Bank of Finland Bulletin 2/2014: Financial stability. Pentti Hakkarainen, Deputy Governor

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1 Bank of Finland Bulletin 2/214: Financial stability Pentti Hakkarainen, Deputy Governor

2 Themes of the stability report Owing to the weak outlook for the real economy, particular attention needs to be devoted to the vulnerabilities of the domestic financial system. Risks can be created by: housing price developments and households considerable debt levels, effects of low interest rates and transmission of bank lending. As demonstrated by the financial crisis, Finland also needs internationally comparable instruments for prevention of systemic risks. Banking union marks an important step forward. Supervision and resolution should be on the same cross-border level as the actual operations of financial institutions

3 Risks related to economic and credit cycles

4 Improved access to finance supports euro area s gradual recovery from the crisis 8 Risk premia on bonds issued by financial institutions and public-sector entities* Public sector*, peripheral countries** Public sector*, Countries with good credit ratings Financial institutions, peripheral countries** Financial institutions, countries with good credit ratings Basis points * Public-sector bonds refer to bonds issued by local government and central government-guaranteed bonds. ** Peripheral countries: Italy, Spain, Greece, Ireland and Portugal. Sources: Bloomberg and BofA Merrill Lynch

5 Increased risk appetite may distort prices on securities markets 25 Issues of bonds by high-risk non-financial corporations and risk premia on yields % Numer of issues (right-hand scale) Risk premium Number Source: Bloomberg

6 Share prices on the increase 22 Stock indices of major countries S & P 5 index Tokyo, Nikkei 225 index Total euro area: Dow Jones Euro Stoxx (Broad) index MSCI emerging markets index Beginning of period = Source: Bloomberg

7 Risks transmitted from abroad to Finland The development of the international economy and financial markets has a great impact on the prospects and risks for the Finnish economy and financial system. Risks of key concern for Finland: Emergence of renewed instability on international financial markets. Long-sustained low level of interest rates and excessive rise in asset prices. Impact of geopolitical tensions on the Finnish economic outlook

8 Domestic economy, non-financial corporations, households, public finances

9 Makrotalous Makrotalous Indebtedness and development of the real economy pose the main risks to the Finnish financial system Real economy n kien kestävyys kestävyys Asuntojen Asuntojen hinnat hinnat Banks viability Housing prices Riskipreemiot Riskipreemiot Risk premia Velkaantuneisuus Indebtedness IV/29 June IV/ I/212 June I/ III/212 III/212 May 214 The outer values reflect higher systemic risks. Sources: NASDAQ OMX Helsinki, banks, Statistics Finland and Bank of Finland. hteet: NASDAQ t: NASDAQ OMX Helsinki, OMX Helsinki, pankit, pankit, Tilastokeskus Tilastokeskus ja ja Suomen ja Suomen Pankki. Pankki

10 Growth rate of MFI corporate loans has remained subdued 1 Average interest rates on MFI corporate loans and annual growth rate in Finland % 1 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) % * Includes housing corporations. ** Excludes housing corporations. Source: Bank of Finland

11 Interest rates on corporate loan stock in euro area countries Finland Germany France Italy Spain Euro area 7 % Sources: European Central Bank and Bank of Finland calculations

12 Access to finance has remained good in the corporate sector in Finland Got everything Refused to withdraw because cost too high Don't know Got part of it Application rejected 1 % * October March. ** April September. Source: European central bank. * ** * ** * **

13 Bankruptcies increasing slightly, but still at a moderate level Bankruptices and non-performing assets in Finland Bankruptcy filings for non-financial corportaions, 12-month moving sum (left-hand scale) Banks' non-performing assets* (right-hand scale) 8 Number, 1, EUR billion * Assets due and unpaid for at least 9 days. Sources: Statistics Finland, Financial Supervisory Authority and Bank of Finland calculations

14 Household indebtedness continued to grow but at a slower pace Household indebtedness and interest burden in Finland Other loans (left-hand scale) Housing corporation loans* (left-hand scale) Housing loans (left-hand scale) Interest expenditure (right-hand scale) 14 % of disposable income % of disposable income * Statistics Finland s estimate of the loan stock of household-owned housing corporations. Sources: Statistics Finland and Bank of Finland calculations

