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Bank of Finland Bulletin 2/2013: Financial stability Deputy Governor, Pentti Hakkarainen 23/05/2013 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 1 Themes of the Financial Stability publication International operating environment Domestic operating environment and the financial sector Infrastructure Measures to ensure financial stability 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 2 International operating environment 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 3 Twofold situation: financial markets picked up, real economy deteriorating CDS spreads on European government bonds have declined GDP developments have deteriorated also in countries with high credit ratings CDS spreads on European government bonds Portugal 16 Italy Spain Ireland GDP Finland Percentage points 114 14 112 12 110 10 108 8 106 6 104 4 102 2 100 0 Countries with good credit rating* Euro area 2005/I = 100 Finland GIIPS countries** 98 2008 2009 Source: Bloomberg. 23.5.2017 2010 2011 2012 2013 2005 2006 2007 2008 2009 2010 2011 * Austria, Belgium, Finland, France, Germany and the Netherlands. ** Greece (2011-2012, est.), Ireland, Italy, Portugal and Spain. Sources: Eurostat and Bank of Finland calculations. SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 4 2012 Factors outside Finland causing uncertainty Weaker-than-expected economic development – Negative influence on domestic corporations and households – Financial sector profitability pressures and disturbed transmission of financing – Threat from growing problems in public sector Re-emergence of European financial crisis – Weakening confidence, renewed escalation of debt crisis – Potential negative impact on Finnish government and banking sector funding, as highly dependent on foreign sources Negative side effects of low interest rates 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 5 Negative effects of long-term low interest rates Rates kept low for protracted period reduce banks' net interest income and insurance companies' investment income and put pressure on their profitability Debt service burden eased, increases loan forbearance, delays deleveraging Search for yield affects allocation of investment, can distort pricing of risk and overheat prices 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 6 Domestic operating environment and the financial sector 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 7 Makrotalous Makrotalous Indebtedness and macroeconomic development pose greatest risks to Finnish financial system Macroeconomy kestävyys kestävyys Asuntojen Asuntojenhinnat hinnat Banks' current viability Housing prices Riskipreemiot Riskipreemiot Velkaantuneisuus Velkaantuneisuus Risk premia June 2011 IV/2009 IV/2009 Indebtedness June 2012 I/2012 I/2012 May 2013 III/2012 III/2012 The outer values reflect higher systemic risks. Sources: NASDAQ OMX Helsinki, banks, Statistics Finland and Bank of Finland. t:: NASDAQ NASDAQ OMX OMXHelsinki, Helsinki,pankit, pankit,Tilastokeskus Tilastokeskusja jaSuomen SuomenPankki. Pankki. 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 8 Growth of non-financial corporations' stock of loans decelerated 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) 10 % % 8 30 20 6 3 4 10 0 1 2 2 0 -10 -20 2004 2006 2008 2010 2012 * Also includes housing corporations. Source: Bank of Finland. 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 9 Interest rate margins widened most for small corporate loans Average margins on new corporate loans granted by Finnish MFIs, by loan size 3.5 New drawdowns of up to EUR 50.000 New drawdowns of up to EUR 250.000 New drawdowns of over EUR 50.000 and up to EUR 250.000 New drawdowns of over EUR 250.000 and up to EUR 1 million New drawdowns of over EUR 1 million Percentage points 3.0 2.5 2.0 1.5 1.0 0.5 2010 2011 Excluding account and repo agreements. Source: Bank of Finland calculations. 23.5.2017 2012 2013 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 10 Companies increasing bond financing Finnish corporate sector's interest-bearing debt structure 1 Loans from MFIs 3 Loans from other OFIs 5 Loans from other public-sector entities 7 Long-term debt securities 140 EUR bn 2 Overseas loans (excl. direct investments) 4 Loans from employee pension companies 6 Short-term debt securities 8 Debt relative to GDP (right-hand scale) % of annual GDP 70 8 120 60 7 100 50 80 6 5 4 3 40 60 2 30 40 20 1 20 10 0 0 2007 2008 2009 2010 Sources: Statistics Finland and Bank of Finland 23.5.2017 2011 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 2012 11 Household debt accumulation continues – the bulk of which for housing or renovation Household indebtedness and interest burden in Finland Housing-related loans*, % of disposable income (left-hand scale) Other loans, % of disposable income (left-hand scale) Total loans*, % of GDP (left-hand scale) Total interest expenditure, % of disposable income (right-hand scale) 140 % % 14 120 12 100 10 80 8 60 6 40 4 20 2 0 0 1986 1991 1996 2001 2006 2011 * Housing loans and households' estimated share of housing corporation loans. Sources: Statistics Finland and Bank of Finland calculations. 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 12 Debt burden and risks distributed unevenly Households and their debt by debt ratio* in Finland 50 Share of households (left-hand scale) Share of household debt (left-hand scale) Average debt per household (right-hand scale) % EUR, Thousands 300 40 240 30 180 20 120 10 60 0 0 0% (no debt) Over 0 % and up to 100 % Over 100 % and up to 200 % Yli 200 % Over 300 % Over 400 % Over 500 % and up to and up to and up to 300 % 400 % 500 % * Horizontal axis: household debt, % of disposable monetary income 2011. Sources: Statistics Finland and Bank of Finland calculations. 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 13 Relative housing prices higher than long-term averages Relative housing prices in Finland 250 In relation to cost of housing construction Average* In relation to housing rents Average* In relation to wage and salary earnings Average* Index 1981/I=100 200 150 100 50 1981 1986 1991 1996 2001 * Average of the review period. Sources: Statistics Finland and Bank of Finland calculations. 