## cr1705 - EXECUTIVE SUMMARY

## Source details

**Canonical URL:** [cr1705 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2017/cr1705.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2017/cr1705.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2017/cr1705.pdf.json)

---

### Recent institutional changes and mandate sharing
- Major changes: macroprudential policy framework in Finland has become shared with the ECB.
- Domestic formalization (2014):
  - Act on Credit Institutions (2014) designated the Board of the Finnish Financial Supervisory Authority (FIN-FSA) as authority to implement a set of macroprudential instruments and established coordination among domestic authorities, including the Bank of Finland (BoF).
- European layer:
  - Start of the Single Supervisory Mechanism (SSM) in 2014 designated the ECB as a macroprudential authority for the euro area; the European Systemic Risk Board (ESRB) retains an advisory role for all EU countries.
- Result: macroprudential policy is a shared responsibility among national, EU and euro-area level authorities.

### Strengthening of national institutional arrangements
- Legal and organizational features:
  - The 2014 Act on Credit Institutions assigned the FIN-FSA Board decision-making powers on instruments in legislation; BoF represented by the Deputy Governor as chair of FIN-FSA’s Board.
  - FIN-FSA’s mandate for macroprudential policy is narrowly defined; hard powers limited to instruments in the legislation.
- Joint FIN-FSA–BoF monitoring and analysis:
  - BoF and FIN-FSA jointly conduct systemic risk monitoring.
  - BoF primarily responsible for cyclical and interlinkages analysis; FIN-FSA for institutional-level analysis.
  - Joint vulnerability analyses prepared ahead of FIN-FSA Board meetings; FIN-FSA Director General makes proposals to the Board.
  - Macroprudential analysis summarized in quarterly joint macroprudential reports for Board meetings and in semi-annual joint reports for external publication.

### Coordination with international and regional bodies
- Regular interaction:
  - Finnish authorities regularly coordinate with the ECB and the ESRB for quarterly macroprudential decision making and systemic risk assessments.
  - Participation in the Macroprudential Forum facilitates discussion with Nordic and Baltic jurisdictions.
- Forum role and limits:
  - Nordic-Baltic Macroprudential Forum is informal and non-binding but effective for regional coordination.
- Cross-border considerations:
  - High Nordic interconnectedness and increasing branchification (e.g., largest bank converting into a branch) heighten the need for strengthened regional cooperation in supervisory information sharing and joint stress testing.

### Activation and calibration of macroprudential instruments
- Instruments introduced and activated:
  - 2014 Act on Credit Institutions implements instruments set out in the CRDIV/CRR.
  - Four banks designated as systemically important, with additional capital requirements from January 2016.
  - Loan-to-collateral (LTC) cap for housing loans effective from July 2016 (90 percent; 95 percent for first home buyers).
- Instruments not activated:
  - Countercyclical capital buffer (CCB) and other instruments have not been activated due to lack of conclusive evidence on heightened systemic risks.

### Identified gaps and recommended improvements
- Legal mandate and governance:
  - FIN-FSA mandate narrowly defined; recommendation to clarify a broader macroprudential policy mandate in law.
  - Recommendation: expand FIN-FSA human resources for macroprudential policy.
  - Recommendation: consider formalizing BoF chairmanship of FIN-FSA Board for macroprudential meetings and formalize staff-level cooperation through an MOU.
- Data, analysis and toolkit expansion:
  - Need more granular data to calibrate tools; important gaps in household and housing sector data.
  - Toolkit gaps: add the systemic risk buffer (SRB) to the toolkit (activation and level require further analysis).
  - Consider borrower-based tools: loan-to-income (LTI) caps, debt-service-to-income (DSTI) caps, and limits on loan maturity to address household risks and cross-border leakages.
- Regional cooperation:
  - Strengthen cross-border cooperation in the Nordic region, especially supervisory information sharing and joint stress-testing.

### Recommendations (action items, responsible agencies, timing)
- Timing legend: I (immediate) = within one year; NT (near term) = 1-3 years; MT (medium term) = 3-5 years.
- Institutional Arrangements
  - Clearly define a macroprudential policy mandate of the FIN-FSA beyond measures approved in laws — MoF — NT
  - Expand the human resources of the FIN-FSA for macroprudential policy — FIN-FSA — NT
  - Formalize the practice that the FIN-FSA Board member proposed by the BoF chairs FIN-FSA Board for macroprudential meetings — MoF — I
  - Explicitly set out a domestic cooperation framework in an MOU — FIN-FSA, BoF, and MoF — I
  - Strengthen collaboration with Nordic-Baltic authorities in supervisory data sharing and joint stress testing — FIN-FSA, BoF, and ECB — NT
- Systemic Risk Monitoring
  - Enhance presentation of macro-financial linkages in the financial stability report — BoF — I
  - Start creating a household loan registry system — FIN-FSA — NT
- Tools and Calibration
  - Complete process to set higher risk weights on housing loans with reciprocity agreements for foreign bank branches — FIN-FSA, BoF, and MoF — I
  - Redefine or review calibration of the loan-to-collateral limit — FIN-FSA and BoF — NT
  - Introduce the loan-to-income limit to the toolkit — MoF — NT
  - Once a loan registry is available, introduce a maximum DSTI ratio and a maximum maturity limit for household loans — MoF — MT
  - Introduce the systemic risk buffer to the toolkit — MoF — I
  - Assess application and calibration of the systemic risk buffer — FIN-FSA, BoF — NT

### Mandate and legal framework (FIN-FSA)
- Designation and scope:
  - FIN-FSA designated macroprudential authority in Finland.
  - Act on Credit Institutions assigns FIN-FSA supervisory role; FIN-FSA Act does not set out a formal macroprudential mandate.
  - FIN-FSA Act provides Board decision-making responsibility on instruments in the Act on Credit Institutions and the CRR but restricts scope to instruments outlined there.
- Recommendation: next revision of FIN-FSA Act should explicitly include “maintaining the stability of the financial system as a whole” as a primary objective (Chapter 1, Section 1) and provide power to make regulations (Chapter 1, Section 3: 12).

### Decision-making and governance
- Decision process:
  - Macroprudential decisions made by FIN-FSA Board after Director General proposal.
  - Board composition: representatives from BoF, MoF, Ministry of Social Affairs and Health (MoSH), and two independent members; all appointed by the Parliamentary Supervisory Council.
  - Board meets every quarter on macroprudential issues.
  - BoF, MoF and MoSH give opinions before preliminary Board decision; ECB is consulted for an opinion; Board decides by consensus or majority voting.
- Transparency and accountability:
  - Final Board decisions published on FIN-FSA website next day after meeting with opinions and proposal.
  - Joint Macroprudential Reports published semi-annually; BoF publishes annual financial stability report.
  - Parliamentary Ombudsman, Chancellor of Justice, and Parliamentary Supervisory Council provide oversight channels.

### Powers, information access, and resources
- FIN-FSA Board powers include calibration of CCB, capital surcharges to systemic institutions, changes to loan-to-collateral limit, and designation of systemic institutions.
- FIN-FSA can request information from supervised entities (Act on the FIN-FSA, Section 18); supervised entities list includes credit institutions, insurance companies, pension funds, investment fund companies, exchanges, central counterparties, etc.
- Resources:
  - FIN-FSA has only a few staff fully dedicated to macroprudential policy.
  - BoF has high capacity and resources for financial stability risk analyses.
  - Recommendation: FIN-FSA should expand human resources and build its analytical capacity to complement BoF.

