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Bank of Finland Bulletin 2/2012 – Financial stability 2012 Pentti Hakkarainen Deputy Governor 8 May 2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 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 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 2 Euro area countries’ 10-year bond yield spreads vis-à-vis German yields Euro area countries 10-year bond yield spreads vis-à-vis German yields Finland 6 France Netherlands Spain Italy Percentage points 5 4 3 2 1 0 12/2011 1/2012 2/2012 3/2012 4/2012 5/2012 Source: Reuters. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 3 Stability situation and outlook for the Finnish financial system 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 4 Stability of the Finnish financial system strengthened in 2012 Macroeconomy Banks' sustainability Housing prices Risk premia December 2009 September 2011 Indebtedness March 2012 Sources: NASDAQ OMX Helsinki, banks, Statistics Finland and Bank of Finland. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 5 Annual growth in corporate loans* accelerated Average interest rates on corporate loans* and annual growth rate 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) 7 % % 25 6 20 5 15 4 10 3 3 5 1 2 2 0 1 -5 0 2003 -10 2004 2005 2006 2007 2008 2009 2010 2011 2012 *Also includes housing corporations. Source: Bank of Finland. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 6 Household indebtedness to grow Household indebtedness continues tocontinues grow Loan stock (left-hand scale) Share of housing corporations' loan stock (left-hand scale) Interest expenditure (right-hand scale) 120 % of disposable income % of disposable income 12 100 10 80 8 60 6 40 4 20 2 0 0 1987 1992 1997 2002 2007 Sources: Statistics Finland and Bank of Finland calculations. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 7 Household indebtedness at average European level Household indebtedness at average European level % Denmark Netherlands Ireland Norway Cyprus Sweden United Kingdom Portugal Spain European Union Finland Euro area* Estonia Germany Austria Belgium Greece France Italy Slovakia Slovenia 0 50 100 150 200 250 300 350 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 (8.5.2012). 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 8 Share of heavily indebted households (debt ratio* inhouseholds excess ofof 500%) 500%) Share of heavily indebted (debt ratio* in excess on the increase on the increase Proportion of households with debt (left-hand scale) Proportion of total household debt (left-hand scale) Average debt (right-hand scale) 18 EUR, thousands % 15 250 12 200 9 150 6 100 3 50 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 * Debt, % of disposable monetary income. Sources: Statistics Finland and Bank of Finland calculations. 8.5.2012 300 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 9 Low lending rates have kept interest payment Low lending rates have kept interest paymentat burden tolerable at tolerable levels burden levels Loans, average interest rate Total margin 6 Deposits, average interest rate 12-month Euribor % 5 4 3 2 1 0 2006 2007 2008 2009 2010 2011 2012 Sources: Bank of Finland and Reuters. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 10 Risk resilience of the Finnish financial system 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 11 Banks strong in terms of profitability and Banks strong adequacy, in terms of profitability and capital adequacy, leverage ratio capital leverage ratio declined declined Return on equity (ROE) Leverage ratio (equity / total assets) Capital adequacy, % 16 % 12 % 8% 4% 0% 2006 2007 2008 2009 2010 2011 Source: Financial Supervisory Authority. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 12 Banks’ credit Banks’ credit risk outlook stablerisk 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 EUR billion Number, 1,000 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. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 13 Covered bonds have diversified Finnish banks’ funding structure Covered bonds have diversified Finnish banks’ funding structure 1 Outstanding 24 2 Issues EUR billion 20 1 16 12 2 8 4 * 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 *For 2012, outstanding volume at end-February, issues in January-February. Sources: Bank of Finland, European Covered Bonds Council and Bloomberg. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 14 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 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 15 Measures to enhance financial stability 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 16 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 90%. Banks and authorities should be cautious about amortisation-free and bullet housing loans that have become widespread in some countries. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 17 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. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 18 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. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 19 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. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 20 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. 8.5.2012 SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 21