## 1finea2023002

## Source details

**Canonical URL:** [1finea2023002](https://www.imf.org/-/media/files/publications/cr/2023/english/1finea2023002.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2023/english/1finea2023002.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2023/english/1finea2023002.pdf.json)

---

### Executive summary — background and recent macrofinancial developments
- Finland is a small open economy significantly exposed to global financial and economic conditions.
- GDP grew by 3.5 percent in the recovery after the pandemic; unemployment fell to 6.7 percent at end-2021 from 7.6 percent a year prior.
- Growth remained robust in the first half of 2022, but the outlook deteriorated because of the war in Ukraine and the ensuing energy crisis:
  - The energy crisis is expected to slow activity in 2023, push up consumer prices, worsen consumer confidence, and weigh on private consumption and residential real estate.
  - Higher electricity and gas prices are a concern for corporates, affecting profitability and tightening financing conditions; market-based funding is more expensive and equity markets have become more volatile.
- Direct financial system exposures to Russia are limited: under 0.1 per cent of banking sector assets, and 0.3 per cent of total assets of insurance companies are direct exposures to Russia.

### Major vulnerabilities and systemic risks
- Key systemic risk drivers:
  - A concentrated and large banking sector that is highly interconnected with other Nordic financial systems.
  - High household indebtedness, which has increased to its highest levels in recent years and was exacerbated by the pandemic.
  - Nonbank Financial Intermediation (NBFI) features: Pension Insurance Companies (PICs) account for a large share of nonbank assets, have highly correlated portfolios, and have exhibited potential procyclical behavior.
- High-level stress test findings:
  - Under a severe but plausible macro-financial scenario, bank solvency falls sharply but remains above regulatory requirements.
  - Banks remain vulnerable to liquidity shocks because of reliance on short-term wholesale funding.
  - Cross-border analysis shows vulnerability to a systemic event in Nordic countries owing to strong linkages and high exposures.

### Financial system structure and size
- Total banking sector assets were close to 350 percent of GDP at end–2021.
- Nordea’s redomicilation in 2018 increased banking sector assets substantially.
- The banking system remains highly concentrated: three largest banks—Nordea Bank, OP Financial Group, and Municipality Finance—are designated as significant institutions (SIs) and supervised by the Single Supervisory Mechanism (SSM).
- Subsidiaries and branches of foreign banking groups in Finland amount to 44 percent of GDP.
- Together, the banking sector, fund management, insurance, and pensions are 518 percent of GDP.
- Key balance-sheet figures (selected items as reported for 2016 and 2021):
  - Banking Sector (consolidated) Assets 2016 = 537,397; Assets 2021 = 870,440.
  - Domestic banking groups Assets 2016 = 185,366; Assets 2021 = 759,029.
  - Three largest banking groups Assets 2016 = 157,360; Assets 2021 = 707,190.
  - Subsidiaries and branches of foreign banking groups operating in Finland Assets 2016 = 352,031; Assets 2021 = 111,411.
  - Insurance and Pension Sector Assets 2016 = 194,252; Assets 2021 = 250,847.
  - Investment Funds Assets 2016 = 119,963; Assets 2021 = 179,883.
  - Stock Market Capitalization 2016 = 203,265; 2021 = 345,689.
  - Corporate Debt Outstanding loans and debt securities 2016 = 229,054; 2021 = 263,744.
  - Of which: issued in Finland 2016 = 155,344; 2021 = 176,777.
- Notes: Nordea is the largest bank in Finland by total assets (EUR 552 billion); OP has around 35 percent market share; Municipality Finance total assets EUR 44 billion end-2020.

### Capital adequacy, profitability, and funding vulnerabilities
- Regulatory capital position (CET1) of Finnish banks is 21.2 percent.
- Leverage ratio is 6.2 percent.
- Liquidity coverage ratio (LCR) is 171 percent.
- Gross interest margins are 47.6 percent.
- Return on assets (ROA) is 0.6 percent.
- Return on equity (ROE) is 8.2 percent.
- Banks are reliant on wholesale funding: wholesale funding is 43 percent of total liabilities.
- Banks retain significant derivatives exposure.