### Nordic-Baltic regional cooperation
- Participation:
  - Finland participates in the Nordic and Baltic Macroprudential Forum; FIN-FSA and BoF attend.
  - Forum produces internal reports; semi-annual meetings share experience and common understanding.
- Formal arrangements:
  - Forum lacks hard or soft powers and does not mandate supervisory information sharing.
  - A separate MoU for crisis management predates the Banking Union.
- Recommended actions:
  - Strengthen regional cooperation given strong interlinkages and branch conversions (e.g., systemic Swedish bank converting to a branch).
  - Discussions underway on an MoU for enhanced data sharing and joint stress testing; consider issuing recommendations based on joint stress test findings.

### Systemic risk monitoring (BoF and FIN-FSA approaches)
- Monitoring approach:
  - Quarterly Macroprudential Reports use several indicators and judgment, complementing credit-to-GDP gap with other data and qualitative information.
- BoF models and tools:
  - Early warning models, heatmaps, scenario analyses, stress tests, autoregressive model for CCB tradeoffs, DSGE model for macro-financial impacts and intertemporal tradeoff of the CCB, and network/contagion models.
- FIN-FSA responsibilities:
  - Institutional-level analysis and collection of quarterly bilateral exposure data from large banks; quarterly reporting of bilateral exposures to be expanded to insurance companies from 2016 under Solvency II.
- Publication recommendation:
  - BoF’s annual Bank of Finland Bulletin should complement thematic articles with holistic macro-financial linkages analysis.

### Data gaps and recommendations
- Primary data gaps:
  - Granular information on credit to households and corporate sectors; aggregate household indebtedness at historic high.
  - AnaCredit will collect corporate loan information from 2018; household loan coverage not envisaged in the first round.
- Recommendation: create a loan registry system for disaggregated household loan stock with borrower-level information (income and other debt obligations).
  - Existing privately operated credit bureau provides only bad credit information.
  - From September 2016 FIN-FSA requires banks to report LTV and LTC ratios for new household loans at individual loan level, but this covers only new loans.

### Systemic risks and macroprudential instruments — overview and current calibration
- Toolkit status:
  - Toolkit predominantly those required in CRDIV/CRR; introducing new instruments requires legislation.
  - Important to broaden toolkit for precautionary reasons.
- Table (selected settings as presented in source):
  - Countercyclical capital buffer (up to 2.5 percent): Set at 0%
  - Maximum loan-to-collateral ratio: 90 percent from July 2016
  - Additional risk weights for mortgage loans: Under discussion
  - Liquidity Coverage Ratio: Being phased in
  - Net Stable Funding Ratio: Planned for 2018
  - Capital conservation buffer: 2.5 percent from January 2015
  - O-SII buffer: 0.5-2 percent from January 2016

### A. Vulnerabilities from broad-based credit booms
- Indicators:
  - Credit-to-GDP gap has remained above the 2 percent lower threshold for activating a CCB in BCBS guidance; driven largely by decline in nominal GDP growth.
  - Rate of credit growth mostly between 0-5 percent since 2011.
  - Credit gap from long-term trend is declining due to slowing credit growth.
  - Other indicators point to benign credit conditions: house prices relative to income or rent show no large deviations; household debt servicing ratio continues to drop due to low interest rates.
  - Leverage ratio above the minimum of three percent and improving.
  - Reliance on wholesale funding is declining.
  - Current account imbalances not expanding with credit.
- CCB status and rationale:
  - Law requires FIN-FSA to decide CCB (0-2.5 percent) every quarter with MoF and BoF; conditions in MoF Decree 1029/2014.
  - Since January 2015 introduction of CCB framework, FIN-FSA has not imposed a positive buffer requirement; the ECB has not imposed an additional requirement either.
  - Keeping CCB at zero percent judged appropriate against slow economic growth and lack of investment opportunities.

- Cross-border and leverage considerations:
  - Leverage ratio reporting began in 2013; requirement expected from 2018.
  - CCB subject to mandatory reciprocity under Basel III and EU rules up to 2.5 percent; Finland can recognize host country CCB exceeding 2.5 percent for the full amount.
  - CCB settings among Nordic countries (source: National authorities):
    - Finland 0 percent
    - Denmark 0 percent
    - Norway 1.5 percent (raised in June 2016 from 1 percent)
    - Sweden 1.5 percent (raised in June 2016 from 1 percent)

### B. Vulnerabilities from corporate sector
- Indicators:
  - Banks finance more than 24 percent of nonfinancial corporations’ borrowing.
  - Credit to nonfinancial corporations rose to 105 percent of GDP in 2015, from 85 percent prior to the GFC.
  - Share of corporate credit in total credit around 65 percent since mid-2000s.
  - Bankruptcy applications in early 2016 about 15 percent higher than pre-2009 crisis level.
- Recommendation: remain vigilant; AnaCredit progress will reduce data gap.

### C. Vulnerabilities from housing and household sector
- House prices and scenarios:
  - House prices broadly stabilized after rise between 1995 and 2008; benchmarked against rents and wages show at most moderate overvaluation.
  - Significant household debt increases imply adverse scenarios (less-than-expected growth, higher unemployment, large interest rate increase) could reduce house prices.
  - FIN-FSA 2012 survey showed sizable portion of new housing loans with LTV exceeding 90 percent.
- Household indebtedness and interest-rate sensitivity:
  - Household debt: 123 percent of disposable income (65 percent of GDP).
  - Household loans tied to variable interest rates: 95 percent.
  - Finnish banks offer the lowest interest for mortgage loans among euro area countries.
  - Debt service payments have fallen to historic low; vulnerability to higher interest rates is pronounced.
- Macroprudential measures and calibration:
  - Maximum loan-to-collateral (LTC) ratio became effective July 2016: Cap 90 percent; 95 percent for first home buyers; FIN-FSA may lower limit by max 10 percentage points and/or change definition of accepted collateral.
  - Risk weights on housing loans: FIN-FSA decided to prepare higher risk weights (December 2015); June 2016 announced minimum average risk weight of 10 percent for IRB banks, to come into force on July 1, 2017 at the latest; recommendation to ensure reciprocity for foreign bank branches.
  - Debt-service capacity stress assessment (FIN-FSA recommendation 2010): assess capacity with interest rate of 6 percent (prevailing lending rate around 1.2 percent); maximum amortization period recommended 25 years; no indicative DSTI threshold.
  - Tax deductibility of mortgage interest payments: gradual reduction from 65 percent in 2015 to 25 percent in 2019.
- Calibration and reporting:
  - LTC allows additional collaterals; may undermine effectiveness compared with LTV; recommend assessing whether LTC is appropriate and whether FIN-FSA’s 10 percentage point reduction authority is sufficient.
  - Reporting requirement from September 2016 covers flow of new loans only; recommendation to complement with bad-loan information from credit bureaus.

- Comparative LTV context (selected reported values):
  - Finland: 90 percent (95 percent for first time buyers)
  - Sweden: 85 percent
  - Norway: 85 percent
  - Denmark: 95 percent
  - Netherlands: From 106 percent (2012) to 100 percent (2018)
  - Ireland: 80 percent (sliding limit starting at 90 percent for first time buyers)

### Broadening the macroprudential toolkit — sequencing and design
- Recommended borrower-based instruments:
  - Limits on loan amortization period or maturity; caps on LTV, LTI, DSTI ratios.
- Suggested sequencing:
  - First introduce maximum LTI limit (DSTI requires loan registry).
  - Subsequently add or replace with DSTI limit; introduce maximum loan maturity to prevent circumvention.
- Rationale: borrower-based measures apply to all financial institutions within a country, including foreign branches, reducing cross-border leakage risks; interlocking use effective internationally.

