7685
Pages:
54
DOI:
https://doi.org/10.5089/9798400232176.002
Figure 1.

Finland: Banking Sector

Finnish MFls' Euro-denominated Loans

(To Euro-area residents, in Million EUR)
Figure 2.

Finland: Household and Corporate Indebtedness
Figure 3.

Finland: Cross-Border Exposures and Sources of Funding
Figure 4.

Finland: Macroeconomic Scenario1
Figure 5.

Finland: Solvency Stress Test Results1, 2
Figure 6.

Finland: Sensitivity Analysis Results
Figure 6.

Finland: Sensitivity Analysis Results

Funding Sources for Finnish Banks

(excluding issuance and capital, in percent)
Figure 7.

Finland: Liquidity Analysis Results
Figure 8.

Finland: Bond Yields and Spreads1,2
Figure 9.

Finland: Domestic Interbank Network and Contagion Analysis Results
Figure 10.

Finland: Claims of Finnish Banks
Figure 11.

Finland: Cross-Border Contagion Analysis Results1
Figure 12.

Finland: NBFI Assets and Solvency
Figure 13.

Finland: PIC Returns and Portfolio Composition
Figure 14.

Finland: Vulnerabilities from the Housing Sector and the Configuration of Capital