### Household and corporate indebtedness
- As of August 2021, at least 93 percent of total loans to euro area households by Finnish banks were variable rate.
- Many households purchased rate collars; FIN-FSA board recommended housing loans be granted to applicants whose total loan-servicing costs are assessed to remain below 60 percent of their net income under stress conditions.
- Banks are recommended to stress DSTI of mortgage applications using an interest rate of 6 percent and banks appear to follow this recommendation.
- More than half of bank lending is to households as mortgages to households or to housing companies, and unsecured consumer lending.
- Loans to housing corporations are 40 percent of total non-financial corporate (NFC) debt.

### Top-down solvency stress test — scenarios and headline results
- Coverage: seven banks representing 95 percent of the banking system’s total assets.
- Baseline scenario aligned with October 2022 World Economic Outlook projections.
- Adverse scenario: higher-than-expected inflation in the U.S. and advanced European economies, persistent geopolitical tensions, continued pandemic-related shortages, Eurozone policy rates increased to bring inflation back to target, resulting in a recession, tighter financial conditions, and spiking risk premiums.
- Key outcome:
  - In the adverse scenario, the aggregate CET1 capital ratio declines by 7.4 percentage points to 12 percent at end-2025.
  - Main drivers of capital reduction: credit impairments and increases in risk-weighted assets (RWA).
  - Highest rate of impairments observed in unsecured household lending, followed by SME lending, secured household lending, and large corporate lending.
  - Net interest margins (NIM) increase because of higher pass-through rates on lending than on deposits; a sharp policy rate increase helps offset valuation losses and impairments through higher NIM.
  - Sensitivity: if interest rates in the adverse scenario remained at baseline levels, total capital adequacy ratios would drop to a low of 10.1 percent; CET1 ratios remain sufficient on average, but two banks would be unable to meet their minimum capital requirements in 2025.
- Reported pass-through rates from effective interest rates:
  - Retail lending: 50.7 percent
  - Corporate lending: 65.9 percent
  - Interbank lending: 46.8 percent
  - Term deposits: 35 percent
  - Overnight deposits: 29.4 percent
  - Risk-free rate to effective interest rate of debt securities in the banking book: 78.2 percent
  - Effective interest rate of debt liabilities: unsecured 60.6 percent; secured 49.4 percent

### Liquidity analysis and vulnerabilities
- Three top-down liquidity exercises: LCR stress test; cashflow-based analysis; qualitative NSFR analysis in euros.
- Liquidity analysis reveals significant vulnerabilities due to reliance on short-term wholesale funding.
- By mid-2022, unsecured wholesale funding is 40 percent of total available funding, mostly sight deposits of corporate and financial institutions.
- Under the most severe liquidity stress scenarios, banks’ HQLA are insufficient because LCR falls well below the 100 percent threshold in scenarios with a rise in outflows; more adverse scenarios show larger gaps.
- Liquidity-related recommendations:
  - Authorities should direct Finnish banks to enhance liquidity buffers to cover a predetermined threshold of wholesale funding outflows over a five-day horizon.
  - Banks should restructure wholesale funding over time, aiming to increase the proportion of longer-term and demand deposits.
  - Authorities are recommended to run more frequent liquidity stress test exercises and require banks to hold a higher stock of HQLA.

### Access-to-funding second-round stress test (funding-cost analysis)
- 5-year bank bond yields at end-2021 were 0.5 percent and rose to 2.8 percent in Q2 2022.
- Over the stress scenario, there is an 11.3 percentage point increase in the five-year bond yield on average, of which a 5.4-percentage point increase is due to credit spreads (mainly from the last two years of the stress scenario).
- Semi-elasticities used in the funding-cost model: profitability -3.47; asset quality 0.95; liquidity -0.004.