### Funding and liquidity vulnerabilities
- Key indicators and structure:
  - Loan-to-deposit ratio around 124 percent in 2015.
  - Bank funding structure (2015): retail deposits 45%; wholesale deposits 21%; covered bonds 10%; senior bonds/other 10%; repos 8%; CPs/CDs 6%.
  - NSFR for three largest banks: 114 percent.
- Trends and policy:
  - Loan-to-deposit ratio declining since 2006.
  - LCR phased-in from October 2015; NSFR planned for 2018.
  - FIN-FSA may require tighter liquidity limits via Article 458 of CRR but no additional requirements planned.
  - Recommendation: continue liquidity stress tests fully accounting for liquidity and funding risks.
  - Cross-border branch liquidity: ensure sufficient euro liquidity at group level and coordinate with home supervisors; consider harmonizing liquidity requirements in Nordic region.

### Structural vulnerabilities and systemic institutions
- Concentration and size:
  - Total assets of banks and non-deposit taking credit institutions: around 246 percent of GDP in 2015.
  - Banking sector assets: 230 percent of GDP (from 200 percent at end-2009).
  - One bank (Nordea) accounts for two thirds of total bank assets; top four banks account for over 90 percent.
- O-SII assessment and buffers (scores as of end-2015):
  - Nordea Bank Finland Plc: O-SII score 61.21% — O-SII buffer 2.0%
  - OP Group: O-SII score 16.41% — O-SII buffer 2.0%
  - Municipality Finance Plc: O-SII score 5.44% — O-SII buffer 0.5%
  - Danske Bank Plc: O-SII score 4.32% — O-SII buffer 0.5%
  - Thresholds: 2 percent buffer for O-SII scores >14 percent; 1.5 percent for scores between 10.5 and 14 percent; 1 percent for scores between 7 and 10.5 percent; 0.5 percent for scores between 3.5 and 7 percent; 0 percent for scores below 3.5 percent.
- Recent structural instruments:
  - Capital conservation buffer implemented at 2.5 percent from January 2015.
  - FIN-FSA Board designated four credit institutions as O-SIIs in July 2015, subject to additional capital requirements 0.5-2 percent from January 2016.

### Systemic Risk Buffer (SRB): status, use and recommendations
- SRB description:
  - Included in CRDIV/CRR as voluntary measure to address “long-term, non-cyclical” systemic risks; flexible and can be applied to all or subset of banks.
  - SRB up to 3 percent is subject to ESRB notification; procedures for higher rates differentiated from 2015.
- Use across EU (selected examples):
  - Bulgaria: 3 percent — Scope: All banks.
  - Croatia: 1.5 and 3 percent — Scope: All banks.
  - Denmark: 1-3 percent — Scope: Six O-SII banks.
  - Netherlands: 3 percent — Scope: Three largest banks.
  - Sweden: 3 percent — Scope: Four largest banks.
- Nordic capital requirements (selected figures as of April 2016):
  - Finland: Minimum total capital 8; Capital conservation buffer 2.5; Counter-cyclical capital buffer 0.5-2; SRB: 11-12.5
  - Sweden: SRB: 13.5-14.5
  - Norway: SRB: 14.5 (alternate 15.5-16.5)
  - Denmark: SRB: 10.5 (alternate 11.5-13.5)
- Assessment and recommendation:
  - Desirable to include SRB in Finland’s toolkit given regional interconnectedness.
  - SRB can be set higher than 2 percent (unlike O-SII buffer); other Nordic countries set SRB at 3 percent.
  - Large Finnish banks maintain sufficient capital to meet additional buffers.
  - When calibrating SRB, consider locking-in current high capital levels to maintain resilience.

### Overall assessment and prioritized policy directions
- Clarify and broaden FIN-FSA macroprudential mandate in law.
- Expand FIN-FSA human and analytical resources and formalize interagency cooperation (MOU); consider formalizing BoF chairmanship of macroprudential Board meetings.
- Fill data gaps, notably by creating a household loan registry; complement flow reporting of LTV/LTC with stock-level granular data.
- Broaden toolkit to include SRB, borrower-based instruments (LTI, DSTI), and loan maturity limits; sequence introduction starting with LTI, then DSTI once registry available.
- Strengthen Nordic and EU coordination: supervisory data sharing, joint stress testing, and reciprocity arrangements for a wider set of tools.

*International Monetary Fund — Executive Summary (cr1705)*

### EXECUTIVE SUMMARY __________________________________________________________________________ 5

### cr1705 - EXECUTIVE SUMMARY __________________________________________________________________________ 5

### Recent institutional changes and mandate sharing
- The macroprudential policy framework in Finland has experienced major changes recently and the mandate has become shared with the ECB.
- A domestic framework was formalized in 2014: the Act on Credit Institutions (2014) designated the Board of the Finnish Financial Supervisory Authority (FIN-FSA) as the authority to implement a set of macroprudential instruments in Finland, and established coordination among domestic authorities, including the Bank of Finland (BoF).
- With the start of the European Single Supervisory Mechanism (SSM) in 2014, the European Central Bank (ECB) was designated as a macroprudential authority for the euro area; the European Systemic Risk Board (ESRB) continues to play an advisory role for all EU countries.
- Result: macroprudential policy is a shared responsibility among national authorities, and EU and euro-area level authorities.

### Strengthening of national institutional arrangements
- Key legislative and organizational features:
  - The 2014 Act on Credit Institutions assigned the Board of the FIN-FSA decision-making powers on specific macroprudential policy instruments. The BoF is represented by the Deputy Governor as chair of the FIN-FSA’s Board.
  - The FIN-FSA’s mandate for macroprudential policy is narrowly defined and its hard powers are limited to the macroprudential instruments in the legislation.
- Joint FIN-FSA–BoF monitoring and analysis:
  - The BoF and the FIN-FSA jointly conduct systemic risk monitoring.
  - Established practice: BoF primarily responsible for cyclical and interlinkages analysis; FIN-FSA for analysis at individual institutions’ level.
  - They jointly prepare vulnerability analyses and preliminary recommendations ahead of FIN-FSA Board meetings; the FIN-FSA Director General makes proposals to the Board on implementation.
  - Macroprudential analysis is summarized in quarterly joint macroprudential reports for Board meetings and in semi-annual joint reports for external publication.

### Coordination with international and regional bodies
- Regular interaction:
  - Finnish authorities regularly coordinate and collaborate with the ECB and the ESRB, particularly for quarterly macroprudential decision making and systemic risk assessments by the ECB.
  - Participation in the Macroprudential Forum facilitates regular discussion with Nordic and Baltic jurisdictions on financial stability risks.
- Forum role and limits:
  - The Nordic-Baltic Macroprudential Forum is informal; it does not have binding powers but serves as an effective coordination platform in the region.
- Cross-border considerations:
  - High interconnectedness in the Nordic region and increasing branchification (e.g., the largest bank converting into a branch) heighten the need for strengthened regional cooperation in supervisory information sharing and joint stress testing.

### Activation and calibration of macroprudential instruments
- Instruments introduced and activated:
  - The 2014 Act on Credit Institutions implements instruments set out in the CRDIV/CRR.
  - Four banks have been designated as systemically important, with additional capital requirements from January 2016.
  - A loan-to-collateral (LTC) cap for housing loans will become effective from mid-2016.
- Instruments not activated:
  - Other instruments in the toolkit, including the countercyclical capital buffer (CCB), have not been activated, reflecting a lack of conclusive evidence on heightened systemic risks.

