## cr1907

## Source details

**Canonical URL:** [cr1907](https://www.imf.org/-/media/files/publications/cr/2019/cr1907.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2019/cr1907.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2019/cr1907.pdf.json)

---

### Outlook and risks
- Growth projections:
  - GDP 2018: 2.4 percent
  - GDP 2019: 1.9 percent
- Downside risks to the outlook:
  - An increase in protectionism could weaken demand for Finnish exports and damage confidence.
  - Higher bank funding costs could mean tighter credit.
- Staff assessment:
  - Growth likely to slow next year as global demand moderates and financial conditions tighten.
  - Given relatively modest potential growth, structural reform and cautious fiscal policy are needed.

### Recent reforms, labor market, and productivity
- Reforms implemented:
  - 2016 Competitiveness Pact improved cost competitiveness of Finnish exports.
  - Changes to social benefits enhanced incentives to look for jobs.
  - New rules for temporary hires have the potential to boost employment and labor flexibility.
- Remaining problems:
  - Firms face difficulties matching workers to job opportunities.
  - Unemployment rates remain persistently high in some regions despite ample vacancies in others.
  - Job mobility is low and has not picked up.
  - Productivity growth remains below pre-crisis rates despite the strength of the recovery.
- Staff recommendations on structural policies:
  - Increase labor market dynamism while maintaining a strong safety net.
  - Increase wage flexibility at the firm level.
  - Further changes to unemployment benefits to foster increased job search.
  - Efforts to increase regional labor mobility to help reduce regional disparities in unemployment rates.
  - Targeted infrastructure investment to bolster long-term productivity growth.

### Fiscal policy and health and social services reform
- 2019 budget:
  - Implies a moderate tightening of fiscal policy.
  - Staff supports moderate tightening to build fiscal buffers given looming age-related spending pressures and contingent liabilities.
- Health and social services reform:
  - Targets substantial savings from efficiency gains which, if realized, would make a substantial contribution toward closing the fiscal sustainability gap and restoring fiscal buffers.
  - Savings from the proposed reform are uncertain and will depend crucially on implementation.
- Fiscal policy focus:
  - Raise the effectiveness of public spending, such as those proposed in the social services and health care reform.
- Fiscal stance and projections:
  - Revenue measures (including personal income tax cuts and reductions in unemployment contributions) are expected to increase the deficit by about 0.4 percent of GDP (2018 assessment).
  - An almost neutral expenditure budget and favorable cyclical conditions will help contain the deficit expansion to close to 0.3 percent of GDP.
  - Given Finland’s position in the business cycle, this implies a fiscal stimulus of 0.7 percent of GDP (2018 assessment).
  - Fiscal policy projected to become contractionary in 2019, with a reduction in the deficit of about 0.7 percentage points of GDP relative to 2018.
  - With a closed output gap, the 2019 budget implies a structural contraction of almost 0.4 percent of GDP, reversing the 2018 fiscal stimulus.
  - Medium term: fiscal policy projected to remain contractionary; public debt projected to remain on a downward path.

### Financial sector soundness, vulnerabilities, and macroprudential policy
- Banking sector characteristics and risks:
  - System is sound overall but highly concentrated.
  - Interconnected with financial sectors of other Nordic countries.
  - Reliant on wholesale funding.
  - Size of the banking sector increased substantially with the recent redomicile of Nordea to Finland, increasing demands on supervision and crisis preparedness.
  - Immediate financial stability risks appear limited, but increased size and regional inter-connectedness heighten supervisory demands.
- Household vulnerabilities:
  - Household debt has been increasing as the economy has recovered.
  - Some borrowers appear vulnerable to interest rate increases.
  - Growth in consumer credit raises questions about whether some borrowers are sufficiently informed about loan conditions.
  - Household indebtedness stands at approximately 128 percent of disposable income.
  - Highly-indebted households (debt greater than four times their income) accounted for over a quarter of borrowing in 2016; preliminary survey data for 2017 indicate the typical new borrower for housing purchases is taking on leverage of 4½ times income.
- Credit and housing market developments:
  - Total loan growth to the private nonfinancial sector has remained broadly constant at around 3½ percent for the past five years.
  - Most lending to households has been secured lending for housing, which has grown around 4 percent.
  - Loans to housing corporations have been expanding rapidly—above 10 percent—for many years.
  - Consumer credit has been increasing steadily—above 7 percent y/y in the second quarter of 2018—and now accounts for 12 percent of aggregate household debt.
  - The share of floating rate loans in household lending is high.
- Macroprudential and consumer protection recommendations:
  - Expand toolkit to include debt-to-income and debt-service-to-income caps, supported by a comprehensive credit register.
  - Improve consumer protection: better information disclosure requirements and interest rate caps.
  - Use debt-based macroprudential tools and access to better data, such as from a comprehensive positive credit registry.
  - Monitor risks from the real estate sector closely due to the high level of household indebtedness.
  - Monitor lending by non-banks and consider changes to consumer protection laws.
- Authorities’ recent macroprudential actions:
  - A floor of 15 percent on the average risk weight for housing loans took effect in January 2018 for institutions using internal risk-based (IRB) models.
  - Effective July 2018, the maximum loan-to-collateral (LTC) ratio for housing loans (excluding loans on first homes) was cut from 90 to 85 percent.
  - FIN-FSA imposed systemic risk buffers in June 2018, binding by July 1, 2019.

### Executive Board Assessment and staff appraisal
- Directors’ overall view:
  - Agreed with the thrust of the staff appraisal.
  - Welcomed continued good economic performance but noted growth is likely to slow next year as global demand moderates and financial conditions tighten.
  - Stressed need for structural reform, particularly in the labor market, and cautious fiscal policy.
- Specific Director observations and recommendations:
  - Welcome recent reforms that improved export cost competitiveness and helped boost employment.
  - Note that productivity growth remains below pre-crisis levels; ongoing structural reforms and targeted infrastructure investment are needed to bolster long-term productivity.
  - Emphasize increasing labor market dynamism while maintaining a strong safety net: increased wage flexibility at firm level, further changes to unemployment benefits, and efforts to increase regional labor mobility.
  - Support the moderate tightening implied by the 2019 budget and concentrating fiscal policy on raising effectiveness of public spending.
  - Note increased demands on supervision and regional cooperation due to redomicile of the largest Nordic financial group to Finland.
  - Recommend additional consumer protection measures and improved macroprudential policies, including debt-based tools and a comprehensive positive credit registry.
- Staff appraisal — macro outlook and policy priorities:
  - Finland is enjoying its third consecutive year of economic recovery.
  - The unemployment rate has declined to its lowest level since 2011.
  - Growth in 2018 is expected to be 2.4 percent.
  - Over the long term, growth is likely to be lower than recent levels unless productivity growth permanently increases.
  - Authorities should continue to rebuild fiscal buffers and concentrate fiscal policy on raising the effectiveness of public spending.
  - Authorities should continue to keep a close eye on banks’ exposures to real estate and enhance macroprudential tools and consumer protection.

### Key statistics (selected from Table 1)
- Output and demand (percentage change):
  - GDP: 2016: 2.5; 2017: 2.8; 2018: 2.4; 2019: 1.9; 2020: 1.7; 2021: 1.4; 2022: 1.3; 2023: 1.3; 2024: 1.3
  - Domestic demand: 2016: 3.1; 2017: 2.1; 2018: 2.3; 2019: 1.8; 2020: 1.7; 2021: 1.3; 2022: 1.2; 2023: 1.2; 2024: 1.2
  - Private consumption: 2016: 2.0; 2017: 1.3; 2018: 2.1; 2019: 1.8; 2020: 1.3; 2021: 1.1; 2022: 1.1; 2023: 1.1; 2024: 1.1
  - Exports of goods and services: 2016: 3.9; 2017: 7.5; 2018: 3.2; 2019: 3.3; 2020: 3.1; 2021: 3.1; 2022: 3.0; 2023: 3.0; 2024: 3.0
- Prices and costs:
  - Consumer price inflation (harmonized, average): 2016: 0.4; 2017: 0.8; 2018: 1.2; 2019: 1.4; 2020: 1.6; 2021: 1.8; 2022: 1.9; 2023: 2.0; 2024: 2.0
  - GDP deflator: 2016: 0.6; 2017: 0.8; 2018: 1.6; 2019: 1.6; 2020: 1.8; 2021: 1.8; 2022: 1.9; 2023: 2.0; 2024: 2.0
- Labor market:
  - Labor force: 2016: -0.2; 2017: 0.8; 2018: 0.3; 2019: 0.6; 2020: 0.5; 2021: 0.3; 2022: 0.1; 2023: 0.1; 2024: 0.1
  - Employment: 2016: 0.5; 2017: 1.0; 2018: 1.4; 2019: 0.9; 2020: 0.6; 2021: 0.4; 2022: 0.2; 2023: 0.1; 2024: 0.1
  - Unemployment rate (in percent): 2016: 8.8; 2017: 8.6; 2018: 7.6; 2019: 7.3; 2020: 7.1; 2021: 7.0; 2022: 6.9; 2023: 6.9; 2024: 6.9
- General government finances (percent of GDP):
  - Overall balance: 2016: -1.7; 2017: -0.7; 2018: -1.0; 2019: -0.3; 2020: 0.0; 2021: 0.1; 2022: 0.0; 2023: -0.1; 2024: 0.0
  - Primary balance: 2016: -0.6; 2017: 0.3; 2018: -0.1; 2019: 0.5; 2020: 0.8; 2021: 0.9; 2022: 1.0; 2023: 1.0; 2024: 1.0
  - Structural balance (in percent of potential GDP): 2016: 0.0; 2017: -0.1; 2018: -0.8; 2019: -0.5; 2020: -0.2; 2021: -0.1; 2022: -0.2; 2023: -0.2; 2024: 0.0
  - Gross debt: 2016: 63.0; 2017: 61.3; 2018: 60.5; 2019: 59.8; 2020: 58.8; 2021: 58.4; 2022: 56.6; 2023: 54.9; 2024: 53.2
- Credit and external sector:
  - Domestic nonfinancial private sector credit growth (e.o.p.): 2016: -2.6; 2017: 2.4; 2018: 4.8; 2019: 4.6; 2020: 4.6; 2021: 4.5; 2022: 4.3; 2023: 4.0; 2024: 3.9
  - Current account balance (percent of GDP): 2016: -0.7; 2017: -0.7; 2018: -0.5; 2019: 0.1; 2020: 0.5; 2021: 0.6; 2022: 0.8; 2023: 0.9; 2024: 1.0
  - Gross external debt (percent of GDP): 2016: 195.0; 2017: 182.2; 2018: 185.6; 2019: 188.9; 2020: 191.9; 2021: 194.9; 2022: 198.0; 2023: 200.4; 2024: 202.0
- Memorandum items:
  - Nominal GDP (in Euro billions): 2016: 216.1; 2017: 223.9
  - Nominal GDP (in U.S. dollar billions at market exch. rates): 2016: 239.2; 2017: 252.8

