Bank of Finland Bulletin 2/2012 Financial stability 2012

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1 Bank of Finland Bulletin 2/212 Financial stability 212 Pentti Hakkarainen Deputy Governor 8 May 212 SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND

2 Themes 1) Stability situation and outlook for the Finnish financial system - domestic and foreign operational environment - situation of main debtor sectors 2) Risk resilience of the Finnish financial system 3) Necessary measures for strengthening the stability of the Finnish financial system SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 2

3 Euro area countries 1-year bond yield spreads vis-à-vis German yields Finland France Netherlands Spain Italy 6 Percentage points /211 1/212 2/212 3/212 4/212 5/212 Source: Reuters. 3

4 Stability situation and outlook for the Finnish financial system 4

5 Stability of the Finnish financial system strengthened in 212 Macroeconomy Banks' sustainability Housing prices Risk premia Indebtedness December 29 September 211 March 212 Sources: NASDAQ OMX Helsinki, banks, Statistics Finland and Bank of Finland. 5

6 Annual growth in corporate loans* accelerated Average interest rate on corporate loan stock (left-hand scale) 2 Average interest rate on new corporate loans (left-hand scale) 3 Corporate loans, annual growth rate (right-hand scale) % % *Also includes housing corporations. Source: Bank of Finland. -1 6

7 12 Household indebtedness continues to grow Loan stock (left-hand scale) Share of housing corporations' loan stock (left-hand scale) Interest expenditure (right-hand scale) % of disposable income % of disposable income Sources: Statistics Finland and Bank of Finland calculations. 7

8 Denmark % Netherlands Ireland Norway Cyprus Sweden United Kingdom Portugal Spain European Union Finland Euro area* Estonia Germany Austria Belgium Greece France Italy Slovakia Slovenia Household indebtedness at average European level Loans, % of disposable income. Also includes non-profit institutions serving households. Sources: Eurostat and Bank of Finland calculations. * Euro area figure has been corrected after the press conference ( ). 8

9 18 Share of heavily indebted households (debt ratio* in excess of 5%) on the increase Proportion of households with debt (left-hand scale) Proportion of total household debt (left-hand scale) Average debt (right-hand scale) % EUR, thousands * Debt, % of disposable monetary income. Sources: Statistics Finland and Bank of Finland calculations. 9

10 Low lending rates have kept interest payment burden at tolerable levels % Loans, average interest rate Total margin Deposits, average interest rate 12-month Euribor Sources: Bank of Finland and Reuters. 1

11 Risk resilience of the Finnish financial system 11

12 Banks strong in terms of profitability and capital adequacy, leverage ratio declined 16 % Return on equity (ROE) Capital adequacy, % Leverage ratio (equity / total assets) 12 % 8 % 4 % % Source: Financial Supervisory Authority. 12

13 Banks credit risk outlook stable Filed corporate bankruptcies, 12-month moving sum (left-hand scale) Banks' non-performing assets (right-hand scale) Banks' net impairment losses, 12-month moving sum (right-hand scale) 7 Number, 1, EUR billion Sources: Statistics Finland, Financial Supervisory Authority and Bank of Finland calculations

14 Covered bonds have diversified Finnish banks funding structure 1 Outstanding 2 Issues 24 EUR billion * *For 212, outstanding volume at end-february, issues in January-February. Sources: Bank of Finland, European Covered Bonds Council and Bloomberg. 14

15 Special questions regarding payment and settlement systems Benefits from international infrastructure services Lower prices with economies of scale Broader markets for participants Challenges for international infrastructure services Harmonised operational procedures still need to support the already achieved efficiency gains: Eg automatic recording of payments at firms Market development must be fostered Risk management must be updated to correspond to the new environment Infrastructure decisions are strategically important Possibilities to influence infrastructures must be retained 15

16 Measures to enhance financial stability 16

17 1) Household indebtedness must be tackled We have to increase awareness of interest rate risks and the risks related to large debts and various loan products. Banks must carefully comply with FIN-FSA s recommendations for assessing mortgage loan applicants housing and repayment affordability and for caution regarding loan-to-value (LTV) ratios in excess of 9%. Banks and authorities should be cautious about amortisation-free and bullet housing loans that have become widespread in some countries SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 17

18 2) Authorities need to be equipped with adequate macroprudential tools Finnish authorities must be equipped with discretionary means for restraining excessive overall lending and lending for house purchases, at least. We must also consider whether tools are needed to restrict excessive growth in banks balance sheets and short-term market funding SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 18

19 3) Sustainability of Finland s public finances must be safeguarded Measures to safeguard the long-term sustainability of Finland s public finances must be continued in a determined manner. The long-term sustainability of the public finances is an indispensable condition for the stability of the national financial system SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 19

20 4) The quality and availability of infrastructure services directed at financial markets must be ensured In developing national financial markets, care must be taken to ensure that infrastructure services directed at financial markets remain reliable and effective and are flexibly accessible to different market participants SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 2

21 5) Attention needs to be devoted to developments in equity ratios Supervisory authorities must pay attention to credit institutions balance sheet growth and declining leverage ratios. Banks operating in Finland differ in terms of their structures and business models, which places special demands on regulation and supervision SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 21