23.5.2017 2006 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 2011 14 Finnish banking sector: capital adequacy improved despite slight decline in own funds Return on equity (ROE)* Common Equity Tier 1 (CET1) Equity ratio (equity/balance sheet ratio) 20 % 16 12 8 4 0 2006 2007 2008 2009 2010 2011 2012 * Returns in 2006–2007 are affected by certain reorganisation measures in the banking sector. Source: Financial Supervisory Authority. 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 15 Low level of interest rates weakens banking profitability Factors underlying changes in Finnish banking performance 3 000 EUR m 10 137 -122 381 2 500 -63 -83 Expenses Value adjustments 2562 2302 2 000 1 500 1 000 500 0 Operating profits 2011 Net income Net income from trading from and investment insurance activities activities Other income Net interest income Operating profits 2012 Source: Financial Supervisory Authority. 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 16 Weak economic development adds to credit risk Bankruptcies, nonperforming assets and net impairment losses in Finland Corporate bankruptcies filed, 12-month moving total (left-hand scale) Banks' non-performing assets (right-hand scale) Banks' net impairment losses, 12-month moving total (right-hand scale) 7 EUR bn Number, 1000 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Sources: Statistics Finland, Financial Supervisory Authority and Bank of Finland calculations. 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 17 High dependency on international market funding Funding deficit of Finnish banking sector Loans to the public 200 Deposits from the public Funding deficit EUR bn 160 120 80 40 0 2007 2008 2009 2010 2011 2012 2013 The counterparties of loans to the public and deposits from the public are others than financial institutions. Source: Bank of Finland. 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 18 Banks increased use of covered bonds Finnish banks' covered bonds 1 Stock (left-hand scale) 2 Issued (left-hand scale) 3 Housing loan encumbrance (right-hand scale)** 28 EUR bn % 70 1 24 60 20 50 3 16 40 12 30 8 20 2 4 10 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* * 2013 to end-April and January-April issue. ** Covered bonds as collateral for housing loans as share of entire stock of housing loans. Calculation presumes 4.4% of housing loan stock does not qualify for use of bond as collateral. Sources: Bank of Finland, European Covered Bonds Council, Bloomberg and Financial Supervisory Authority. 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 19 Finland's banking sector is concentrated Concentration of banking system in different EU countries 100 Proportion of five largest credit institutions in aggregated credit institutions' balance sheet in 2011 % 80 60 40 20 0 EE NL FI PL DK CZ CY LT SE HU IE FR ES IT AT DE The figures for the EU countries also include subsidiaries and branches of foreign banks operating in the country. Source: European Central Bank. 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 20 Infrastructure 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 21 Payment and settlement systems being reformed Challenges posed by internationalisation of infrastructure – Increased competition between infrastructure services – Strive for economies of scale – TARGET2-Securities and European harmonisation Changes and improvement in efficiency in cost of systems’ reliability and service levels? – Importance of market consultation – Continuity and contingency arrangements – Vulnerable groups' requirements: unhindered payments 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 22 Measures to ensure financial stability 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 23 1) Finland to consider additional requirements for systemically important banks Consequences of bank crisis serious in concentrated banking system, such as in Finland Other Nordic countries significantly tightening regulations concerning systemically important banks Regulations need to be as harmonised as possible internationally and in Nordic countries in particular 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 24 2) Finland needs to establish ways of reducing housing loan-related risks No country is safe from the housing and property crises – In the 2000s: Denmark, Ireland, the Netherlands, Spain, the United States... – Finland suffered crises in the 1930s and 1990s International experience: A maximum loan-to-value ratio is a way of dampening excessive growth in housing loans and housing prices Studies show that FIN-FSA's current loan-to-value ratio recommendations are not adequate – A binding LTV ratio is needed as a macroprudential tool 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 25 3) Bank liabilities should be used in banks’ crisis resolution Banks' effective recovery and crisis resolution requires the possibility to write down the liabilities in the balance sheets of troubled banks or convert into equity (bail-in) Bail-in should be the general rule; bail-out should be considered an exceptional solution and only applied after separate political consideration Write-downs should first be directed at those debtors with the best ability to evaluate and price risks (market discipline) Effectiveness of crisis resolution improved by bail-in instruments 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 26 4) Functioning of business financing must be ensured Smooth functioning of corporate financing is vital to economic growth In EU comparison the availability of corporate financing in Finland is good, however lending terms are getting tighter Small and medium-sized companies dependent on bank financing Promoting diverse sources of financing, in particular for small and medium-sized companies – Enhancing the domestic bond market – European level measures 23.5.2017 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 27