### Two underlying weaknesses
- Labor market dynamism and productivity:
  - Vacancies remain high relative to employment; job market dynamism has not picked up with the recovery.
  - Value added per employed worker is only now at the level seen in 2008; productivity growth remains below pre-crisis rates.
  - Labor market tightness is sectoral; recent weak labor productivity growth is a concern.
- Household finances and leverage:
  - Household debt has been increasing steadily despite increases in real disposable incomes.
  - Debt based on bank lending comparable to the euro area average but higher when including non-bank lending and loans to housing corporations.
  - Consumer credit expansion and rising payment defaults noted.

### Nordea redomicile, supervisory response, and remaining European issues
- Impact and supervisory response:
  - Financial sector size increased substantially with Nordea’s redomicile, raising the banking sector to about 3¾ times GDP (about 375 percent of GDP referenced elsewhere).
  - Capital requirements for Nordea have not been weakened; FIN-FSA introduced a bank-specific systemic risk buffer (3 percent binding for Nordea).
  - Supervisory authority will increase headcount and reorganize to better supervise Nordea.
  - Nordea will contribute to the Finnish deposit guarantee fund; target for the Finnish fund is 0.8 percent of covered deposits by 2024.
  - Nordea obliged to contribute to the Single Resolution Fund; MREL decisions at consolidated level taken, other decisions to be made in 2019.
- European-level challenges:
  - Incomplete banking union and crisis management gaps remain; confirmation of a backstop for the Single Resolution Fund is significant but details pending.
  - Third-country branches are outside the SSM perimeter, creating scope for arbitrage; recommendation that SSM should have supervisory powers over significant third-country branches.

### Digitalization, fintech, and AML/CFT issues
- Digitalization and fintech:
  - Finland is at the forefront of digitalization in financial services; this brings benefits and risks to payments security and borrower protection.
  - P2P lending and online platforms have expanded rapidly; online market almost quintupled in size between 2014 and 2017 and is now the fifth largest market for digital finance in Europe by lending volumes.
  - P2P lending benefits: increased competition, financial inclusion, tailored products, potential to reduce concentration risks.
  - P2P lending risks: no regulatory capital, no access to central bank liquidity, untested credit risk models, operational risks (payments changes, cyber risks).
  - Monitoring challenges: P2P lending not captured in official credit statistics or credit registries, complicating risk assessment and policy response.
  - Regulatory priority: activity-based regulation, consumer protection, risk assessment and disclosure, enforcement of KYC regulations, enhanced regional cooperation to limit arbitrage.
- AML/CFT supervision:
  - Recent EU developments raised questions about adequacy of AML/CFT supervision (e.g., Danske’s Estonian branch).
  - Finland: no specifically Finnish investigation into the Danske affair at time of writing, but a complaint about Nordea’s Finnish operation was received; no decision yet on opening an investigation.
  - Legislative amendments to the AML Act in 2017 added national and supervisory-specific risk assessments, a register for beneficial owners, and new obligations for businesses.
  - FATF assessment of Finland under revised standards to be published in 2019.

### Regional labor mobility (Annex III) — findings and policy implications
- Mobility levels and persistence:
  - On average, about 2.3 (2.6) percent of total (working age) population moves across regions every year.
  - Large regional discrepancies in unemployment and participation exhibit high persistence.
  - Finland’s mobility is low relative to U.S. benchmarks (U.S.: about 9 percent between states; 18.6 percent between counties).
- Response to shocks:
  - Estimate for Finland (NUTS 3): a 1 percent decrease in regional labor demand is associated with a 0.35 percent increase in labor moves to other regions.
  - Comparative U.S. estimate: 0.52 percent response.
- Impediments to mobility:
  - Geographical distance, population size, house prices, regional GDP per capita, unemployment differences; real wages across regions not significantly affecting mobility.
- Policy recommendations:
  - Increase regional wage flexibility and decentralization at local and firm levels.
  - Revisit generosity of unemployment insurance and social benefits, combined with stronger ALMPs.
  - Improve infrastructure and transportation around growth regions.
  - Reduce mortgage interest deductibility to reduce home ownership bias and make the rental market more vibrant.

### Recommendations to increase job market dynamism (cr1907 - ¶38)
- Enhance ability to differentiate wages at the firm level to increase job-to-job transitions and regional labor mobility.
  - Note: About 25 percent of employees that work for non-organized employers, mostly SMEs, cannot bargain locally but are bound by sectoral agreements.
- Improve incentives from social benefits by tapering benefits to gradually fall with duration to increase job search intensity.
  - A tripartite working group was set up to assess effectiveness of measures to incentivize job search by Spring 2019.
- Address other policies to improve regional job mobility:
  - Staff analysis finds a significant role for housing market variables.
  - Authorities have implemented measures to expand housing supply in urban areas and provide mobility allowances.
  - Scope to improve transport infrastructure around growth regions.
  - Gradual decline in mortgage interest deductibility to 25 percent in 2019 would mitigate debt-financed ownership incentives.
- Supporting evidence and country experience:
  - Evidence cited from OECD survey and academic studies; example outcome: estimated decrease of unemployment duration by 10 percent and fiscal savings of more than € 100 million from prior reforms.

### External sector assessment (Annex I) — summary
- NIIP and external positions:
  - NIIP was 2½ percent of GDP as of end-2017, after 8.6 percent in 2016.
  - Gross assets 278 percent of GDP; liabilities 276 percent of GDP (2017).
  - Financial sector accounts for just over half of both external assets and liabilities.
- Current account and REER assessment:
  - Current account expected to be negative in 2018 and improve to a small surplus over the medium term.
  - EBA current account model gap of -2.1 percent of GDP in 2017; staff assess CA gap between -1 and -3¼ percent.
  - Staff assess the REER to be between 5 and 10 percent above the level consistent with fundamentals.
- Capital and financial accounts:
  - Net total financial inflows moderated to 2 percent of GDP in 2017.
  - Finland has a fully open capital account and remains exposed to financial market risks given interconnected regional financial markets.

### Box: Fintech and Consumer Credit — key points
- Fintech developments:
  - “Fintech” denotes technology-enabled innovations in finance; focus on implications for operational risks, payments systems, and cyber risks.
  - P2P lending expanded rapidly; online market almost quintupled between 2014 and 2017.
- Benefits:
  - Increased competition, financial inclusion, tailored products, potential resilience if lower maturity mismatches.
- Risks:
  - No regulatory capital, no central bank liquidity access, untested credit models, operational risks.
- Monitoring and regulatory challenges:
  - P2P not captured in official credit statistics or registries.
  - Regulatory focus likely more successful on activities rather than entities.
  - Priorities: consumer protection, risk assessment and disclosure, KYC enforcement, regional cooperation to limit arbitrage.

*Source: FINLAND — STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION (IMF). cr1907.*

### 2.4 percent, then 1.9 percent in 2019 as global demand slows and financial conditions tighten.

### 2.4 percent, then 1.9 percent in 2019 as global demand slows and financial conditions tighten.

### Outlook and risks
- Growth projections:
  - GDP 2018: 2.4 percent
  - GDP 2019: 1.9 percent
- Downside risks to the outlook:
  - An increase in protectionism could weaken demand for Finnish exports and damage confidence.
  - Higher bank funding costs could mean tighter credit.
- Staff assessment:
  - Growth likely to slow next year as global demand moderates and financial conditions tighten.
  - Given relatively modest potential growth, structural reform and cautious fiscal policy are needed.

### Recent reforms, labor market, and productivity
- Reforms implemented:
  - 2016 Competitiveness Pact improved cost competitiveness of Finnish exports.
  - Changes to social benefits enhanced incentives to look for jobs.
  - New rules for temporary hires have the potential to boost employment and labor flexibility.
- Remaining problems:
  - Firms face difficulties matching workers to job opportunities.
  - Unemployment rates remain persistently high in some regions despite ample vacancies in others.
  - Job mobility is low and has not picked up.
  - Productivity growth remains below pre-crisis rates despite the strength of the recovery.
- Staff recommendations on structural policies:
  - Increase labor market dynamism while maintaining a strong safety net.
  - Increase wage flexibility at the firm level.
  - Further changes to unemployment benefits to foster increased job search.
  - Efforts to increase regional labor mobility to help reduce regional disparities in unemployment rates.
  - Targeted infrastructure investment to bolster long-term productivity growth.