### Identified gaps and recommended improvements
- Legal mandate and governance:
  - The FIN-FSA’s mandate is narrowly defined over the use of tools explicitly approved by laws. Recommendation: clarify a broader macroprudential policy mandate in law to strengthen willingness and ability to act.
  - Recommendation: expand FIN-FSA human resources for macroprudential policy.
  - Recommendation: consider formalizing the chairmanship of the BoF representative in FIN-FSA decision-making meetings, and formalize staff-level cooperation among FIN-FSA, BoF and MoF through a memorandum of understanding (MOU).
- Data, analysis and toolkit expansion:
  - Need for more detailed analyses using granular data to calibrate tools; important data gaps exist, including more disaggregated household and housing sector data.
  - Toolkit gaps: add the systemic risk buffer to the toolkit (activation and level require further analysis).
  - Consider borrower-based tools: caps on loan-to-income (LTI) and debt-service-to-income (DSTI), and limits on loan maturity, to address household sector risks and potential cross-border leakages for capital-based tools.
- Regional cooperation:
  - Further strengthen cross-border cooperation in the Nordic region, especially supervisory information sharing and joint stress-testing given high interconnectedness and reduced host-supervisor influence on branch operations.

### Recommendations (from Table 1) — action items, responsible agencies, and timing
- Institutional Arrangements
  - Clearly define a macroprudential policy mandate of the FIN-FSA beyond the measures approved in laws — MoF — NT
  - Expand the human resources of the FIN-FSA for macroprudential policy — FIN-FSA — NT
  - Formalize the practice that the FIN-FSA Board member proposed by the BoF chairs the FIN-FSA Board for meetings on macroprudential policy — MoF — I
  - Explicitly set out a domestic cooperation framework for macroprudential policy in an MOU — FIN-FSA, BoF, and MoF — I
  - Seek to further strengthen collaboration with Nordic-Baltic macroprudential authorities in supervisory data sharing and joint stress testing exercises — FIN-FSA, BoF, and ECB — NT
- Systemic Risk Monitoring
  - Enhance the presentation of macro-financial linkages analysis in the financial stability report — BoF — I
  - Start creating a household loan registry system — FIN-FSA — NT
- Tools and Calibration
  - Complete the process to set higher risk weights on housing loans with reciprocity agreements in place for foreign bank branches — FIN-FSA, BoF, and MoF — I
  - Redefine or review the calibration of the loan-to-collateral limit — FIN-FSA and BoF — NT
  - Introduce the loan-to-income limit to the toolkit — MoF — NT
  - Once a loan registry system becomes available, introduce a maximum debt-service-to-income ratio and a maximum maturity limit for household loans — MoF — MT
  - Introduce the systemic risk buffer to the toolkit — MoF — I
  - Assess application and calibration of the systemic risk buffer — FIN-FSA, BoF — NT
- Timing legend (as presented in the source):
  - I (immediate) = within one year; NT (near term) = 1-3 years; MT (medium term) = 3-5 years.

### Context and rationale (select excerpts)
- Post-GFC imperative: the Global Financial Crisis demonstrated the need for macroprudential policy to complement microprudential supervision because systemic risks can grow under the surface of economic tranquility.
- Finnish system vulnerabilities: household indebtedness at or near historic highs; banking sector reliance on wholesale funding; large use of derivatives (mainly related to customer activity); high regional interconnectedness; high concentration — all increase the need for high capacity to assess systemic risk and implement macroprudential measures.
- EU institutional constraints and powers:
  - CRDIV/CRR introduced instruments such as the countercyclical capital buffer (CCB), systemic risk buffer, and capital surcharges for systemically important institutions, but processes for some tools involve notification and approval at the EU level.
  - For countries in the SSM, the ECB has “top up” power to apply more stringent requirements for instruments in CRDIV/CRR; the ECB’s power does not extend to measures outside CRDIV/CRR, where it can issue instructions but not binding decisions.
  - The ESRB can issue non-binding warnings and recommendations subject to “comply or explain” procedures and monitors macroprudential measures reported by country authorities.

_International Monetary Fund — Executive Summary (cr1705)_

### 11.      The Finnish Financial Supervisory Authority (FIN-FSA) is the designated

### 11.      The Finnish Financial Supervisory Authority (FIN-FSA) is the designated

### Mandate and legal framework
- The FIN-FSA is the designated macroprudential authority in Finland.
- The Act on the FIN-FSA does not set out a formal macroprudential mandate for the FIN-FSA.  
- The Act on Credit Institutions provides for macroprudential measures in Finland and assigns FIN-FSA as a supervisory authority of the Act, effectively giving the mandate to the FIN-FSA (Chapter 1, Section 3 of the Act on Credit Institutions).
- The Act on the FIN-FSA provides the Board of the FIN-FSA with decision-making responsibility on the use of macroprudential instruments in the Act on Credit Institutions and the CRR, but restricts scope to instruments outlined there (including structural and cyclical capital requirements, loan-to-collateral ratio), leaving responsibility for other possible instruments undefined.
- In practice, there is shared understanding in Finland that the FIN-FSA is responsible for macroprudential policy, in cooperation with the Bank of Finland (BoF) and the Ministry of Finance (MoF).
- Recommendation: At the next revision of the Act on the FIN-FSA, its objectives and tasks as a macroprudential authority should be more clearly provided to strengthen the legal underpinning for a broader set of macroprudential policy instruments.
  - Example: explicitly include “maintaining the stability of the financial system as a whole” as a primary objective (Chapter 1, Section 1), and provide for the power to make regulations to achieve this objective in its tasks (Chapter 1, Section 3: 12).
  - The objective can further articulate the scope of responsibilities in both the time and structural dimensions.

### Balance between macroprudential and microprudential objectives
- The FIN-FSA Act formally focuses on microprudential supervisory and market conduct roles; macroprudential objective (“ensuring the stability of the financial system as a whole”) is mentioned as part of its tasks (Chapter 1, Section 1; Chapter 1, Section 3).
- Risk: greater emphasis on microprudential objectives in law could cause macroprudential objectives to be insufficiently weighed in times of tension.
- Mitigants in practice:
  - Existence of resources fully dedicated to macroprudential policy at the FIN-FSA (though limited in number).
  - Close collaboration with the BoF in systemic risk assessments.
  - Consultations with the ECB during decision making.
- Consideration: define the hierarchy of policy objectives in case of conflict.

### Decision-making and governance
- Macroprudential decisions are made by the FIN-FSA’s Board after considering the proposal of the FIN-FSA Director General.
- Board composition:
  - Representatives from the BoF, the MoF, and the Ministry of Social Affairs and Health (MoSH), and two independent members; all appointed by the Parliamentary Supervisory Council.
  - The Board meets every quarter to discuss macroprudential issues.
- Process overview:
  - FIN-FSA, BoF and MoF staffs jointly prepare vulnerability analyses and preliminary recommendations.
  - The FIN-FSA’s Director General makes a proposal to the Board.
  - BoF, MoF and MoSH give opinions before the preliminary decision by the Board.
  - The ECB is consulted for an opinion on the preliminary decision; the Board makes the final decision based on that consultation.
  - The Board decides by consensus; if there is disagreement it can take a decision by majority voting.
- The decision-making structure entails multiple layers of reviews and extensive preparation involving different agencies.
- The Board can discuss a broader agenda when justified by risk analysis; to date actual decisions remain within the pre-defined set of instruments, though the Board has discussed higher risk weight rules to mortgage loans.
- Transparency and accountability mechanisms:
  - Final Board decisions are published on the FIN-FSA website the next day after the meeting, with opinions of relevant agencies and the Director General’s decision proposal.
  - Macroprudential Reports (prepared by BoF and FIN-FSA) are published semi-annually.
  - BoF publishes an annual financial stability report with short updates and regularly updates key systemic risk indicators.
  - Parliamentary Ombudsman and Chancellor of Justice can assess FIN-FSA’s compliance with law when an issue is raised.
  - Parliamentary Supervisory Council has administrative and supervisory responsibilities over FIN-FSA (appointments, suspension of Board members and Director General).
  - International communication and consultation with the ECB and the ESRB contribute to accountability.