15 Half of household debts held by a tenth of households Households and their debt by debt ratio* Share of households (left-hand scale) Share of total household debt (left-hand scale) Average debt per household (right-hand scale) 6 % EUR, thousands Households with no debt Households with debt ratio of over % and up to 3 % Households with debt ratio of over 3 % * Debt ratio = household debt, % of disposable monteary income in 212. Sources: Statistics Finland and Bank of Finland calculations

16 Growth rate of housing loans has decelerated Annual change in household loan stock* in Finland 2 % Total loans Housing loans * Finnish households' euro-denominated loans from MFIs operating in Finland, excluding household-owned housing corporation loans. Source: Bank of Finland

17 Real housing prices have declined, regional differences in price developments Real housing prices in Finland Whole country Greater Helsinki area Rest of Finland 16 Index, 2 = Nominal housing price indices are converted into real indices, using the consumer price index for the whole country. Source: Statistics Finland

18 Financial system risk resilience and structural risks

19 Finnish banking sector s risk resilience has remained good Own funds and capital adequacy in the Finnish banking sector Loss buffer* (left-hand scale Minimum requirement for own funds (left-hand scale) Capital adequacy ratio (Tier 1 and Tier 2) (right-hand scale) Common Equity Tier 1 ratio (CET1) (right-hand scale) 25 EUR bn % * Own funds surplus = own funds minimum requirement for own funds. Source: Financial Supervisory Authority

20 Banking sector performance unchanged and loan losses small Finnish banking sector performance Net interest income Net income from trading and investment Expenses and depreciations Pre-tax profit Net fee income Other income Net impairment losses 8 EUR bn Source: Financial Supervisory Authority

21 Low interest rates and slower growth of lending stock strain profitability Overall margin and 3-month Euribor Overall margin (average interest rate on loan stock - average interest rate on deposit stock) 3-month Euribor 6 % Finnish MFI loans to and deposits from the public. Sources: Reuters and Bank of Finland

22 Dependency on international wholesale funding increases vulnerability 2 Finnish banking sector s dependency on wholesale funding Issues of long-term debt securities Issues of short-term debt securities Loans to households and non-financial corporations Deposits from households and non-financial corporations Structural financial deficit (loan stock - deposit stock) EUR bn Deposit banks, mortgage banks and other credit institutions in the same group. Source: Bank of Finland

23 Banking sector sensitive to contagion Finnish banking sector s degree of concentration among the highest in the EU. Strong interconnectedness within the Nordic banking system. Large amount of assets in the Nordic countries, only small amount in the higher-risk countries. Significant share of the Finnish banking sector in the ownership of Nordic parent banks. Domestic banks foreign assets and liabilities have increased in the 2s

24 Insurance sector has maintained its solvency Insurance sector profitability and solvency have remained good, but considerable differences between companies can be observed. Insurance companies have been able to adjust their business models in the low interest rate environment. Unexpected shocks in the investment market pose the main risk to profitability and solvency

25 Infrastructure has operated reliably A reliable infrastructure that functions under all circumstances is a key part of a stable financial system International cooperative oversight plays an important role Fragmentation of functions can endanger continuity National contingency arrangements important Finland migrated to SEPA on schedule, development continues New cooperation groups have been established: the Euro Retail Payments Board (ERPB) in Europe and the Payments Council in Finland

26 Measures to ensure financial stability

27 The macroprudential tools to be introduced in Finland Countercyclical capital buffer requirement: 215 Binding maximum loan-to-value (LTV) ratio for housing loand (loan-to-value cap): 7/216 Minimum risk weights for housing loans: 215 Additional capital requirement for domestic systemically important credit institutions (O-SII requirement):

28 . should be supplemented Use of the systemic risk buffer should also be made possible in Finland Additional capital requirement permitted by the Capital Requirements Directive if the national banking sector is structurally vulnerable There should not be big differences in regulation and supervision in an integrated banking market Nearly all EU countries will incorporate the requirement in their legislation An internationally comparable set of instruments is necessary; use of the instruments to be determined separately

29 National additional capital requirements for systemically important credit National institutions additional in capital the Nordic requirements countries, for maximum systemically requirement important credit institutions in the Nordic countries, maximum amount 6 % Sweden Norway Denmark Finland Source: National central banks

30 Banking union about to start The two key elements of banking union single supervision of banks and single resolution are about to start. The resolution mechanism and bail-in remove/reduce the costs of banking crises to taxpayers. Also in Finland, resolution legislation and the related powers for authorities must be implemented promptly in all respects

31 Single Resolution Mechanism

32 Thank you!