### Fiscal policy and health and social services reform
- 2019 budget:
  - Implies a moderate tightening of fiscal policy.
  - Staff supports moderate tightening to build fiscal buffers given looming age-related spending pressures and contingent liabilities.
- Health and social services reform:
  - Targets substantial savings from efficiency gains which, if realized, would make a substantial contribution toward closing the fiscal sustainability gap and restoring fiscal buffers.
  - Savings from the proposed reform are uncertain and will depend crucially on implementation.
- Fiscal policy focus:
  - Raise the effectiveness of public spending, such as those proposed in the social services and health care reform.

### Financial sector soundness and vulnerabilities
- Banking sector characteristics and risks:
  - System is sound overall but highly concentrated.
  - Interconnected with financial sectors of other Nordic countries.
  - Reliant on wholesale funding.
  - Size of the banking sector increased substantially with the recent redomicile of Nordea to Finland, increasing demands on supervision and crisis preparedness.
  - Immediate financial stability risks appear limited, but increased size and regional inter-connectedness heighten supervisory demands.
- Household vulnerabilities:
  - Household debt has been increasing as the economy has recovered.
  - Some borrowers appear vulnerable to interest rate increases.
  - Growth in consumer credit raises questions about whether some borrowers are sufficiently informed about loan conditions.
- Macroprudential and consumer protection recommendations:
  - Expand toolkit to include debt-to-income and debt-service-to-income caps, supported by a comprehensive credit register.
  - Improve consumer protection: better information disclosure requirements and interest rate caps.
  - Use debt-based macroprudential tools and access to better data, such as from a comprehensive positive credit registry.
  - Monitor risks from the real estate sector closely due to the high level of household indebtedness.
  - Monitor lending by non-banks and consider changes to consumer protection laws.

### Executive Board Assessment
- Directors’ overall view:
  - Agreed with the thrust of the staff appraisal.
  - Welcomed continued good economic performance but noted growth is likely to slow next year as global demand moderates and financial conditions tighten.
  - Stressed need for structural reform, particularly in the labor market, and cautious fiscal policy.
- Specific Director observations and recommendations:
  - Welcome recent reforms that improved export cost competitiveness and helped boost employment.
  - Note that productivity growth remains below pre-crisis levels; ongoing structural reforms and targeted infrastructure investment are needed to bolster long-term productivity.
  - Emphasize increasing labor market dynamism while maintaining a strong safety net: increased wage flexibility at firm level, further changes to unemployment benefits, and efforts to increase regional labor mobility.
  - Support the moderate tightening implied by the 2019 budget and concentrating fiscal policy on raising effectiveness of public spending.
  - Note increased demands on supervision and regional cooperation due to redomicile of the largest Nordic financial group to Finland.
  - Recommend additional consumer protection measures and improved macroprudential policies, including debt-based tools and a comprehensive positive credit registry.

### Key statistics (selected from Table 1)
- Output and demand (percentage change):
  - GDP: 2016: 2.5; 2017: 2.8; 2018: 2.4; 2019: 1.9; 2020: 1.7; 2021: 1.4; 2022: 1.3; 2023: 1.3; 2024: 1.3
  - Domestic demand: 2016: 3.1; 2017: 2.1; 2018: 2.3; 2019: 1.8; 2020: 1.7; 2021: 1.3; 2022: 1.2; 2023: 1.2; 2024: 1.2
  - Private consumption: 2016: 2.0; 2017: 1.3; 2018: 2.1; 2019: 1.8; 2020: 1.3; 2021: 1.1; 2022: 1.1; 2023: 1.1; 2024: 1.1
  - Exports of goods and services: 2016: 3.9; 2017: 7.5; 2018: 3.2; 2019: 3.3; 2020: 3.1; 2021: 3.1; 2022: 3.0; 2023: 3.0; 2024: 3.0
- Prices and costs:
  - Consumer price inflation (harmonized, average): 2016: 0.4; 2017: 0.8; 2018: 1.2; 2019: 1.4; 2020: 1.6; 2021: 1.8; 2022: 1.9; 2023: 2.0; 2024: 2.0
  - GDP deflator: 2016: 0.6; 2017: 0.8; 2018: 1.6; 2019: 1.6; 2020: 1.8; 2021: 1.8; 2022: 1.9; 2023: 2.0; 2024: 2.0
- Labor market:
  - Labor force: 2016: -0.2; 2017: 0.8; 2018: 0.3; 2019: 0.6; 2020: 0.5; 2021: 0.3; 2022: 0.1; 2023: 0.1; 2024: 0.1
  - Employment: 2016: 0.5; 2017: 1.0; 2018: 1.4; 2019: 0.9; 2020: 0.6; 2021: 0.4; 2022: 0.2; 2023: 0.1; 2024: 0.1
  - Unemployment rate (in percent): 2016: 8.8; 2017: 8.6; 2018: 7.6; 2019: 7.3; 2020: 7.1; 2021: 7.0; 2022: 6.9; 2023: 6.9; 2024: 6.9
- Potential output and NAIRU:
  - Output gap (in percent of potential output): 2016: -2.8; 2017: -1.5; 2018: -0.5; 2019: 0.0; 2020: 0.2; 2021: 0.1; 2022: 0.1; 2023: 0.1; 2024: 0.1
  - Growth in potential output: 2016: 1.0; 2017: 1.4; 2018: 1.4; 2019: 1.5; 2020: 1.5; 2021: 1.4; 2022: 1.3; 2023: 1.3; 2024: 1.3
- General government finances (percent of GDP):
  - Overall balance: 2016: -1.7; 2017: -0.7; 2018: -1.0; 2019: -0.3; 2020: 0.0; 2021: 0.1; 2022: 0.0; 2023: -0.1; 2024: 0.0
  - Primary balance: 2016: -0.6; 2017: 0.3; 2018: -0.1; 2019: 0.5; 2020: 0.8; 2021: 0.9; 2022: 1.0; 2023: 1.0; 2024: 1.0
  - Structural balance (in percent of potential GDP): 2016: 0.0; 2017: -0.1; 2018: -0.8; 2019: -0.5; 2020: -0.2; 2021: -0.1; 2022: -0.2; 2023: -0.2; 2024: 0.0
  - Gross debt: 2016: 63.0; 2017: 61.3; 2018: 60.5; 2019: 59.8; 2020: 58.8; 2021: 58.4; 2022: 56.6; 2023: 54.9; 2024: 53.2
- Credit and external sector:
  - Domestic nonfinancial private sector credit growth (e.o.p.): 2016: -2.6; 2017: 2.4; 2018: 4.8; 2019: 4.6; 2020: 4.6; 2021: 4.5; 2022: 4.3; 2023: 4.0; 2024: 3.9
  - Current account balance (percent of GDP): 2016: -0.7; 2017: -0.7; 2018: -0.5; 2019: 0.1; 2020: 0.5; 2021: 0.6; 2022: 0.8; 2023: 0.9; 2024: 1.0
  - Gross external debt (percent of GDP): 2016: 195.0; 2017: 182.2; 2018: 185.6; 2019: 188.9; 2020: 191.9; 2021: 194.9; 2022: 198.0; 2023: 200.4; 2024: 202.0
- Memorandum items:
  - Nominal GDP (in Euro billions): 2016: 216.1; 2017: 223.9
  - Nominal GDP (in U.S. dollar billions at market exch. rates): 2016: 239.2; 2017: 252.8

*Source: FINLAND — STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION (IMF).*

### 7. Two underlying weaknesses remain.

### 7. Two underlying weaknesses remain.

### Labor market dynamism and productivity
- Vacancies remain high relative to employment; job market dynamism—the rate at which new jobs are created and the “churn” of workers relocating across jobs—has not picked up with the recovery (¶34–36 and Figure 4).
- Value added per employed worker has been slow to recover and is only now at the level seen in 2008.
- Authorities noted the labor market is tight in some sectors, but the cyclical upswing has reached a mature stage and has likely peaked; recent weak labor productivity growth was a concern.

### Household finances and leverage
- Household debt has been increasing steadily (¶12–13), despite increases in real disposable incomes.
- Debt levels (based on lending from banks) remain comparable to the euro area average and well below those of other Nordic households, but the increase is notable given deleveraging by other sectors.
- When non-bank lending and loans to housing corporations are included, household debt is notably higher.
- Distribution of household debt has been broadly stable in recent years, but unofficial data indicate new borrowers are taking on more leverage than the average.

### Outlook and macroeconomic projections
- GDP growth is projected to be 2.4 percent in 2018 and 1.9 percent in 2019, before reverting to a long-run growth rate of 1¼ percent.
- Net exports’ contribution to growth would remain slightly positive, tempered by gradually tightening financial conditions, increases in costs, and a gradual slowdown in global growth.
- Private investment growth is assumed to ease off after three years of above-trend growth; private consumption growth is expected to ease only slightly in 2019, supported by increases in real wages, improvement in employment, and easy access to credit.
- Long-run growth is mainly determined by labor productivity growth, which is expected to be around 1½ percentage points, offset slightly by a net employment contribution of -0.2 percentage points (increasing participation only partly compensates for a declining working age population).
- Inflation is expected to remain low in 2018 and only gradually increase thereafter; the output gap would remain slightly positive for some time.
- Overall fiscal balance is projected to remain in deficit in 2018:
  - Revenue measures (including personal income tax cuts and reductions in unemployment contributions) are expected to increase the deficit by about 0.4 percent of GDP.
  - An almost neutral expenditure budget and favorable cyclical conditions will help contain the deficit expansion to close to 0.3 percent of GDP.
  - Given Finland’s position in the business cycle, this implies a fiscal stimulus of 0.7 percent of GDP.
  - The fiscal policy stance is contractionary thereafter, assuming the government expenditure ratio declines in line with the government’s consolidation plan and debt continues to fall.
- The current account is projected to improve gradually from a half percentage point deficit in 2018 to a surplus of around one percent of GDP after five years (assuming maintained export market shares at recent slightly-higher levels and an improvement in the income balance to about zero).