### Powers, information access, and resources
- The FIN-FSA Board has decision-making powers over certain instruments as prescribed by the Act on Credit Institutions:
  - Instruments include recurring decisions (calibration of countercyclical capital buffer and capital surcharges to systemic institutions) and instruments used at supervisory discretion (changes in loan-to-collateral limit).
  - Power to designate systemic institutions and regularly update the list.
- The Board can make recommendations to supervised entities on macroprudential measures not approved by national law or regulations (e.g., 2010 Director General recommendation: banks apply maximum loan-to-value of 90 percent to new housing loans and assess borrower’s repayment capacity with a maximum maturity of 25 years).
- The FIN-FSA has powers to collect information for macroprudential policy:
  - The Act on the FIN-FSA, Section 18: FIN-FSA can request information it needs from entities supervised by the FIN-FSA; it has the right to receive information relevant for its tasks from other financial market actors.
  - Supervised entities include credit institutions, insurance companies, pension funds, investment fund companies and related custodians, investment companies, exchanges, settlement institutions, central securities depositories, central counterparties and payment institutions, related holding companies, deposit insurance fund, investor insurance fund, etc.
  - Other actors include issuers of securities, clearing counterparties, insiders, etc.
  - Although FIN-FSA does not have legal access to information beyond those institutions or persons, the lists appear sufficiently comprehensive for macroprudential policy.
- Resources:
  - FIN-FSA has only a few staff fully dedicated to macroprudential policy.
  - Resource constraints are partly mitigated by flexibly allocating microprudential supervision staff to macroprudential analysis on an ad hoc basis, especially for structural systemic risk analysis at the institution level.
  - The BoF has high capacity and resources for financial stability risk analyses; interagency cooperation supplements national macroprudential policy resources.
  - Recommendation: FIN-FSA should expand its human resources for macroprudential policy and build its own analytical capacity to complement the BoF’s work.

### Domestic coordination and institutional arrangements
- The FIN-FSA Board serves as a coordination platform among relevant agencies and has been chaired by the Deputy Governor of the BoF since its current form in 2009.
- Roles in practice:
  - BoF: primarily responsible for macroprudential analysis to support decision making; conducts regular macroprudential analysis and prepares quarterly Joint Macroprudential Report (in Finnish) with the FIN-FSA for Board meetings.
  - MoF and MoSH: responsible for proposals for legislative amendments in the banking and insurance sectors, respectively; MoF also contributes to staff-level discussions on analysis and policy recommendations.
  - FIN-FSA Director General: formulates macroprudential decision proposals to the Board based on staff-level committee discussions involving BoF, MoF and FIN-FSA.
- Consideration: study redefining FIN-FSA Board composition to include the FIN-FSA Director General as a voting member, given the Director General’s role in presenting proposals and publishing separate views.
  - If implemented, additional arrangements may be needed to distinguish board responsibilities for executives (Director General) and nonexecutives (other board members) because the FIN-FSA Board is a fiduciary board focused on oversight and organizational issues.
- Consideration: formalize the practice that the FIN-FSA Board is chaired by a member proposed by the BoF to harness BoF expertise; formalizing BoF chairmanship can support a strong BoF role in macroprudential policy.
- Staff-level committee (“Macroprudential Group”) with FIN-FSA, BoF and MoF staff facilitates interagency coordination:
  - FIN-FSA and BoF jointly conduct risk assessments prior to Board meetings; MoF is consulted in preparation of preliminary proposals.
  - Committee discussion outcomes are submitted to the FIN-FSA Director General, who formulates the decision proposal to the Board.
- Recommendation: formalize interagency coordination through a memorandum of understanding (MOU) clarifying division of responsibilities; publish a document summarizing the official policy framework and strategy for macroprudential policy.
  - Longer term: periodically re-evaluate domestic coordination framework; consider assigning a formal macroprudential mandate to the BoF, especially if FIN-FSA faces continued resource constraints.

### European coordination and cross-border issues
- FIN-FSA regularly communicates with the ECB for quarterly macroprudential decision makings and for ECB systemic risk assessments.
  - Under the SSM Regulation, prior to FIN-FSA Board’s quarterly decisions, FIN-FSA makes official notification of intended policy decisions to the ECB ten working days prior to making the final decisions; the ECB has an option to object within five working days.
  - In practice, the ECB is informed at an early stage in the decision-making process.
  - The ECB conducts regular assessments of systemic risks and macroprudential needs for the Macroprudential Forum of the ECB Governing Council and Supervisory Board, covering SSM area countries and country-specific systemic risks; assessments are discussed in the ECB Financial Stability Committee and in bilateral dialogues with national authorities.
- Dialogue with the ESRB:
  - Mainly takes place through quarterly preparations for General Board, Advisory Technical Committee, and subgroup meetings where country-specific systemic risks and macroprudential policy assessments are discussed; complemented by informal dialogue.
  - Dialogues with the ECB and the ESRB are interlinked due to organizational links and reference to ECB systemic risk analyses in ESRB assessments.
  - ESRB facilitates cross-border coordination:
    - Mandatory reciprocity for the CCB under Basel III up to a certain level; ESRB has also recommended reciprocation of all macroprudential policy measures by other member states (measures under CRR/CRDIV and measures outside their scope).
    - A member state can request reciprocation of a measure through the ESRB, enabling notification and reciprocation arrangements within the EU.
    - ESRB recommended ex ante and ex post assessments of cross-border effects of national macroprudential policies.

*Italic: Source: IMF staff report text for Finland, chapter on FIN-FSA macroprudential framework (extracted content).*

### 29.      In view of significant cross-border effects of systemic risks, Finland is actively involved

### 29.      In view of significant cross-border effects of systemic risks, Finland is actively involved

### Nordic-Baltic regional cooperation on macroprudential issues
- Finland participates in the Nordic and Baltic Macroprudential Forum; both the FIN-FSA and the BoF participate in discussion.
- Forum outputs are not publicly available; working groups and streams produce internal reports on topics such as countries’ experiences with the use of the CCB, and reciprocity arrangements.
- Semi-annual Forum meetings facilitate sharing of experiences in macroprudential analysis and a common understanding of financial stability risks in the region.
- Formal arrangements are still evolving:
  - The Forum does not have hard or soft powers over macroprudential policy in participating countries and does not require supervisory information sharing for macroprudential policy.
  - By contrast, cooperation for crisis management has an MoU among Nordic countries (this MoU predates the Banking Union and the new framework for bank recovery and resolution).
- Recommendation: authorities should seek to further strengthen regional cooperation arrangements due to strong interlinkages:
  - Close attention to financial cycles and structural developments in other Nordic countries is desirable.
  - Conversion of a systemic Swedish bank in Finland to a branch highlights the need for close cooperation between home and host supervisors.
  - Authorities have started discussions with other Nordic countries on an MoU involving enhanced data sharing, including supervisory data sharing covering direct and indirect cross-border exposure information and joint stress testing exercises.
  - Consideration could be given to issuing recommendations or guidance based on findings from joint stress tests.

