Deputy Governor Marja Nykänen Bank of Finland New instruments to rein in household debt Bank of Finland Bulletin press conference 4 May 2021 bofbulletin.fi #bofbulletin

1. Bank of Finland
New instruments to rein in household
debt
Bank of Finland’s Financial stability assessment
Bank of Finland Bulletin press conference 4 May 2021
Marja Nykänen

2. | Public | BOF/FIN-FSA-UNRESTRICTED
Bank of Finland’s financial stability assessment
• Editorial: New instruments to rein in household debt
• Stability assessment: Debt-to-income cap and maximum maturity on housing loans
needed to curb risks to financial stability
• Experts’ articles on topical subjects
• Assessment of impact of macroprudential tools proposed by Ministry of Finance working group
• Effects of COVID-19 on banks, businesses and residential and real estate investment markets
• New stress testing framework to assess the capital adequacy of Finnish banks
• New statistics on households’ housing loans for investment purposes
• Accessible summary
• Available on the Bank of Finland Bulletin website at
https://www.bofbulletin.fi/en/home/
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Key messages
• Support measures have maintained the stability of the international financial
system.
• Regulatory measures have strengthened banks’ loss absorption and lending
capacity.
• We have yet to see all the impacts of the COVID-19 pandemic on banks and
non-financial corporations.
• Housing market risks have increased amid weak economic developments.
• A debt-to-income cap and a limit on the maturity of housing loans should be
introduced without further delay.
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4. | Public | BOF/FIN-FSA-UNRESTRICTED
Regulatory measures have strengthened
banks’ lending and loss absorption capacity
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5. | Public | BOF/FIN-FSA-UNRESTRICTED
Support measures have maintained the stability of the
international financial system
• Support measures have built a bridge over the crisis.
• All the effects of the crisis on businesses and households are not
yet discernible.
• The key is how businesses and households can service their debts
once the support measures come to an end.
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6. | Public | BOF/FIN-FSA-UNRESTRICTED
Financial conditions tightened as economic
expectations rose
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-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
01/2020 05/2020 09/2020 01/2021
United States United Kingdom Germany France
10 year government bond yield, %
Source: Macrobond.
Long-term government bond yields increased in the
spring of 2021, especially in the USA

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Downward trend of non-performing loans may turn
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8. | Public | BOF/FIN-FSA-UNRESTRICTED
Financial regulation strengthened banks before the
pandemic
• Regulation has strengthened banks’ capital adequacy and loss
absorption capacity.
• Macroprudential tools contributed to further improve banks’
resilience before the pandemic.
• Relaxation of macroprudential requirements and banking
supervision and regulation has fostered lending during the
pandemic.
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9. | Public | BOF/FIN-FSA-UNRESTRICTED
We have yet to see all the impacts of the COVID-19
pandemic on banks and non-financial corporations
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10. | Public | BOF/FIN-FSA-UNRESTRICTED
Finnish banking sector remains well-capitalised
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11. | Public | BOF/FIN-FSA-UNRESTRICTED
No alarming increase in bankruptcies
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0
50
100
150
200
250
300
2017 2018 2019 2020 2021
January February March
Source: Statistics Finland.
Number of companies
Bankruptcy proceedings launched

12. | Public | BOF/FIN-FSA-UNRESTRICTED
Housing market risks have increased
amid weak economic developments
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13. | Public | BOF/FIN-FSA-UNRESTRICTED
Housing loans and loans to the real estate sector
account for a large proportion of Nordic bank lending
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0
20
40
60
80
Denmark Sweden Finland Norway
Residential mortgage loans Commercial real estate loans
Lähde: EBA.
%
Nordic banks have issued high volumes of residential and
commercial real estate loans

14. | Public | BOF/FIN-FSA-UNRESTRICTED
Finnish housing market and mortgage lending
recovered quickly from first wave of the pandemic
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0
500
1 000
1 500
2 000
2 500
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2018 2019 2020 2021
EUR million
Source: Bank of Finland. @38215
New housing loan drawdowns from the Finnish credit institutions
0
1 000
2 000
3 000
4 000
5 000
6 000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2018 2019 2020 2021
Number of transactions
Source: Statistics Finland (sales through real estate agents). @38215
Monthly sales of old dwellings in housing companies in Finland