### Risks to the outlook
- Main external downsides (Annex IV: Risk Assessment Matrix):
  - Weaker global growth and trade disruption, including increased protectionism; Finland’s exports are predominantly directed to Europe, with value-added importance of the United States, Russia, Sweden, Germany, China, and the UK.
  - Financial system exposures: systemic exposure to Nordic economies and their housing markets; reliance on wholesale funding, including covered bonds; sharper-than-expected increases in global interest rates could curb domestic consumption and investment.
- Domestic risks:
  - Reforms: labor productivity and employment growth could slow if reforms to work incentives deliver weaker gains than expected.
  - Health and social services reforms (¶30) might stall or fail to deliver targeted savings, jeopardizing the government’s objective of closing the fiscal sustainability gap.

### Credit markets, household borrowing, and housing
- Total loan growth to the private nonfinancial sector has remained broadly constant at around 3½ percent for the past five years.
- Most lending to households has been secured lending for housing, which has grown around 4 percent.
- Corporate loan growth rebounded strongly in the second quarter of the year after a sharp contraction in the second half of 2017.
- Two lending categories of concern:
  - Loans to housing corporations have been expanding rapidly—above 10 percent—for many years. Drivers include expansion of the housing stock and renovation of rental properties; shareholders of housing corporations include homeowners, making these de facto indirect loans to households.
  - Consumer credit has been increasing steadily—above 7 percent y/y in the second quarter of 2018—and now accounts for 12 percent of aggregate household debt, driven by easing lending standards at credit institutions and a rapid increase in non-bank lending. The expansion has been associated with an increase in payment defaults.
- Highly-indebted households (debt greater than four times their income) accounted for over a quarter of borrowing in 2016; preliminary survey data for 2017 indicate the typical new borrower for housing purchases is taking on leverage of 4½ times income.
- The share of floating rate loans in household lending is high, exacerbating vulnerabilities to interest rate and/or income shocks, although this is mitigated by the prevalence of mortgages with annuity repayments.
- Residential real estate markets do not seem overheated overall, but demand exceeds supply in major metropolitan areas; housing starts and completions have been elevated, price increases in greater Helsinki suggest demand still outstrips supply, while price-to-income and price-to-rent ratios have not risen much during the recent recovery. Low and declining yields in commercial real estate suggest relatively high valuations.

### Macroprudential policy assessment and recommendations
- Authorities have tightened credit policies:
  - A floor of 15 percent on the average risk weight for housing loans took effect in January for institutions using internal risk-based (IRB) models.
  - Effective July, the maximum loan-to-collateral (LTC) ratio for housing loans (excluding loans on first homes) was cut from 90 to 85 percent.
- Staff view: the recent tightening is appropriate, but the toolkit could be more effective if modified:
  - Replace the cap on mortgage loans relative to collateral with a cap relative to the value of the property (common in other countries).
  - Have debt-based macroprudential tools (such as debt-to-income or debt-service-to-income caps) available should leverage become more stretched.
  - Support establishment of a "positive credit register" to obtain real-time information about customers’ debt and income levels; accurate information is essential for applying debt-based tools well.
  - Non-bank lending, including online platforms such as peer-to-peer lending, is not being recorded in credit statistics and registers; this presents a new challenge.
  - Additional consumer protection measures and tighter prudential requirements to demonstrate creditworthiness could be considered, and legislation on interest rate caps is being amended to close loopholes.
- Macroprudential tools should not be expected to solve underlying housing supply problems. Authorities have implemented measures to expand housing supply in urban areas and provide substantial support for social housing:
  - The guarantee portfolio for government housing financing has increased by around 8 percent each year from 2010 to 2017, with higher increases for subsidized loans.
  - The government now guarantees the construction of 8,000 social apartments each year.
- Property taxation and transaction taxes may affect mobility: recurrent property taxes collected by municipalities tend to be low, while transaction tax rates are steeper at 4 percent. (Note: They are 2 percent for shares in housing companies, with an exemption for first time buyers.)

### Financial system structure, concentration, and digitalization risks
- The Finnish financial system is sound: system-wide capital ratios exceed minimum requirements by a clear margin; leverage ratios have improved to levels above European averages; loan quality is very good overall, with low NPLs.
- Distinctive structural features indicating supervisory challenges:
  - Financial sector size increased with the redomicile of Nordea, raising the size of the banking sector to about 3¾ times GDP once total assets of foreign subsidiaries are accounted for.
  - Covered deposits within the Finnish deposit guarantee scheme grow from around €51 billion to around €127 billion after Nordea’s redomicile; the maximum amount guaranteed remains €100,000.
  - Over half of bank lending is directed to real estate (including construction and housing corporations); the Finnish real estate investment market is estimated to be worth over a quarter of GDP in 2017.
  - Interconnectedness: reliance on covered bonds increases exposure to Nordic real estate markets; exposure to other Nordic economies increases with Nordea’s redomicile.
  - Systemic branches: Danske Bank is a significant lender in Finland, with branch activities supervised by the Danish competent authority (partly ameliorated by Danske’s Finnish subsidiary providing Finnish representation in the supervisory college).
  - Digitalization: Finland is at the forefront of digitalization in financial services, bringing benefits but also risks to payments security and to borrowers vulnerable to misleading loan offers from entities that are not supervised or regulated.

*Source: cr1907 - 7. Two underlying weaknesses remain.*

### 21. The authorities have responded to many of the challenges posed to the system. The

### 21. The authorities have responded to many of the challenges posed to the system. The

### Response to Nordea’s redomicile and supervisory changes
- Mission assessment: responsible authorities have responded within the bounds of their remits.
- Capital requirements:
  - Capital requirements for Nordea have not been weakened.
  - The FIN-FSA has a new capital buffer—the bank-specific systemic risk buffer—in addition to G-SII and O-SII buffers.
  - These were set for financial institutions in June 2018 and become effective in January 2019; for Nordea, the binding buffer is the 3 percent set for its systemic risk buffer.
  - Nordea will maintain nominal capital levels roughly constant until the ECB issues its decision in 2019. Capital ratios will fall somewhat as a result of different approaches to the use of Pilar 1 and Pilar 2 requirements under the SSM to those employed by Swedish authorities in 2017. The Swedish and Finnish authorities assess that Nordea would face equivalent regulatory capital requirements.
- Supervisory capacity and cooperation:
  - The supervisory authority will increase headcount and reorganize to better supervise Nordea.
  - The ECB and Nordic authorities have reaffirmed commitments to information exchange and cooperation, mitigating cross-border discrepancy risks.
- Deposit guarantee and resolution:
  - Nordea will contribute to the Finnish deposit guarantee fund with annual deposit guarantee fees, as with all banks in Finland.
  - The target for the Finnish fund is 0.8 percent of covered deposits by 2024.
  - Nordea is obliged to contribute to the Single Resolution Fund, like other euro area banks.
  - No changes are expected to the single point of entry resolution strategy previously established for Nordea by the Swedish-led Supervisory College; the SRB has made decisions on MREL at the consolidated level, but decisions over e.g. subordination and intragroup MREL will be made in 2019.
- Comparative systemic risk buffer levels for other institutions: OP Group, 2.0 percent; Municipality Finance Plc, 1.5 percent; Aktia Bank Plc, Danske Mortgage Bank Plc, Evli Bank Plc, Handelsbanken Finance Plc, Oma Savings Bank Plc, POP Bank Group, S-Bank Ltd, Mortgage Society of Finland Group, Savings Banks Group, and Bank of Åland Plc, 1.0 percent.

### Remaining challenges and European-level issues
- Incomplete banking union and crisis management gaps:
  - Banking supervision in the euro area improved after the Single Supervisory Mechanism, but bank crisis preparedness and management still face significant transitional challenges.
  - Confirmation of a backstop for the Single Resolution Fund in June is a significant step for market confidence, but important details still need to be finalized.
  - Establishing a common European deposit insurance scheme would increase confidence of retail depositors and is important where liquidation would be required.
- Third-country branches:
  - Third-country bank branches are outside the perimeter of ECB banking supervision, creating scope for arbitrage and inconsistent supervisory treatment.
  - Recommendation: The SSM should have supervisory powers over significant third-country branches operating in the euro area.

### Digitalization challenge
- Rapid changes in services and platforms and lack of data on activities of non-bank service providers complicate supervision and regulation.
- Products morphing across lines of supervision suggest activity-based regulation may manage prudential risks more successfully than entity-based approaches.
- Consumer protection (e.g., transparency about lending terms and conditions) is an important issue.