### Systemic risk monitoring (BoF and FIN-FSA roles and approaches)
- Macroprudential policy decisions in Finland use several indicators and judgment; Quarterly Macroprudential Reports summarize monitoring indicators and complement signals (typically credit-to-GDP gap) with other data and qualitative information.
- BoF uses multiple indicators and methodologies:
  - Identification of systemic risks starts from assessments of various leading indicators of stress in domestic, Nordic and international financial systems. Main indicators and models, such early warning models and heatmaps, are updated regularly.
  - Scenario analyses and stress tests using in-house models are applied jointly with FIN-FSA; risk scenarios (excessive cyclicality in the real estate sector and stress in the financial market) are analyzed with an autoregressive model to assess impacts on the real economy and financial sector losses.
  - Stress tests are routinely applied to assess solvency and liquidity risks of the banking sector and the payment system.
  - Other models include a DSGE model to assess macro-financial impacts and intertemporal tradeoff of the CCB, and network and contagion models to assess risks from domestic and regional financial interconnectedness.
- FIN-FSA is responsible for institutional level analysis:
  - FIN-FSA collects quarterly data from large deposit-taking banks on bilateral exposures to largest counterparties; these data are used in stress tests to assess bank and Finnish financial market sensitivity to micro and macroeconomic shocks.
  - Quarterly reporting of bilateral exposures will be expanded to insurance companies from 2016 as Solvency II comes into effect; pension funds, investment firms or other financial institutions are not subject to the reporting requirements.
- Assessment of public reporting and analysis:
  - The BoF publishes an annual overview of financial stability (May issue of Bank of Finland Bulletin) comprising articles analyzing systemic risks; recommendation to complement thematic articles with more holistic macro-financial linkages analysis, including domestic and external outlook linkages with risks across financial-sector segments.

### Data gaps and recommendations
- Important data gaps, especially related to the household sector:
  - Primary data gaps relate to granular information on credit to households and corporate sectors; aggregate indebtedness is at a historic high.
  - Granular loan profiles would help identify risks not visible from aggregates, calibrate macroprudential measures, and monitor effectiveness.
  - Corporate loan information will be collected from 2018 under ECB AnaCredit; gap remains for household sector data unless ECB later extends AnaCredit coverage to household loans (not envisaged for the first round).
- Recommendation: create a loan registry system to enable monitoring of household indebtedness at a disaggregated level:
  - A privately operated credit bureau exists but provides information only on bad credits.
  - From September 2016 FIN-FSA requires banks to report loan-to-value and loan-to-collateral ratios for new household loans at individual loan level, but this covers only new loans without detailed borrower profiles.
  - Granular data on the entire stock of household loans with borrower information (including income and other debt obligations) remains missing; authorities should start creating a loan registry system.
- Access to information on domestically important foreign branches:
  - Supervisory colleges have been established for all banks with domestically important branches in Finland; FIN-FSA generally participates as a host supervisor, and in case of significant institutions together with the ECB.
  - Deposit-taking foreign branches account for five percent of total banking sector deposits in Finland, with two Swedish banks’ branches each representing two percent of deposits.
  - Swedish supervisor shares relevant group-level supervisory information, including risk assessments, with the FIN-FSA.
  - When Nordea’s subsidiary in Finland converts into a branch of its Swedish parent, supervisory colleges’ importance will rise; it is important that Finnish authorities have full membership and access to full supervisory information as a host supervisor.

### Systemic risks and macroprudential instruments — overview and calibration
- The section presents an overview of macroprudential instruments identified to address different types of systemic risks, assessing vulnerabilities using multiple signaling indicators following IMF (2014) approach, and assessing effectiveness for activities by foreign bank branches and arrangements to address cross-border leakages.
- Need to ensure macroprudential toolkit covers sufficiently broad instruments:
  - A set of macroprudential instruments available for the FIN-FSA Board is pre-defined in legislation; introducing new instruments would require new legislation.
  - Important to broaden the toolkit for precautionary reasons even if not activated immediately.
- Table 2. Macroprudential Instruments and Current Calibration in Finland (presented as in source):
  - Broad based tool
    - Countercyclical capital buffer (up to 2.5 percent) Set at 0%
  - Housing market tools
    - Maximum loan-to-collateral ratio 90 percent from July 2016
    - Additional risk weights for mortgage loans Under discussion
  - Liquidity tools
    - Liquidity Coverage Ratio Being phased in
    - Net Stable Funding Ratio Planned for 2018
  - Structural tools
    - Capital conservation buffer 2.5 percent from January 2015
    - O-SII buffer 0.5-2 percent from January 2016

A. Vulnerabilities from broad-based credit booms
- Indicators show a mixed picture:
  - Credit-to-GDP gap has remained above the 2 percent lower threshold for activating a CCB in BCBS guidance; driven largely by decline in nominal GDP growth.
  - Rate of credit growth has mostly remained between 0-5 percent since 2011.
  - Most recently, the credit gap from the long-term trend is declining due to slowing credit growth.
  - Other indicators point to benign credit conditions: house prices relative to income or rent do not show large deviations from long-term trends; household debt servicing ratio continues to drop thanks to low interest rates.
  - Leverage ratio has remained above the minimum of three percent and has been improving recently.
  - Reliance on wholesale funding is declining.
  - Current account imbalances are not expanding along with credit.
- The Basel III CCB is main broad-based instrument and is not currently activated:
  - Law requires FIN-FSA to decide imposition of the CCB (0-2.5 percent) every quarter, in cooperation with the MoF and the BoF, based on developments in a credit-to-GDP gap and other complementary information; conditions specified in MoF Decree 1029/2014.
  - Since introduction of the CCB framework in January 2015, FIN-FSA has not imposed a positive buffer requirement; the ECB has not imposed an additional requirement either.
  - Guided discretion on CCB activation is appropriate given statistical caveats in credit gap calculation; BoF and FIN-FSA should complement credit gap estimates with granular data and forward-looking estimates.
  - Against slow economic growth and lack of investment opportunities, keeping the CCB at zero percent appears appropriate.
- Leverage ratio monitoring and cross-border arbitrage:
  - Authorities monitor leverage ratio but do not have powers to impose a limit yet; Basel III leverage ratio reporting began in 2013 and is expected to become a requirement from 2018.
  - Broad-based instruments are subject to cross-border regulatory arbitrage risks; risks are mitigated for the CCB by reciprocity arrangements.
  - Finnish legislation provides for CCB up to 2.5 percent with mandatory reciprocity arrangement under Basel III and EU rules; Finland can recognize a host country CCB exceeding 2.5 percent for the full amount.
  - Table 3: Current settings for CCB by Nordic countries (source: National authorities):
    - Finland 0 percent
    - Denmark 0 percent
    - Norway 1.5 percent (raised in June 2016 from 1 percent)
    - Sweden 1.5 percent (raised in June 2016 from 1 percent)

B. Vulnerabilities from corporate sector
- Financial sector exposure to corporate sector does not appear excessively high at current juncture:
  - Banks finance more than 24 percent of nonfinancial corporations’ borrowing.
  - Credit to nonfinancial corporations rose to 105 percent of GDP in 2015, from 85 percent prior to the GFC; level still below the peak of Nordic crisis in early 1990s.
  - Share of corporate credit in total credit has remained around 65 percent since mid-2000s.
  - Bankruptcy applications in early 2016 are about 15 percent higher than the pre-2009 crisis level.
- Recommendation: remain vigilant and monitor quality and trends in corporate loans; progress in AnaCredit at European level will reduce data gap.

C. Vulnerabilities from housing and household sector
- House prices do not show acute signs of stress under current conditions but could change under adverse scenarios:
  - After rapid rise between 1995 and 2008, house prices have broadly stabilized, including in the capital city region.
  - When benchmarked against rents and wages, housing prices do not seem out of line with historical averages, suggesting at most a moderate overvaluation.
  - Peer-country comparisons do not show excessive house price increases in Finland, though caution due to overvaluation in some peer countries.
  - Given significant household debt increases, scenarios of less-than-expected growth and higher unemployment, or a large increase in interest rates, would likely reduce house prices.
  - A FIN-FSA 2012 survey showed a sizable portion of new housing loans carry a loan-to-value ratio exceeding 90 percent, indicating sensitivity of risks to house prices as collateral.