### Interconnectedness and cross-border contagion
- 80 percent of cross-border exposures are to Denmark, Norway, and Sweden; these typically involve intragroup exposure.
- Among Finnish banks, Nordea holds 74 percent of its assets in Denmark, Norway, and Sweden.
- Indices:
  - Scenario A (exposures to foreign banks only): overall vulnerability is 6.6 percent.
  - Scenario B (credit shock on total exposure including claims to banks, governments, and nonfinancial sector): vulnerability is 39.8 percent and could imply a total loss of Finnish banks’ capital under an economy-wide default in any Scandinavian country.
- Policy recommendation: lead a Nordic-wide stress test coordinated exercise covering interlinkages, liquidity-solvency interactions, and expanding coverage to NBFIs over time.

### Nonbank Financial Intermediation (NBFI) and Pension Insurance Companies (PICs)
- NBFI structure:
  - PICs and fund managers are the most significant part of the NBFI sector, followed by insurance.
  - Top four providers in each NBFI sector typically have 80 percent market share, and 100 percent in the PIC market where only four providers now remain.
- Insurance sector: strong solvency overall, but vulnerable to sharp interest-rate changes, equity market falls, or a local real estate correction.
- PICs:
  - PICs are part of the mandatory social security system; they are not subject to IORPII or Solvency II.
  - Evidence of past procyclical and herding behavior: correlation between major PICs’ equity allocation has surpassed 80 percent and over 90 percent correlation with KEVA since 2015.
  - Since 2010, cyclicality for PICs estimated to have ranged between -0.01 to -0.15.
- NBFI recommendations:
  - Amend PIC solvency regulations to remove remaining procyclical effects and develop new short-term liquidity rules.
  - Introduce a liquidity regulation for PICs to ensure stability during extreme events.
  - Run crisis simulation exercises of a large PIC failure.
  - Increase FIN-FSA resources for PIC supervision and publish more public material on macroprudential risks in the NBFI sector.

### Macroprudential framework, borrower-based and capital-based measures
- Progress since 2016:
  - Introduced SyRB and a minimum risk weight for mortgage loans.
  - Positive credit register under development; expected operational in Spring 2024.
- Borrower-based measures in place:
  - Maximum loan-to-value (LTV) ratio for housing loans of 85 percent, except for first-time home buyers.
  - Nonbinding recommendation to lend only if borrowers can keep DSTI ratios below 60 percent in stressed conditions.
- Recommendations:
  - Add DTI and DSTI limits to the macroprudential toolkit (legislative change required).
  - If DTI/DSTI caps infeasible, consider a sectoral SyRB to raise capital requirements on banks lending to high-DTI/DSTI customers.
  - Reintroduce SyRB when conditions allow and introduce a positive cycle-neutral CCyB in the standard risk environment (requires legislative amendment).
- Calibration estimates:
  - Estimated positive cycle-neutral CCyB for a representative Finnish bank is around 0.75 percent of RWA.
  - For the typical bank, the positive cycle-neutral CCyB and SyRB are estimated at around 0.75 percent and 2.0 percent, respectively (assuming domestic-only exposures).

### Banking supervision, governance, and resourcing
- Supervisory strengths and gaps:
  - Banking supervisory framework is sound and operates within EU regulations and supervisory institutions.
  - Progress made implementing 2016 Basel Core Principles recommendations; Positive Credit Register expected in Spring 2024.
  - Outstanding governance/legal issues: strengthen operational independence and legal protection of FIN-FSA staff; ensure FIN-FSA Board composition excludes Ministry officials and requires diverse backgrounds.
  - Resource needs: increase financial and human resources across FIN-FSA and FFSA to cover traditional and emerging risks (ICT, cyber, climate); options include reallocation, efficiency gains (suptech), higher fees, or greater public contributions.
- Supervisory practice recommendations:
  - Conduct further analysis on banks’ IFRS-9 implementation (staging of exposures and expected credit loss models).
  - Increase on-site inspections and supervisory engagement with boards and external auditors, especially for high-impact LSIs.
  - Include rules on appointment of a sufficient number of independent directors and independency criteria in legislation.
  - Complete supervisory coverage of supervisory boards of amalgamations and assess collective suitability.