### AML/CFT supervision and recent concerns
- Recent developments raised questions about adequacy of AML/CFT supervision across the EU (e.g., Danske’s Estonian branch activities 2007–2013 prompting investigations).
- Finland-specific developments:
  - No specifically Finnish investigation into the Danske affair at time of writing, but Finland’s National Bureau of Investigation has received a complaint about Nordea’s Finnish operation (then a branch) over the same period; no decision yet whether to open an investigation.
- Institutional responsibilities in Finland:
  - Ministry of Finance and Ministry of the Interior: mainly responsible for legislation.
  - FIN-FSA: supervises financial institutions’ compliance, including Know Your Customer requirements.
  - Regional State Administrative Agency for Southern Finland (RSAA), Finnish Patent and Register Office, National Police Board, Finnish Bar Association: tasked with AML/CFT supervision for other entities (real estate agencies, external accounting services, tax advisors, gambling operators).
  - Financial Intelligence Unit: receives and analyzes suspicious transaction reports.
- Legislative developments and FATF assessment:
  - Following FATF’s 2013 9th Follow-Up Report, the government amended the AML Act in 2017 by adding requirements for national and supervisory-specific risk assessments and risk assessments by obliged entities; creating a register for beneficial owners; and adding new obligations for businesses to maintain information concerning their beneficial owners.
  - FATF is conducting an AML/CFT assessment of Finland under revised FATF standards focusing on effective implementation; the report will be published in 2019.

### Authorities’ assessment of the financial system
- Authorities view the financial system as sound and stable.
- Main banking risks: exposure to Nordic real estate markets and rollover risks from covered bond funding, which could escalate with an increase in risk premia in global financial markets.
- Hiring of new supervisory staff has been successful, though demands remain high in complex areas (internal models, money laundering).
- SSM provides additional expertise; Nordic supervisory cooperation continues to work well.
- Capital standards for Nordea were not diluted with redomicile; system-wide capital comfortably above regulatory minima.
- Finnish deposit guarantee fund:
  - Owing to previous funds carrying over and Nordea contributing, only a small amount of funds outside the current system would be necessary to collect from other banks for the Finnish deposit guarantee fund to reach its target, even with the increase in depositors covered by the Finnish scheme with Nordea’s redomicile.
- Finnish authorities’ desire: a mechanism for systemically-important branches (such as the authority to set liquidity requirements).

### Fiscal policies (2019 Budget and medium term)
- 2019 Budget:
  - Continues government policies with new growth-enhancing measures worth about 0.1 percent of GDP aimed at employment growth, R&D and education, and public safety.
  - New revenue measures (reducing taxation of earned income and an increase in excise duties) lead to a net decline in the revenue ratio.
- Fiscal stance in 2019:
  - Fiscal policy in 2019 is expected to become contractionary.
  - Continuation of previous measures implies a reduction in the deficit of about 0.7 percentage points of GDP.
  - Major contributors to deficit reduction: saving measures under the consolidation plan (estimated at about 0.3 percent of GDP), expected reductions in unemployment benefits (about 0.1 percent of GDP), and expiration of public investment projects.
  - With a closed output gap, the budget proposal implies a structural contraction of almost 0.4 percent of GDP, reversing the 2018 fiscal stimulus.
- Medium term:
  - Fiscal policy projected to remain contractionary as expenditure consolidation continues beyond 2019, albeit at a slower pace.
  - With a positive output gap over the medium term, the Budget implies a reduction in the structural primary balance of about 0.3 percent of GDP in 2019 and 0.1 percent of GDP thereafter.
  - With deficits receding and output converging to potential, public debt is projected to remain on a downward path.
- Rationale for tightening:
  - A moderate tightening is justified for cyclical and structural reasons: output is projected above potential and there is no independent monetary policy.
  - Need to build fiscal buffers for looming age-related costs, relatively high level of contingent liabilities, and historical volatility of the economy.
  - Government guarantees are above 20 percent of GDP.
  - With an already-high revenue ratio, little scope for further increases in the tax burden; improvements in VAT collection would help.
  - Continued consolidation commitments under the Competitiveness Pact are important.
  - Unexpected savings should be allocated to reduce debt or to growth-enhancing expenditures (e.g., infrastructure aiding labor mobility, partial reversal of recent cuts in R&D spending).

### Social services and health care reform
- Progress has been slow but reform should be pursued; it is crucial to address age-related challenges and part of the fiscal consolidation plan.
- Current structure: public health and social care provided by 190 local agencies, making economies of scale hard to exploit.
- Reform plan: transfer responsibility from almost 300 municipalities to 18 newly-formed counties, with emphasis on competition and modernization.
- Implementation status and risks:
  - Political consensus not yet achieved; implementation delayed again to 2021.
  - Project is ambitious with major regional administration changes and complex IT commitments; susceptible to downside risks including cost overruns.
- Potential fiscal impact:
  - If successfully implemented, the reform could increase public sector net worth by about 65 percent of GDP.
  - Authorities target fiscal savings of around 1.3 percentage points of GDP by 2030 through successful implementation.
  - Given current health and old-age expenditures of 11.4 percent of GDP and a projected increase from population aging of around 1.3 percent, the target would imply savings of approximately 10 percent of total health and old-age expenditures once the reform is completed.

### Structural policies and labor market issues
- Emphasis: sustainability of the social model depends on high employment and growth, requiring vibrant markets and efficient resource use.
- Labor market adjustments and productivity:
  - Recessions and shocks (including Nokia’s decline) led to substantial job losses in high-productivity manufacturing and compositional effects weakening productivity.
  - Labor productivity recovered only to pre-crisis levels; productivity growth in this recovery slower than during the 1990s recovery.
  - Within sectors, some firms show high productivity growth while others lag; the gap between best and worst performing firms is increasing.
- Labor market dynamism and mobility:
  - Unemployment rate remains notably above Nordic peers.
  - Beveridge curve shifted out during the past three years of recovery, indicating difficulties matching workers to job opportunities.
  - Labor shortages in sectors like construction and services persist despite comparatively high overall unemployment.
  - Regional labor mobility is low relative to other advanced economies.
  - Employment-to-employment transition rates have remained flat; job creation rates across sectors from 2008 to 2016 have been flat or declined slightly; creation of new firms has declined over the same period.
  - Many other advanced economies have higher job-to-job mobility, a key mechanism for skills diffusion.
- Structural features affecting dynamism:
  - Finland’s Employment Protection Legislation is not noticeably restrictive overall, but dismissal procedures are more restrictive; individual dismissal is more stringent than in an average OECD country.
  - Easing dismissal procedures often has no significant effect on employment but can increase productivity and incomes.
  - SMEs face proportionally larger dismissal costs and clauses specifying minimum employment periods on re-employment are considered a deterrent by employers.
- Reforms pursued by authorities:
  - 2016 Competitiveness Pact aimed to move away from tripartite centralized bargaining toward coordinated sectoral bargaining with greater firm-level wage flexibility; social parties did not reach agreement on a formal model; 2017 wage negotiations were bilateral and not formally coordinated.
  - Reforms of social benefits to decrease inactivity: tighter conditions and shortened duration for unemployment benefits effective January 2017; penalties to incentivize active job search; increased funds for active labor market policies; increased mobility allowance to better cover part-time work; extended trial period for new hires; eased conditions for hiring on temporary contracts.
  - Recent agreement on a legislative proposal allowing courts to take firm size into account in dismissal cases and reducing the period during which individually dismissed workers would not receive unemployment insurance from 90 to 60 days.

*International Monetary Fund — Selected excerpts from the source PDF chapter.*

### 38. While recognizing the importance of maintaining social cohesion, staff recommends

### cr1907 - 38. While recognizing the importance of maintaining social cohesion, staff recommends

### Recommendations to increase job market dynamism
- Enhance the ability to differentiate wages at the firm level to increase incentives for job-to-job transitions and foster regional labor mobility, clearing the job market more rapidly and facilitating the transfer of skills.  
  - Note: About 25 percent of employees that work for non-organized employers, mostly SMEs, cannot bargain locally but are instead bound by sectoral agreements.
- Improve incentives from social benefits by tapering benefits to gradually fall with duration to increase job search intensity (job search intensity tends to increase sharply toward the end of benefit time limits).  
  - A tripartite working group was set up to assess the effectiveness of recently introduced measures to incentivize job search of unemployed by Spring 2019.
- Address other policies to improve regional job mobility:
  - Staff analysis finds a significant role for housing market variables.
  - Authorities have implemented measures to expand housing supply in urban areas and provide mobility allowances to compensate for housing cost differentials across regions.
  - There is scope to improve transport infrastructure around growth regions to incentivize commuting and reduce demand pressures from centrally located properties.
  - The gradual decline in mortgage interest deductibility to 25 percent in 2019 would mitigate debt-financed ownership incentives.

### Supporting evidence and country experience
- Evidence cited: an OECD survey and academic studies on employment protection and productivity.  
- Example outcome cited: estimated decrease of unemployment duration by 10 percent and fiscal savings of more than € 100 million from prior reforms.

### Authorities' views
- Authorities agree on the need to continue structural reforms, but highlight challenges associated with enhancing labor market dynamism.
- Past reforms have restored competitiveness and the labor market recovery has exceeded expectations.
- Labor productivity growth remains subdued and has not recovered as fast as in previous upswings.
- Modest labor mobility across regions attributed to geographical dispersion of the population, high home ownership rates, and less liquid real estate markets in rural areas.
- There is scope to reform social benefits to enhance labor incentives and labor market dynamism further, while maintaining social safety nets.
- Regional governance reforms and greater reliance on outsourcing are expected to improve the effectiveness of active labor market policies.