*Source: IMF Finland staff report (excerpts as provided).*

### 49.      Increasing household indebtedness is a concern. Household debt has risen to the highest

### Increasing household indebtedness is a concern. Household debt has risen to the highest

### Household indebtedness and interest-rate sensitivity
- Household debt has risen to the highest level to 123 percent of disposable income (65 percent of GDP).
- Household loans tied to variable interest rates: 95 percent.
- Finnish banks offer the lowest interest for mortgage loans among euro area countries (benefitting from pass-through of low interest rates in the Euro Area).
- Households’ interest expenses have fallen to a historic low in recent years.
- Vulnerability: household debt sustainability is highly dependent on developments in interest rates.
  - With most mortgage loans carrying floating interest rates, debt service payments have declined so far.
  - Under a scenario with higher interest rates, the higher debt service burden may result in significant payments difficulties.

### Macroprudential instruments and recent measures
- A maximum loan-to-collateral (LTC) ratio for housing loans became effective from July 2016.
  - Cap: 90 percent (initially a non-binding recommendation from March 2010 applied to LTV).
  - LTC defined relative to current value of collateral securities (allows more flexibility).
  - 95 percent for first home buyers.
  - The FIN-FSA may lower the limit by a maximum of 10 percentage points and/or change the definition of accepted collateral.
- Risk weights on housing loans: discussion underway to raise risk weights under CRDIV/CRR.
  - FIN-FSA Board decided to start preparing for setting higher risk weights on housing loans (December 2015).
  - In June 2016, announced introduction of a minimum level of 10 percent for the average risk weight on housing loans of banks using the Internal Ratings Based Approach.
  - The minimum level would come into force on July 1, 2017 at the latest.
  - Recommendation: ensure effectiveness by reciprocity agreements for foreign bank branches.
- Debt-service capacity stress assessment: FIN-FSA non-binding recommendation (2010)
  - Assess debt servicing capacity with an interest rate of 6 percent (instead of prevailing lending rate around 1.2 percent).
  - Maximum amortization period recommended: 25 years.
  - No indicative threshold for the debt-service-to-disposable income ratio.
- Tax deductibility of mortgage interest payments:
  - Gradual reduction of share of tax-deductible interest payments from 65 percent in 2015 to 25 percent in 2019.
  - Policy not implemented specifically with macroprudential objectives but will directly influence household borrowing incentives.

### Calibration and definition of LTC limit — recommended reviews
- The LTC cap level is similar to LTV caps used in other European countries, but:
  - Because LTC allows additional collaterals, (i) effectiveness in mitigating housing market booms may be undermined, and (ii) an economically binding limit for LTC needs assessment based on Finnish financial sector data.
- Reporting requirement for LTV and LTC ratios from September 2016 applies only to a flow of new loans.
  - Recommendation: complement with information on bad loans from credit bureaus.
  - Authorities should assess whether applying limit as an LTC cap (instead of LTV) is appropriate and whether FIN-FSA’s maximum 10 percentage point reduction authority is sufficient.

### Comparative LTV context (as reported)
- Selected LTV limits reported in Europe (Table 4 excerpt):
  - Netherlands: From 106 percent (2012) to 100 percent (2018)
  - Slovakia: 100 percent
  - Denmark: 95 percent
  - Poland: 95 percent (lowered to 80 percent by 2017)
  - Finland: 90 percent (95 percent for first time buyers)
  - Latvia: 90 percent (95 percent with a guarantee)
  - Estonia: 85 percent (90 percent with a guarantee)
  - Lithuania: 85 percent
  - Norway: 85 percent
  - Sweden: 85 percent
  - Ireland: 80 percent (a sliding limit starting at 90 percent for first time buyers; 70 percent for buy-to-let housing)
  - Luxembourg: 80 percent
  - Malta: 70 percent
  - Cyprus: 70 percent (80 percent for owner-occupied mortgage)
  - Romania: 60-85 percent
  - Hungary: 35-80 percent

### Broadening the macroprudential toolkit — sequencing and design
- Recommended expansion to include instruments based on loan terms and borrower eligibility:
  - Examples: limits on loan amortization period or maturity; caps on LTV, LTI, or debt-service-to-income (DSTI) ratios.
  - Rationale: can be applied to all products offered by financial institutions within a country, including foreign branches (reduces cross-border leakage risks).
- Suggested sequencing:
  - First introduce a maximum limit on LTI ratio (as DSTI requires creation of a loan registry capturing all household debt).
  - Subsequently replace with or add a maximum limit on DSTI ratio.
  - To avoid circumvention by extending loan maturity, introduce a maximum limit on loan maturity as well.
- International experience: interlocking use of these measures is effective in moderating excessive credit cycle and house price inflation.

### Existing and comparable measures in EU and Nordic region
- Measures in EU (Table 5 highlights):
  - LTI limit: Ireland, Poland, United Kingdom
  - DSTI limit: Estonia, Cyprus, Lithuania, Hungary, Poland
  - Stress test: Ireland, Cyprus, Luxembourg, Slovakia, United Kingdom
  - Loan maturity limit: Estonia, Lithuania, Netherlands, Slovakia
  - Loan amortization limit: Denmark, Netherlands, Slovakia, Sweden
- Nordic region measures (Table 6 highlights for Finland, Sweden, Norway, Denmark):
  - Loan-to-value cap: Finland 90 percent; Sweden 85 percent; Norway 85 percent; Denmark 95 percent
  - Debt-service-to-income cap: n/a across listed countries
  - Sector specific / risk weight: Finland — Risk weight floor of 10 percent (effective July 2017); Sweden — Risk weight floor of 25 percent; Norway — LGD floor 20 percent
  - Amortization requirements: Sweden 2 percent per year for new mortgage loans with LTV>70 percent; 1 percent for LTV>50 percent (proposal under discussion); Norway 2.5 percent per year for LTV>70 percent
  - Maximum loan maturity: Finland recommendation of 25 years
  - Other: Finland — use of a stressed interest rate in debt-servicing capacity assessment (recommendation) and reducing tax deductibility of interest payments; Denmark — limit on the share of interest-only loans with LTV > 70 percent

### Funding and liquidity vulnerabilities
- Loan-to-deposit ratio in Finland: around 124 percent in 2015 (among the highest in the EU).
- Bank funding structure (2015): retail deposits 45%; wholesale deposits 21%; covered bonds 10%; senior bonds/other 10%; repos 8%; CPs/CDs 6%.
- Net Stable Funding Ratio (NSFR) for the three largest banks: 114 percent (comfortably above 100 percent).
- Trend: loan-to-deposit ratio declining since 2006 as banks rely more on deposits.
  - Challenge: attracting more retail deposits without harming profitability in low interest rate / compressed margin environment.
- Basel III liquidity tools implementation:
  - Liquidity Coverage Ratio (LCR) phased-in from October 2015.
  - Introduction of Net Stable Funding Ratio (NSFR) planned for 2018.
  - FIN-FSA may require tighter liquidity limits via Article 458 of the CRR, but no additional requirements currently planned.
  - Recommendation: continue liquidity stress tests fully accounting for liquidity and funding risks.
- Cross-border branch liquidity: authorities should ensure sufficient euro liquidity for systemic foreign branches is held at group level and discuss arrangements with home country supervisors.
  - Consider harmonizing liquidity requirements in the Nordic region to reduce compliance costs and avoid concentration of funding risks.