15. | Public | BOF/FIN-FSA-UNRESTRICTED
Investment loans account for 8% of the housing loan
stock
• One tenth of housing loans taken out in March 2021 were for the
purpose of residential property investment.
• Many property investors also hold housing company loans related
to new-build construction.
• The rental market is an important segment of a well-functioning
housing market, but residential property investment also entails
risks.
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16. | Public | BOF/FIN-FSA-UNRESTRICTED
Further widening of house price differences between
growth centres and rest of Finland
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75
100
125
150
175
200
225
2000 2005 2010 2015 2020
Helsinki city centre Helsinki
Helsinki metropolitan area Turku
Tampere Finland, overall
Finland excl. Helsinki metropolitan area
Real index, 2000 = 100
Sources: Statistics Finland, Macrobond and calculations by the Bank of Finland. @38215
Real prices of old dwellings in housing companies in Finland, quarterly

17. | Public | BOF/FIN-FSA-UNRESTRICTED
A debt-to-income cap and a limit on the maturity of
housing loans should be introduced
without further delay
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18. | Public | BOF/FIN-FSA-UNRESTRICTED
Household indebtedness relative to income has been
rising for a prolonged period
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0
25
50
75
100
0
40
80
120
160
2000 2005 2010 2015 2020
Other loans from Finland and abroad Other loans by Finnish credit institutions
Consumer credit by Finnish credit institutions Loans via housing companies
Housing loans by Finnish credit institutions Housing-related loans (rhs)
% of disposable income % of total household debt
Sources: Statistics Finland and Bank of Finland. @38215
Household debt by purpose in Finland

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New mortgage-borrowers have an increasing amount of
debt relative to income
• A higher proportion of new
housing loans* are granted to
households that are highly
indebted relative to income.
• High debt-to-income ratios are
more common in growth centres
than elsewhere in Finland.
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* Of the euro volume of new housing loans.

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0
20
40
60
80
100
2010 2012 2014 2016 2018 2020
At most 14 years Over 14 and at most 19 years Over 19 and at most 21 years
Over 21 and at most 24 years Over 24 and at most 26 years Over 26 years
Proportion of the amount of new housing loans, %
Source: Bank of Finland. @38215
Maturities of new housing loans drawn in Finland
Rapid increase in the popularity of mortgages with long
maturities
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Approx. 25 years
Approx. 30 or 35 years
Approx. 20 years

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0
20
40
60
80
100
2000 2005 2010 2015 2020
0% 0–39% 40–49% 50–59% 60–69% 70–79% At least 80%
Proportion of transactions, %
Sources: Central Federation of Finnish Real Estate Agencies and Bank of Finland calculations.
@38215
New dwellings sold in blocks of flats and terraced houses by the size
of the housing company loan share
Large shares of housing company loans more
widespread in the sales of new dwellings
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Transactions where at least 60%
of the debt-free price consists of
the buyer’s share of the housing
company loan

22. | Public | BOF/FIN-FSA-UNRESTRICTED
Measures proposed by the Ministry of Finance working
group should be introduced
• A debt-to-income cap would constrain total household debt from rising
to a level too high relative to income.
• Maximum maturities of housing loans and housing company loans
would maintain good credit-servicing practices.
• Limiting very large housing company loans would prevent an
increase in the risks related to housing finance.
• The proposals also allow for some flexibility above the limit.
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23. | Public | BOF/FIN-FSA-UNRESTRICTED
The neutral debt-to-income cap has risen
• The debt-to-income cap would now be set at 500%, if the
objective is to minimise its impact on the provision of credit.
• The constraint would not target particularly the financing of first
homes.
• Impacts on long-term economic growth would be moderate.
• The constraint would dampen economic fluctuations more
effectively than the current maximum loan-to-collateral ratio.
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24. | Public | BOF/FIN-FSA-UNRESTRICTED
A limit on maturities and housing company loans would curb
the granting of very large loans with very long maturities
• The growing popularity of housing loans with very long maturities
increases the need to limit maturities.
• Imposing a limit on maturities would impact banks granting a large
volume of housing loans with long maturities.
• Limits on housing company loans could have an impact on the financing
of new-build construction and increase demand for housing loans.
• A loan-to-value limit would still allow very large housing company loans
in the financing of new-build construction.
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25. | Public | BOF/FIN-FSA-UNRESTRICTED
Summary of key messages
• Finland’s financial system has operated well during the pandemic.
• We have not yet seen all the effects of the COVID-19 pandemic.
• Housing market risks and household indebtedness have
increased.
• Measures to curb indebtedness should be introduced without
delay.
4.5.2021 25

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