### Crisis management, resolution, and financial safety net
- Legal/institutional context:
  - Arrangements rest on EU BRRD; SRB has primary responsibility for larger cross-border institutions; FFSA executes resolution measures for Finnish banks under SRB oversight.
  - FFSA has sole responsibility for executing resolution measures for all Finnish banks—both SIs and LSIs.
- Remaining work and recommendations:
  - Publish policy on bail-in and transfer mechanics addressing valuation, issuance of new instruments, and change in control requirements.
  - Ensure Emergency Liquidity Assistance (ELA) processes, procedures, and operational capabilities support rapid provision of temporary collateralized liquidity for FIs in resolution; test these internally and with external counterparties annually.
  - Centralize cross-authority crisis cooperation and coordination in a Crisis Management Cooperation Group.
  - Ensure Deposit Guarantee Fund (DGF) has sufficient funds under direct control to preserve financial autonomy and minimize dependency on borrowing from banks for payouts.
  - FFSA to develop resolvability scoring framework for LSIs ahead of January 1, 2024.

### Fintech, payments, and data collection
- Finland is the second most digitalized EU Member State with around 200 fintech companies and EUR 1.2 billion total revenues.
- Household consumer credit at end-Q1 2022 estimated around 24 billion EUR, 40 percent of which is lent by digital banks and lending platforms.
- 15 digital-only banks in Finland (one domestic) with market share 0.6 percent of total banking assets and 1.3 percent in household lending.
- Around 50 non-bank digital lenders with estimated market share about 2.5 percent.
- Recommendation: BoF and FIN-FSA should ensure comprehensive data collection on lending by platforms/institutions not supervised by the FIN-FSA.

### Financial integrity (AML/CFT)
- 2019 FATF assessment: effectiveness of some AML/CFT outcomes rated substantial; major improvements needed in 7 out of 11 assessed outcomes.
- Effectiveness of AML/CFT supervision assessed as low in 2019; supervisor improving resources and developing risk-based supervision.
- Remaining gaps and recommendations:
  - Improve variety and quality of information sources for ML/TF risk assessments.
  - Focus on residual risk of financial institutions to better target supervisory resources.
  - Particular focus on cross-border transactions and non-resident risks, including collection and incorporation of payments data.
  - FIN-FSA to develop a banking sector risk assessment to inform supervisory approach.

### FSAP key recommendations (selected items and timing)
- Timing legend: C = Continuous; I = Immediate (within one year); NT = Near Term (within 1–3 years); MT = Medium Term (within 3–5 years).
- Cross-cutting governance and resourcing:
  - Strengthen legal and operational framework for legal protection of officials, staff, and agents of all financial oversight agencies. — MOF — NT
  - Secure FIN-FSA's independence: amend law to ensure future Board members are not officials of Ministries; require a statement of reasons for Director General dismissal to be laid down in law and publicly disclosed if a dismissal occurs; ensure Board members have diverse backgrounds. — MOF — NT
  - Increase resources available to FIN-FSA, FFSA and other oversight agencies to cover traditional and emerging risks. — BoF, FFSA and MOF — NT
- Macroprudential policy:
  - Consider providing FIN-FSA Board hard powers to issue regulations on macroprudential policy; and/or semi-hard powers to issue recommendations on a comply-or-explain basis. — MOF — MT
  - Add DTI and DSTI limits to toolkit; introduce a positive rate of CCyB in the standard risk environment. — MOF — MT
  - Enhance systemic risk monitoring by strengthening disaggregated data analysis and corporate sector vulnerability analysis. — BoF and FIN-FSA — MT
- Systemic risk assessment:
  - Enhance liquidity buffers to cover a predetermined threshold of wholesale funding outflows over a five-day horizon. — FIN-FSA — NT
  - Lead a Nordic-wide stress test coordinated exercise. — FIN-FSA and BoF — MT
- Banking regulation and supervision:
  - Conduct further analysis on banks’ IFRS-9 implementation. — FIN-FSA — NT
  - Include rules on appointment of a sufficient number of independent directors and independency criteria in legislation. — MOF, FIN-FSA — NT
- Nonbank financial institutions:
  - Amend PIC solvency regulations to remove remaining procyclical effects and develop new short-term liquidity rules. — MoSAH, FIN-FSA — NT
  - Enhance public disclosure of analysis and assessment of macroprudential risks in the NBFI sector. — BoF, FIN-FSA — NT
- Crisis management:
  - Publish a policy on bail-in and transfer mechanics addressing valuation, issuance of new instruments and change in control requirements. — FFSA — NT
  - Ensure ELA processes, procedures and operational capabilities are sufficient and tested annually. — BoF — NT, C
  - Centralize cross-authority crisis cooperation in the Crisis Management Cooperation Group. — FFSA, FIN-FSA, BoF, MoF, MoSAH — I, C
- Financial integrity:
  - Enhance AML/CFT supervision by improving the risk-based approach and tools for AML/CFT sectoral and institutional risk assessments, focusing on cross-border and non-resident transaction risks. — FIN-FSA — I