### Structural vulnerabilities and systemic institutions
- Financial system concentration:
  - Total assets of banks and non-deposit taking credit institutions: around 246 percent of GDP in 2015.
  - Banking sector assets: 230 percent of GDP (from 200 percent at end-2009).
  - One bank (Nordea) accounts for two thirds of total bank assets; top four banks account for over 90 percent (two of which are subsidiaries of foreign banks: Nordea and Danske).
- O-SII assessment (FIN-FSA, scores as of end-2015):
  - O-SII scoring criteria weights include: Size (Total assets) 25 percent; plus ten other indicators each weighted 8.33 percent across Importance, Interconnectedness, and Complexity/Cross-border activity.
- O-SII scores and buffers (Table 8):
  - Nordea Bank Finland Plc: O-SII score 61.21% — O-SII buffer 2.0%
  - OP Group: O-SII score 16.41% — O-SII buffer 2.0%
  - Municipality Finance Plc: O-SII score 5.44% — O-SII buffer 0.5%
  - Danske Bank Plc: O-SII score 4.32% — O-SII buffer 0.5%
  - Other institutions listed with O-SII scores below 3.5% have O-SII buffer 0.0%
  - Thresholds: 2 percent buffer for O-SII scores >14 percent; 1.5 percent for scores between 10.5 and 14 percent; 1 percent for scores between 7 and 10.5 percent; 0.5 percent for scores between 3.5 and 7 percent; 0 percent for scores below 3.5 percent.
- Recent structural policy instruments:
  - Capital conservation buffer fully implemented at 2.5 percent from January 2015 for all banks.
  - FIN-FSA Board designated four credit institutions as O-SIIs in July 2015, subjecting them to additional capital requirements of 0.5-2 percent from January 2016.

*Source: IMF staff summary of chapter content.*

### 60.      Finland does not have a Systemic Risk Buffer (SRB) in the legislation. The SRB is

### Finland does not have a Systemic Risk Buffer (SRB) in the legislation.

### Systemic Risk Buffer (SRB): description and rationale
- The SRB is included in the CRDIV/CRR as a voluntary measure that aims to address systemic risks of a “long-term, non-cyclical” nature, which are not covered by the CRR.
- The SRB is a flexible instrument that can be applied to all or to a subset of banks.
- The SRB is subject to a notification requirement to ESRB for buffer rates up to 3 percent.
- Above that rate, until 2015 the authorization of the European Commission must be obtained after the delivery of an opinion by the EBA and ESRB. From 2015 the procedure gets more differentiated depending on the scope, geographic exposure and level of the SRB.
- The systemic risk buffer is sometimes used as a substitute for the O-SII buffer because the latter was not yet available until 2015 and is capped at 2 percent. The ESRB has pointed out the delineation of the SRB applied to a small subset of banks with the O-SII buffer as an issue, and recommended a number of amendments to the SRB and the O-SII buffers.

### Use of the SRB across EU countries (selected findings from Table 9)
- Bulgaria: 3 percent — Scope: All banks. Main motivation: Presence of currency board and impact for monetary and fiscal policy; Weak economic environment.
- Croatia: 1.5 and 3 percent — Scope: All banks. Main motivation: Systemic risk resulting from O-SIIs; High concentration in the banking sector; Feature of real estate markets.
- Czech Republic: 1-3 percent — Scope: Four O-SII banks. Main motivation: Systemic risk resulting from O-SIIs.
- Denmark: 1-3 percent — Scope: Six O-SII banks. Main motivation: Systemic risk resulting from O-SIIs.
- Estonia: 2 percent (1 percent from 2016 Q3) — Scope: All banks. Main motivation: Small and open economy; High concentration in the banking sector and common exposure.
- Netherlands: 3 percent — Scope: Three largest banks. Main motivation: Systemic risk resulting from systemically important institutions.
- Norway: 3 percent — Scope: All banks. Main motivation: Exposure concentration.
- Sweden: 3 percent — Scope: Four largest banks. Main motivation: Systemic risk resulting from systemically important institutions; Features of the banking sector (similarity of business models, high common exposures, high interconnectedness, high concentration).

### Capital requirements in the Nordic region (selected figures from Table 10, as of April 2016)
- Finland:
  - Minimum total capital: 8
  - Capital conservation buffer: 2.5
  - Counter-cyclical capital buffer: 0.5-2
  - The higher of: Minimum for non G-SII/O-SII banks: n/a
  - Minimum for G-SII/O-SII banks: 10.5
  - SRB: 11-12.5
- Sweden:
  - Minimum total capital: 8
  - Capital conservation buffer: 2.5
  - Counter-cyclical capital buffer: 1
  - The higher of: Minimum for non G-SII/O-SII banks: 1
  - Minimum for G-SII/O-SII banks: 2
  - G-SII buffer: 3
  - O-SII buffer: 11.5
  - SRB: 13.5-14.5
- Norway:
  - Minimum total capital: 8
  - Capital conservation buffer: 2.5
  - Counter-cyclical capital buffer: 1
  - The higher of: Minimum for non G-SII/O-SII banks: 1-2*
  - Minimum for G-SII/O-SII banks: 3 (all banks)
  - SRB: 14.5
  - SRB (alternate): 15.5-16.5
- Denmark:
  - Minimum total capital: 8
  - Capital conservation buffer: 2.5
  - Counter-cyclical capital buffer: (not listed)
  - The higher of: Minimum for non G-SII/O-SII banks: (not listed)
  - Minimum for G-SII/O-SII banks: 1-3
  - SRB: 10.5
  - SRB (alternate): 11.5-13.5
- Notes: O-SII buffer in Norway is applied on top of the SRB that is 3 percent for all banks. In Denmark, the SRB is used for O-SII buffer.

### Assessment and policy recommendations (from Conclusion and Recommendations)
- Inclusion of SRB in toolkit:
  - In light of systemic vulnerabilities arising from high interconnectedness in the region, it is desirable to have the SRB in the macroprudential toolkit.
  - The SRB is a flexible measure that can be used not only for the systemic institutions that are subject to the O-SII buffer requirements.
  - Unlike the O-SII buffer, the SRB can be set higher than 2 percent. Other Nordic countries with high interconnectedness introduced the SRB and set it at 3 percent.
  - Large banks in Finland currently maintain sufficient capital to meet additional buffer requirements, so banks are not expected to face difficulties satisfying the SRB even if it is set higher than the O-SII buffer.
  - When calibrating the SRB requirement, authorities should consider the benefit of locking-in the current high level of capital to maintain resilience against potential shocks arising from interlinkages in the future.
- Macroprudential framework and governance:
  - The FIN-FSA Board is designated as macroprudential authority in Finland, while its mandate is limited to the use of tools approved by laws.
  - Clarification of the broader macroprudential policy mandate in the law, including in the FIN-FSA Act, would strengthen the willingness to act.
  - To effectively make use of the BOF’s expertise in macroeconomic analysis for systemic risk assessments, consideration should be given to formalize the chairmanship of the BoF representative in decision making meetings, and formalize the staff level cooperation framework among the FIN-FSA, the BOF and the MoF for macroprudential policy through a memorandum of understanding.
- Cross-border coordination:
  - Cooperation and coordination with European and Nordic macroprudential authorities will remain important.
  - Coordination with European bodies (in particular the ECB and the ESRB) appears to serve well and helps counter bias toward inaction at the national level.
  - Given strong financial linkages with Nordic countries and the presence of large Nordic banks as dominant players, more active collaboration with other Nordic countries, in particular Sweden and Denmark, is critical, including supervisory data sharing, joint stress testing exercises, and reciprocity arrangements for a wider set of tools.
- Data and tools:
  - There are important data gaps that need to be filled. Detailed analyses of risks using more granular data are needed to appropriately target relevant systemic risks.
  - The availability of more disaggregated data, in particular on the household and housing sector, should be enhanced.
  - The macroprudential policy toolkit should be expanded. Current tools in Finnish legislation are predominantly those required in the CRDIV/CRR, with an exception of the LTC limit.
  - Considering scope for cross-border leakages for capital based tools and substantial risks in the household sector, macroprudential tools based on borrower eligibility (such as LTI and DSTI limits) and their interlocking use with limits on loan maturity should be considered.
  - In light of high interconnectedness in the region, the SRB should be also included in the toolkit.

*Italic: Source: IMF staff analysis in the provided content unit.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1705.pdf_