1) The document provides an annual assessment of the stability of the Finnish financial system and risks to financial stability. It discusses concerns about weak global economic growth, uncertainties in financial markets, and ongoing financial regulatory reforms in Europe. 2) The Finnish financial sector is not currently facing cyclical threats, but vulnerabilities like rising indebtedness need monitoring. The banking sector remains sound, though profitability is declining due to low interest rates. 3) While macroprudential indicators do not currently signal risks, household debt is growing and structural vulnerabilities like a concentrated banking sector exist, requiring authorities to remain vigilant and prepared to respond if risks increase.

1. Julkinen
Suomen Pankki
Financial stability
119.5.2016
Pentti Hakkarainen

2. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Financial stability assessment
 Publication on Bank of Finland Bulletin site, see
www.bofbulletin.fi/en/financial-stability/
 Annual assessment of the stability of the Finnish
financial system and the risks to financial stability
 Comprises an editorial, a main article and a number
of thematic articles
19.5.2016 Pentti Hakkarainen 2

3. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Weak global economic growth and financial
market unrest are sources of concern
 Subdued growth in advanced economies and slower
growth in emerging economies
– Growth concerns contributed to financial market unrest in early
2016
 Low level of interest rates underlying the asset price
rise
 Uncertainties in both the short and the long term
– Price of oil, Chinese economic growth, normalisation of US
monetary policy, geopolitical risks, refugee situation
– See articles ‘What would Brexit mean for the financial markets?’
and’ Low oil price reveals implications of carbon risk’.
19.5.2016 Pentti Hakkarainen 3

4. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Construction of Banking Union and financial
regulatory reform close to completion
 Banking Union’s single supervision and resolution
already operational; single deposit insurance scheme
the missing piece
 Financial regulatory reform in the final phase;
increasing attention to be focused on supporting
economic growth
– Capital Markets Union
 See articles ‘Reform of bank capital regulation enters
final phase’ and ‘New European Deposit Insurance
Scheme to be introduced soon’
19.5.2016 Pentti Hakkarainen 4

5. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Finnish financial sector not facing any
immediate cyclical threats to financial
stability
 Credit growth and rising asset prices not associated
with acute risks, but the risks must be monitored
– See main article ‘Stability of Finnish financial system cannot
be taken for granted’
 Increasing indebtedness a more permanent
vulnerability
– See article ‘High housing debt increases risks to financial
stability’
 Finnish financial system has functioned reliably
– Banking and insurance sectors financially sound and
generating profits, but profitability will in future be eroded by
the low level of interest rates
– See article ‘Low interest rates place a strain on the banks’
19.5.2016 Pentti Hakkarainen 5

6. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
No alert from the early warning indicator that
has performed well in anticipating banking
crises
19.5.2016 Pentti Hakkarainen 6
–30
–20
–10
0
10
20
30
40
1985 1990 1995 2000 2005 2010 2015
Credit to private non-financial sector / GDP, trend deviation
%
Banking and housing market crisis at the beginning of the 1990s
Thresholds for countercyclical capital buffer requirement
The indicator has been calculated according to Basel Committee (2010) recommendations
using the one-sided Hodrick–Prescott filter (lambda = 400,000).
Sources: Bank of International Settlements (BIS), Statistics Finland and Bank of Finland
calculations.
Credit to private non-financial sector / GDP, trend
deviation (primary risk indicator)
12.4.2016

7. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Relative housing prices close to their
long-term averages
19.5.2016 Pentti Hakkarainen 7
50
100
150
200
250
1980 1985 1990 1995 2000 2005 2010 2015
Housing prices relative to consumer prices
Housing prices relative to rents
Average of the review period
Housing prices relative to wage and salary earnings
Average of the review period
Index, 1981/I = 100
Sources: Statistics Finland and Bank of Finland calculations.
Relative housing prices in Finland
Banking and housing market crisis at the beginning of the 1990s
18.5.2016

8. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Significant improvements in capital
adequacy of Finnish banks
19.5.2016 Pentti Hakkarainen 8
0
5
10
15
20
25
30
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2010 2011 2012 2013 2014 2015
Distribution of total capital adequacy ratios
Range Weighted average Median
23,1 %
19,0 %
Source: Financial Supervisory Authority.
%

9. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Finnish financial sector globally
interconnected
 Finnish financial sector concentrated (large entities, significant
market positions)
 Financial sector interconnected with global financial markets:
– wholesale funding
– investment activities
– ownership
 In addition to domestic entities, foreign-owned banks also
highly important for Finnish banking system
 Nordea’s conversion of subsidiaries into branches strengthens
banking sector’s Nordic interconnectedness => problems in
neighbouring countries may spread more directly to Finland
– See article ‘Conversion of Nordea’s subsidiaries into branches – Nordic
interconnectedness increases’
19.5.2016 Pentti Hakkarainen 9

10. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Finnish financial system structurally
vulnerable
 Finnish banking sector
– highly concentrated
– strongly interconnected across borders
– dependent on market funding, a large share of which is in the form of
mortgage-backed bonds
 Finnish financial system vulnerable to risks related to
lending for house purchase
– high household debt levels
– housing wealth of high importance in terms of household wealth
– housing loans a major part of bank lending
– mortgage-backed funding reflected in high asset encumbrance
 Growth in housing loan-related risks partly levelled off
– debt accumulation has slowed
– shares of heavily indebted households have no longer increased
19.5.2016 Pentti Hakkarainen 10

11. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Household indebtedness growing, but
more slowly than before
19.5.2016 Pentti Hakkarainen 11
–12
–8
–4
0
4
8
12
16
0
20
40
60
80
100
120
140
1980 1985 1990 1995 2000 2005 2010 2015
Household credit, % of GDP
Household credit, % of disposable income
Credit-to-GDP ratio, trend*
Deviation from trend (right-hand scale)
%
Credit incl. credit to housing corporations.
*Calculated using the one-sided Hodrick–Prescott filter (lambda = 400,000).
Sources: Statistics Finland and Bank of Finland calculations.
Percentage points
Household indebtedness in Finland
Banking and housing market crisis at the beginning of the 1990s
13.5.2016

12. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Difficult operating environment burdens
particularly insurance sector
 Finnish insurance sector strongly concentrated and a
significant investor
– Balance sheets of three largest life and non-life insurance companies
account for over three quarters of the sector’s total assets.
– Earnings-related pension company assets almost 90% of GDP
– Finnish earnings-related pension companies and non-life insurance
companies own nearly one third of domestic corporate debt securities.
 Low returns on fixed income investments burden
insurance company profitability
 Solvency 2 regulation on insurance companies entered
into force on 1 January 2016
– Insurance corporations’ assets and liabilities are valuated using the
mark-to-market approach.
 See article ‘Reform of insurance sector regulation’
19.5.2016 Pentti Hakkarainen 12

13. Julkinen
Suomen Pankki
Conclusions
Pentti Hakkarainen
19.5.2016 13

14. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Changes in Finnish financial system
 Nordea’s conversion of subsidiaries into branches
transfers operations outside the scope of single banking
supervision and crisis resolution within Banking Union.
=> We need close cooperation between the Banking
Union’s single supervision and Nordic banking
supervisors.
 In the concentrated banking, insurance and earnings-
related pension markets in Finland, we must ensure an
adequate level of competition that forces companies to
develop products and services and improve
productivity.
 Financial sector undergoing changes due to new
technology and business models
19.5.2016 Pentti Hakkarainen 14

15. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Low interest rates support growth but
may create risks
 Euro area monetary policy that is supportive of growth
also sustains provision of credit
 Accommodative monetary policy may in some countries
lead to
– excessive credit growth
– flow of assets to financial investments
– a rise in asset values.
 Macroprudential policy may be used to reduce adverse
side effects of low interest rates.
 Authorities must be prepared to act in the event of an
escalation of financial stability risks and increase in
vulnerabilities.
19.5.2016 Pentti Hakkarainen 15

16. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Finland’s macroprudential toolkit must
be internationally comparable
 Risks and problems in the financial system spread
rapidly across borders on integrated markets.
 Finnish authorities should have a toolkit comparable to
other countries – particularly Nordic countries and Baltic
States
– See article ‘Finland's neighbours rein in lending for house purchase’
 The toolkit lacks
– a systemic risk buffer
– instruments ensuring households can adequately service their loans.
 Too late to build and introduce a toolkit in a crisis
situation
– Lessons learned from the global financial crisis and the 1990s crisis in
the Finnish economy
19.5.2016 Pentti Hakkarainen 16

17. Suomen Pankki – Finlands Bank – Bank of Finland Julkinen
Contributors to the financial stability
assessment
 Asplund, Tuulia
 Björklund, Nina
 Haajanen, Jyrki;
 Jantunen, Lauri
 Kauko, Karlo
 Korpinen, Kasperi
 Koskinen, Kimmo
 Leino, Topias
 Manninen, Otso
 Miettinen, Paavo
 Putkuri, Hanna
 Pylkkönen, Pertti
 Savolainen, Eero
 Snellman, Heli
 Strandman, Ville
 Taipalus, Katja
 Tölö, Eero
 Vauhkonen, Jukka
 Virtanen, Jere
19.5.2016 Pentti Hakkarainen 17