### Staff appraisal — macro outlook and policy priorities
- Growth and labor market:
  - Finland is enjoying its third consecutive year of economic recovery.
  - The unemployment rate has declined to its lowest level since 2011.
  - Growth in 2018 is expected to be 2.4 percent.
  - Growth is likely to slow next year as global demand slows and financial conditions tighten; downside risks include an increase in trade protectionism.
  - Over the long term, growth is likely to be lower than recent levels unless productivity growth permanently increases.
- Reform focus:
  - The challenge is to make the economy more dynamic: unemployment rates remain persistently high in some regions despite ample vacancies in others; productivity growth is below pre-crisis levels; external balances remain moderately weaker than desirable for an aging population.
  - The reform focus should be on increasing labor market dynamism while maintaining a strong safety net: more flexibility in setting wages at the firm level and changing unemployment benefits to increase job search soon after job loss. Other policies may be needed to aid regional labor mobility.
- Fiscal policy:
  - Because growth is likely to slow, there is a need to continue to rebuild fiscal buffers.
  - The 2019 budget implies a moderate tightening; going forward, fiscal policy should concentrate on raising the effectiveness of public spending, alongside policies to boost potential growth.
- Financial sector:
  - The financial system is sound.
  - Authorities should continue to keep a close eye on banks’ exposures to real estate.
  - The size of the banking sector has increased substantially with the recent redomicile of Nordea to Finland, increasing demands on supervision and heightening the importance of continued close regional cooperation and preparedness for crises.
- Consumer protection and macroprudential policy:
  - Extra measures to protect borrowers are needed.
  - Authorities should be given more macroprudential tools and access to better data, such as from a comprehensive positive credit registry.
  - The growth in consumer credit raises the question of whether some borrowers are sufficiently informed about the conditions of their loans—extra consumer protection measures should be considered.
- Consultation cycle:
  - It is proposed that the next Article IV consultation with Finland be held on the standard 12-month cycle.

*Source: IMF staff text (cr1907).*

### Box 1. Fintech and Consumer Credit

### Box 1. Fintech and Consumer Credit

### Definition and scope
- “Fintech” is an appellation for a broad and fluid set of technology-enabled innovations in finance.
- Recent attention has focused on implications for regulation of increased operational risks (e.g. from changes to payments systems and from cyber risks).1
- The box emphasizes important implications from new developments in consumer lending.

### Developments in Finland
- Historically, credit has usually been intermediated by banks, but electronic platforms now enable borrowers to be matched directly with investors.
- Finland, described as one of the most digitized economies in the world, provides a natural environment for such developments.
- Data are sparse, but survey data suggest that “peer-to-peer” (P2P) lending and related practices are expanding very rapidly.
- According to survey data, the online market has almost quintupled in size between 2014 and 2017 and is now the fifth largest market for digital finance in Europe after the UK, France, Germany and the Netherlands in terms of lending volumes.2

### Potential benefits of P2P lending
- Can increase competition in consumer credit markets.
- Can increase financial inclusion.
- Can create tailored products that better match borrowers’ needs.
- An increase in the share of P2P lending could reduce risks arising from concentration in bank intermediation.
- P2P lending could possibly make credit creation more resilient and less susceptible to business cycles, to the extent that P2P lending has lower maturity mismatches.

### Risks and limitations
- Credit risk could be increased because:
  - There is no regulatory capital to back such lending.
  - There is no access to central bank liquidity.
  - Credit risk models are untested.3
- Operational risks (payments system changes, cyber risks) remain an important focus for regulation.

### Monitoring challenges
- P2P lending is not captured in official credit statistics nor conventional credit registries.
- As a result, central banks and regulators cannot accurately:
  - Measure the impact of P2P lending on the real economy.
  - Evaluate its role in the transmission of monetary policy.
  - Assess risks to lenders and borrowers.
- Monitoring cross-border payments associated with P2P activity is especially difficult.

### Regulatory challenges and priorities
- Because the field is changing quickly, regulation of activities is likely to prove more successful than regulation of entities.
- Emerging regulatory issues include:
  - Consumer protection.
  - Risk assessment and disclosure.
  - Enforcement of KYC regulations to prevent money laundering.
- Regulatory arbitrage across jurisdictions is likely to exacerbate these issues without enhanced regional cooperation.

*Source: Box 1. Fintech and Consumer Credit, IMF staff.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Foreign asset and liability position and trajectory
- NIIP was 2½ percent of GDP as of end-2017, after 8.6 percent in 2016.
- Gross assets and liabilities in 2017: assets 278 percent of GDP; liabilities 276 percent of GDP.
- Financial sector accounts for just over half of both external assets and liabilities; remainder largely held by nonfinancial corporations and government social security funds.
- Assessment:
  - NIIP expected to remain positive over the medium term, consistent with improvement in current account balances.
  - Vulnerabilities mainly stem from large cross-border exposures of the financial sector, including liquidity risk related to foreign-financed wholesale funding.

### Overall assessment and policy implications
- Overall Assessment (2017): external position assessed to be moderately weaker than medium-term fundamentals and desirable policies.
  - Unit labor costs have declined and market shares have increased.
  - Improvement in the trade balance has been modest and offset by persistent negative net income balances.
- Potential policy responses:
  - Continue wage restraint gains while increasing wage flexibility at the firm level to enhance adjustment to future shocks.
  - Continue structural reforms to increase productivity and support the ongoing recovery.
  - Ongoing gradual fiscal consolidation expected to buttress the external balance.

### Current account
- Background:
  - Current account balance turned to deficit in 2011 amid sharp export decline of wood and paper and electronics industries (Nokia).
  - Deficit has averaged around 1.2 percent of GDP during the past five years.
  - Exports recovered strongly across different sectors in 2017 and into early 2018, reflecting brisk external growth and recent moderation of unit labor costs.
  - Current account expected to be negative in 2018 and improve thereafter to a small surplus over the medium term.
- Assessment:
  - EBA current account model estimates a gap of -2.1 percent of GDP in 2017, from a cyclically-adjusted current account balance of -1.3 percent of GDP and an EBA current account norm of 0.8 percent of GDP.
  - Taking into account normal uncertainties, staff assess the CA gap to be between -1 and -3¼ percent.
  - Same model estimates a largely unchanged norm for 2018; applied to projected 2018 CA balances, the gap would be -1.3 percent of GDP.
  - These CA gap estimates are consistent with real exchange rate overvaluation in the range of 5 to 10 percent.

### Real exchange rate
- Background:
  - After the depreciation in 2010–11, the CPI-based REER has been relatively stable for the last 6 years.
  - CPI-based REER depreciated by about 0.4 percent in 2017 and by a further 0.4 percent in the first half of 2018.
  - ULC-based REER depreciated by some 6 percent in 2017 and by a further one percentage point in the first half of 2018.
- Assessment:
  - EBA level and index REER models suggest REER was overvalued by 5 and 7 percent, respectively.
  - EBA external sustainability model suggests a REER undervaluation of 4 percent.
  - Staff assess the REER to be between 5 and 10 percent above the level consistent with fundamentals, reflecting a small cost competitiveness gap expected to be gradually closed.

### Capital and financial accounts: flows and policy measures
- Background (2017):
  - Net total financial inflows moderated to 2 percent of GDP, mostly reflecting developments in the Financial account.
  - Portfolio flows into equities and fixed income instruments posted a small outflow of around 2 percent of GDP.
  - This outflow was offset by an inflow into financial derivatives of about 3.6 percent of GDP.
  - FDI outflows and other investment inflows were both of the order of ¼ percent of GDP, broadly offsetting each other.
- Assessment:
  - Finland has a fully open capital account.
  - Remains exposed to financial market risks given interconnected regional financial markets.

### FX intervention and reserves level
- Background: the euro has the status of global reserve currency.
- Assessment: Reserves held by Euro area countries are typically low relative to standard metrics. The currency is freely floating.

### Technical background notes
- A standard deviation of 1.2 percent of GDP around the cyclically-adjusted current account norm is applied to obtain the current account gap range.
- Note: data for the trade and income balances and net international investment position in 2016 and 2017 were substantially revised in November 2018, indicating a 0.7 percent of GDP current account deficit in 2017 instead of a 0.7 percent surplus.

*Source: IMF staff.*

### Annex III. Regional Labor Mobility in Finland

### Annex III. Regional Labor Mobility in Finland

### Role of regional labor mobility
- Regional labor mobility is important to cushion regional shocks in Finland, where other shock absorption mechanisms such as wage adjustments were constrained by centralized wage bargaining prevailing until 2016.
- In the absence of labor mobility, labor shortages in some regions could coexist with persistently high unemployment in others, potentially inflating national unemployment and increasing fiscal redistribution demands from low-unemployment to high-unemployment regions.

### Regional patterns and persistence (sample and measures)
- Sample: 70 NUTS 4 regions over the period 1987–2016 (figures for unemployment and labor force participation); 19 NUTS 3 regions for gross/net mobility; NUTS 2 regions used for EU comparisons over 2000–16.
- Unemployment:
  - In low-unemployment regions, unemployment rate fluctuated around from 1 to 6 percent during 1987–2016.
  - In high-unemployment regions it was consistently high, reaching 35 percent in 1996.
  - High persistence over time: regions with high unemployment in 1987 tend to have high unemployment in 2016.
- Labor force participation:
  - Ranged from around 65 to 82 percent before the crisis, with the range widening further in 2016.
- These large regional discrepancies and persistence are indirect signs of limited labor mobility.

### Levels of gross and net mobility
- On average, about 2.3 (2.6) percent of total (working age) population in Finland moves across regions every year.
- Gross mobility exhibits some cyclicality and picked up following the global financial crisis.
- Net mobility varies across regions: some Southern urban regions are net recipients of labor flows; some Northern rural regions are net donors.
- Comparative benchmarks:
  - U.S.: about 9 percent of the population moved between states and 18.6 percent of population moved between counties in the 2000s.
  - Finland’s mobility is low relative to these U.S. figures.

### Response of mobility to regional labor demand shocks
- Methodology: Blanchard and Katz (1992) identity and VAR model estimations (2 lags).
- Estimate for Finland (NUTS 3): a 1 percent decrease in regional labor demand is associated with a 0.35 percent increase in labor moves to other regions in Finland.
- Comparative estimates:
  - U.S. (325 MSAs, 1990–2012): 0.52 percent response.
  - Across EU peers (NUTS 2, 2000–16): Finland shows close to 0 percent labor mobility and is the second lowest among EU peers.

### Impediments to regional labor mobility (empirical findings)
- Gravity analysis on regional labor flows (19 NUTS 3 regions) indicates:
  - Mobility is adversely affected by geographical distance across regions.
  - Mobility is positively affected by the size of the population in origin and destination regions.
  - Labor moves out from regions with relatively low GDP per capita, high unemployment, and high house prices toward regions with relatively high GDP per capita, low unemployment, and low house prices.
  - Real wages in origin and destination regions do not have a significant impact on regional labor mobility—possibly due to relatively low variation of wages across regions from centralized wage bargaining.

### Policy implications and recommendations
- Some impediments are exogenous (large geographical distances, sparse population density); others can be influenced by policy.
- Policy options to incentivize regional labor mobility and improve job matching:
  - Increase regional wage flexibility and enhance decentralization further at local and firm levels (building on the Competitiveness Pact decentralization effort in 2016).
  - Revisit the generosity of unemployment insurance and social benefits, combined with strengthening active labor market policies to encourage job search and reduce unemployment differentials across regions.
  - Improve infrastructure and transportation, especially around vibrant urban areas, to encourage commuting and reduce pressures on urban housing demand.
  - Reduce the mortgage interest deductibility to reduce home ownership bias and make the rental market more vibrant.

*Source: Annex III. Regional Labor Mobility in Finland (IMF staff compilation).*

### Annex V. Past Fund Staff Recommendations and

### Annex V. Past Fund Staff Recommendations and Implementation

### Fiscal Policy
- Past recommendation: Fiscal adjustment should remain focused on restoring long-term fiscal sustainability while minimizing negative short-term effects on output.
- Implementation notes:
  - The 2019 Budget implies a moderate tightening of fiscal policy in 2019, partly reflecting measures carried over from previous budgets, including expenditure savings measures from the government’s consolidation plan.
  - Resources not destined to deficit reduction should be reallocated toward productive public spending, while reducing poorly-targeted transfers and tax expenditures.
  - Recent structural reforms encompassed both growth-enhancing and revenue-control measures, including the reductions in the duration of unemployment benefits, R&D and education spending.
  - The authorities continue to implement their medium-term consolidation programs to ensure fiscal sustainability.
  - A report on the basic income experiment (UBI) is set to expire at the end of 2018 and a report from the authorities is expected by December 2018.
  - Ensure that health and social services reforms (SOTE) moves forward and generates the ambitious targeted revenue savings and productivity gains; clear and timely communication about the key elements of the new system and potential implementation hurdles should be maintained with stakeholders.
  - Status: The SOTE proposal is currently under consideration by Parliament, with voting expected before the end of 2018; the transition to the new health and social reforms regime has been postponed by one year to January 2021.

### Labor Market Policy
- Past recommendation: The Competitiveness Pact and other targeted measures, including provisions to improve incentives to re-enter the labor market and increasing the flexibility of firm-level wage bargaining, should be implemented in full.
- Implementation notes:
  - The Competitiveness Pact has been fully implemented, and the wage freeze in 2017 resulted in a material decline in ULCs and a notable improvement in Finland’s cost-competitiveness.
  - Strengthen ALMPs further to facilitate labor mobility, as job-to-job transition remains comparatively modest.
  - Funding for active labor market policies was augmented to the increase the frequency of interviews with unemployment insurance recipients and step-up job-matching efforts.
  - Measures implemented to address the inactivity trap:
    - childcare fees were reduced for low- and middle-income families;
    - vocational educational programs were broadened with a focus on life-long learning;
    - duration of unemployment benefits was shortened;
    - conditions for granting unemployment benefits were tightened;
    - a tapering scheme for unemployment benefits was introduced to incentivize job search efforts.

### Product Market Policy
- Past recommendation: Reforms to the retail and state-dominated sectors, such as rail and postal services, should be furthered to increase competition and yield productivity gains.
- Implementation notes:
  - The Postal Act and Decree was amended in 2017 to diminish regulatory obstacles and boost job creation.
  - The Land Use and Building Act and building regulations have been modernized in May 2017, relaxing size restrictions for large stores and allowing stores to develop their concepts more freely without limitations on their location.
  - The revised provisions of the Alcohol Act entered into force from 2018, modernizing the rules and reforming the outdated, cumbersome and unnecessary regulation.
  - In August 2018, the authorities announced that railways will also be liberalized, and work is starting to this effect.
  - The authorities are considering to further privatize other public corporations.

### Financial Sector Policy
- Past recommendation: The relocation of Nordea to Finland implies a significant increase of the scale and depth of FIN-FSA supervision and cross-border coordination; despite the good progress so far, additional resources may be needed for this task.
- Implementation notes:
  - Nordea is now supervised by the Single Supervisory Mechanism (SSM) in collaboration with Finnish authorities.
  - FIN-FSA’s staffing increases to oversee Nordea’s relocation to Finland have been accomplished successfully.
  - Bank supervision should be strengthened further by ensuring effective monitoring of banks’ internal risk models and intensifying oversight of their liquidity positions.
    - Targeted review of internal models (TRIM) was conducted in coordination with the SSM to harmonize practices and ensure compliance with regulatory requirements.
    - A 15 percent minimum risk weight on residential mortgage loans was introduced.
  - Macroprudential tools should be enhanced, including through introduction of instruments based on borrower and loan characteristics.
    - Legislation for a Systemic Risk Buffer has been approved by parliament and is now effective.
    - The authorities are exploring options to expand the macroprudential toolkit to include more instruments based on borrower and loan characteristics.
  - There is a continued effort to introduce a comprehensive positive credit register and more comprehensive data collection among non-bank providers of credit.
  - AML issues require continued effort to improve effectiveness, including by making sure that appropriate resources are devoted.
    - The AML Act was revised in 2017. Among the changes are increased written documentation of the risk assessments process.
  - Strengthen regional supervisory cooperation, including through data sharing, supervisory cooperation provisions, conduct of joint stress tests to capture regional linkages between banks, and enhancing joint crisis planning.
    - An updated comprehensive MOU on cooperation on financial stability between Nordic and Baltic countries was signed in January 2018.

### Fund Relations
- Membership Status: Joined January 14, 1948; Article VIII.
- General Resources Account (SDR Million / Percent of Quota):
  - Quota 2,410.60 100.00
  - Fund holdings of currency 2,113.38 87.67
  - Reserve Tranche Position 297.22 12.33
  - New Arrangements to Borrow 114.43
- SDR Department (SDR Million / Percent of Quota):
  - Net cumulative allocation 1,189.51 100.00
  - Holdings 1,121.77 94.31
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements: None
- Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs): Forthcoming 2018 2019 2020 2021 2022
  - Principal
  - Charges/Interest  0.75 0.75 0.75 0.75
  - Total  0.75 0.75 0.75 0.75
- Exchange Rate Arrangements: Finland’s currency is the euro, which floats freely and independently against other currencies. Finland has accepted the obligations under Article VIII, Sections 29a0, 3, and 4 of the Fund’s Articles of Agreement. It maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions, except for those measures imposed for security reasons in accordance with Regulations of the Council of the European Union, as notified to the Executive Board in accordance with Decision No. 144-(52/51).
- Article IV Consultation: Finland is on the 12-month consultation cycle.
- FSAP Participation: Finland had a review under the Financial Sector Assessment Program (FSAP) in 2016.

### Statistical Issues
- (As of October 31, 2018) Assessment of Data Adequacy for Surveillance:
  - General: Data provision is adequate for surveillance. The country has a full range of statistical publications, many of which are on the internet. The quality and timeliness of the economic database are generally very good.
- Data Standards and Quality:
  - Subscriber to the Fund’s Special Data Dissemination Standard (SDDS) since June 3, 1996. Uses SDDS flexibility option for timeliness on data for central government operations.
  - The authorities have expressed initial interest to adhere to the Special Data Dissemination Standard Plus.
  - Adherent to the Fund’s Special Data Dissemination Standards Plus since June 6, 2018.
- National Accounts: Finland publishes the national accounts according to the European System of Accounts (ESA) 2010 since September 2014.
- Government Finance Statistics: Government finance statistics were published based on ESA 2010 methodology since September 2014.
- External Sector Statistics: Finland publishes external sector statistics based on the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) format since December 2014.
- Monetary and Financial Statistics: Monetary data reported for International Financial Statistics are based on the European Central Bank’s (ECB) framework for collecting, compiling, and reporting monetary data.
- Finland: Table of Common Indicators Required for Surveillance (As of November 31, 2018) — Date of latest observation / Date received / Frequency of Data / Frequency of Reporting / Frequency of Publication:
  - Exchange Rates 11/31/18 11/31/18 D D D
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities 10/2018 11/2018 M M M
  - Reserve/Base Money 10/2018 11/2018 M M M
  - Broad Money 10/2018 11/2018 M M M
  - Central Bank Balance Sheet 10/2018 11/2018 M M M
  - Consolidated Balance Sheet of the Banking System 10/2018 11/2018 M M M
  - Interest Rates 10/31/18 10/31/18 D D D
  - Consumer Price Index 10/2018 11/2018 M M M
  - Revenue, Expenditure, Balance and Composition of Financing – General Government 2017 09/2018 A A A
  - Revenue, Expenditure, Balance and Composition of Financing – Central Government 2017 09/2018 A A A
  - Stocks of Central Government and Central Government-Guaranteed Debt 09/2018 10/2018 M M M
  - External Current Account Balance 09/2018 10/2018 M M M
  - Exports and Imports of Goods and Services 10/2018 11/2018 M M M
  - GDP/GNP Q3 2018 11/2018 Q Q Q
  - Gross External Debt Q3 2018 11/2018 Q Q Q
  - International Investment Position Q3 2018 11/2018 Q Q Q

### Recent Economic Developments, Outlook and Risks (Statement by Mr. Kimmo Tapani Virolainen, Alternate Executive Director for Finland, January 11, 2019)
- Economic growth continued for almost three years, fuelled by recovery in Finnish goods and services exports and increased household consumption driven by growth in disposable income and low interest rates.
- Employment growth has exceeded expectations.
- Fundamentals for continued expansion remain in place; the Competitiveness Pact has contributed to improving global competitiveness.
- Outlook and risks:
  - Growth will continue but moderately decelerate to its long-term potential rate.
  - Rapid employment growth in 2018 will slow, partly due to labor market mismatches and a decline in the working-age population.
  - Uncertainty surrounding global economic development has increased and risks are tilted to the downside; a realization of foreseeable risks could cut export growth significantly.
  - Household consumption has exceeded household disposable income in recent years, leading to a rise in household debt levels; household income will grow markedly faster in the forecast period than in the past few years, but household indebtedness will likely rise further.
  - Population aging and weak productivity developments will begin to drag on the Finnish growth outlook.
- Fiscal outlook:
  - The 2018 budget deficit is expected to decrease to EUR 1.25 billion (0.5 percent of GDP) due to higher tax revenues, lower unemployment-related expenditures, and some positive one-off factors.
  - Fiscal stance in 2018 was slightly expansionary; authorities committed to medium-term consolidation implying a contractionary fiscal stance in 2019.
  - The deficit will remain clearly under the EU Stability and Growth Pact’s (SGP) 3 percent of GDP reference value limit throughout the forecast horizon.
  - Public finances are expected to be in balance at the beginning of the 2020s.
  - Government projections for 2019: general government net lending of -0.4 percent of GDP and the debt ratio of 58.4 percent of GDP.
  - Debt-to-GDP ratio turned downward in 2016, falling below the EU SGP’s 60 percent reference value in 2018.
  - In 2018, central government reduced outstanding stock of debt by EUR 0.9 billion for the first time in 10 years; in 2019 central government debt is expected to grow again by EUR 1.6 billion.
  - Authorities agree that the favorable cyclical situation presents an opportunity to rebuild fiscal buffers, but demographic headwinds and increasing age-related public expenditures complicate the task.
- Government measures since 2015:
  - Package aims at cost savings of some EUR 10 billion comprised of consolidation measures (EUR 4 billion), structural reforms (EUR 4 billion), and measures boosting growth and employment (EUR 2 billion).
  - Bulk of structural reform savings expected from social and healthcare reform in the long term.
  - Growth and employment supported by the Competitiveness Pact and measures to improve productivity and shift taxation from labor to indirect taxation.
- Structural issues — Social and healthcare reform:
  - Fundamental reform (SOTE) necessary due to demographic headwinds and unequal access to public health and social services across municipalities and regions.
  - Reform estimated to curb future increase in costs by EUR 3 billion by 2029; for this to be possible, health and social service expenditure can only be allowed to grow by

*Source: cr1907 - Annex V. Past Fund Staff Recommendations and Implementation*

### 0.9 percent per year, whereas at present they increase by 2.4 percent annually. The cost and

### cr1907 - 0.9 percent per year, whereas at present they increase by 2.4 percent annually. The cost and

### Health and social services reform (SOTE)
- Reform aims to realize cost and efficiency gains via:
  - better integration of health and social services, and primary and specialized care;
  - allowing more freedom of choice for customers through increased competition;
  - digitalization and technology when effectively and systematically implemented in the counties.
- Objectives:
  - safeguard equal access to social and healthcare services;
  - create a more harmonious regional administration by transferring responsibility for organizing services from nearly 400 different responsible authorities to 18 autonomous counties with directly elected decision makers.
- Timeline and legislative process:
  - Regional government, health, and social services reform due to come into force on January 1, 2021, with the freedom of choice implemented in stages in 2021–23.
  - Laws to be put to a vote in the Parliament in early 2019 after the final constitutional assessment.
  - Election of the county councils to be held in the fall 2019.

### Labor market reforms and competitiveness
- 2016 Competitiveness Pact outcomes:
  - successful in lowering unit labor costs and restoring national competitiveness;
  - main elements: reductions in employers’ social security contributions, extensions in working time, cuts in public sector holiday pay, and wage freezes in 2017;
  - Government implemented tax concessions to compensate for purchasing power losses.
- Wage bargaining and decentralization:
  - social partners have held discussions to reform the highly-centralized wage bargaining process with limited success so far;
  - 2017–18 decentralized, but closely coordinated, wage bargaining round was satisfactory; further progress needed.
- Recent labor market policy changes:
  - pension reform;
  - reduction in the duration of earnings-related unemployment benefit;
  - mandatory job search plans and regular interviews for all unemployed jobseekers;
  - reforms to the unemployment insurance system incentivizing active job search and making short-term and part-time work financially more viable;
  - legislative change making hiring and firing easier for smaller firms (recently approved by Parliament).
- Employment targets and demographics:
  - Government goal: raise employment rate from 68 percent in 2015 to 72 percent by 2019.
  - Outcome: Finland's seasonally adjusted employment rate rose to 72 percent in November 2018.
  - Demographic pressures: declining birth rate will reduce the working age population and strain public finances, emphasizing need to increase employment rate further and implement structural reforms.
- Ongoing initiatives:
  - authorities continue to work on improving incentives to work by changes to social benefits;
  - public employment services to be reorganized into the 18 new regional governance structures in connection with the SOTE reform;
  - pilots and initiatives addressing labor market matching problems and new forms of work, with strong emphasis on digitalization and intelligent matching.
- Housing and labor mobility:
  - major obstacle to labor mobility is lack of affordable housing in growth centers;
  - housing construction in the Helsinki Metropolitan area has increased significantly but will take time to meet demand;
  - authorities adjusting zoning rules and building regulations to address housing situation in growth centers.

### Financial sector stability
- System overview:
  - Finnish financial system described as sound with a well-capitalized and profitable banking system.
  - Key supervisory and oversight challenges: financial sector size, high concentration, strong regional interconnections, and digitalization.
  - Low interest rate environment poses challenges for banking and insurance sectors.
- Impact of Nordea relocation:
  - Nordea’s relocation from Sweden to Finland significantly increased the size of the Finnish banking sector to about 375 percent of GDP and increased exposure to other Nordic economies.
  - Authorities strengthened domestic supervisory resources and ensured Nordea’s capital requirements are maintained, including a 3 percent systemic risk buffer effective from July 1, 2019.
- European frameworks and regional cooperation:
  - Single Supervisory Mechanism (SSM) ensures consistent application of EU regulations and common supervisory practices across the euro area.
  - Single Resolution Mechanism (SRM) ensures a consistent approach to banking resolutions.
  - Nordic-Baltic regional supervisory cooperation functions well; ECB and the SRM have led joint supervisory and resolution colleges, respectively.
  - Authorities committed to joint monitoring of financial stability risks and reciprocation of macroprudential measures.
- Banking Union:
  - authorities and staff desire further progress in completing the Banking Union, including a common European deposit insurance scheme, contingent on reducing risks in the European banking sector.

### Household indebtedness, housing, and consumer risk
- Household indebtedness and credit trends:
  - Household indebtedness stands at approximately 128 percent of disposable income.
  - In 2018, loans to housing corporations and consumer loans increased rapidly.
  - Increased number of consumer payment default entries prompted the Ministry of Justice to review establishing a comprehensive credit registry in Finland with a legislative proposal expected in 2019.
- House prices and consumer confidence:
  - House price developments moderate at the aggregate level with increasing divergence across the country driven by urbanization and investor demand.
  - Consumer confidence relatively robust, implying household indebtedness may continue to increase, adding to elevated structural vulnerability.

### Macroprudential measures and policy actions
- FIN-FSA actions to safeguard system-wide credit market risks:
  - An average risk weight floor of 15 percent on mortgage loans for IRB banks came into force on January 1, 2018.
  - Loan-to-collateral cap on housing loans was reduced from 90 to 85 percent in July 2018.
  - In June (2018 implied), FIN-FSA imposed a systemic risk buffer on all Finnish credit institutions and re-examined institution-specific additional capital requirements on larger credit institutions, binding by July 1, 2019.
- Toolkit development and data coverage:
  - Authorities broadly agree on need to develop and broaden the macroprudential toolkit.
  - They are analyzing whether to include additional borrower-based tools into the toolkit and a legislative proposal is likely expected in 2019.
  - Agreement on need to increase coverage of data collection among non-bank providers of debt.

*Source: cr1907*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1907.pdf_