### Concluding assessment
- The Finnish financial system shows resilience to severe macro-financial shocks in baseline stress tests, but important vulnerabilities remain—particularly liquidity risk in banks, concentrated banking sector exposures in the Nordic region, high household indebtedness, and procyclicality risks in PICs.
- Addressing these vulnerabilities requires:
  - a stronger macroprudential toolkit (including DTI/DSTI and a positive CCyB where feasible),
  - enhanced systemic monitoring and disaggregated data analysis,
  - increased resourcing and legal protections for oversight agencies,
  - targeted PIC regulatory reform and liquidity rules,
  - improved crisis preparedness and resolution mechanics,
  - and stronger AML/CFT supervision.

*Source: IMF Financial Sector Assessment Program — Finland (selected chapter content).*

### EXECUTIVE SUMMARY ______________________________________________________________________________________7

### EXECUTIVE SUMMARY

### Background and recent macrofinancial developments
- Finland is a small open economy significantly exposed to global financial and economic conditions.
- The economy weathered the COVID-19 pandemic well, supported by fiscal policy and other interventions.
- GDP grew by 3.5 percent in the recovery after the pandemic; unemployment fell to 6.7 percent at end-2021 from 7.6 percent a year prior.
- Growth remained robust in the first half of 2022, but the outlook deteriorated because of the war in Ukraine and the ensuing energy crisis:
  - The energy crisis is expected to slow activity in 2023, push up consumer prices, worsen consumer confidence, and weigh on private consumption and residential real estate.
  - Higher electricity and gas prices are a concern for corporates, affecting profitability and tightening financing conditions; market-based funding is more expensive and equity markets have become more volatile.
- Direct financial system exposures to Russia are limited: under 0.1 per cent of banking sector assets, and 0.3 per cent of total assets of insurance companies are direct exposures to Russia. Indirect trade and corporate channels remain material for some industries.

### Major vulnerabilities and systemic risks
- Key systemic risk drivers:
  - A concentrated and large banking sector that is highly interconnected with other Nordic financial systems.
  - High household indebtedness, which has increased to its highest levels in recent years and was exacerbated by the pandemic.
  - Nonbank Financial Intermediation (NBFI) features: Pension Insurance Companies (PICs) account for a large share of nonbank assets, have highly correlated portfolios, and have exhibited potential procyclical behavior.
- Stress test findings (high-level):
  - Under a severe but plausible macro-financial scenario, bank solvency falls sharply but remains above regulatory requirements.
  - Banks remain vulnerable to liquidity shocks because of reliance on short-term wholesale funding.
  - Cross-border analysis shows vulnerability to a systemic event in Nordic countries owing to strong linkages and high exposures.

### Financial sector oversight and institutions
- The banking supervisory framework is sound and operates within EU regulations and supervisory institutions.
- Progress has been made implementing recommendations from the 2016 Basel Core Principles (BCP) assessment.
- Outstanding governance and legal issues:
  - Strengthening operational independence of the Finland Financial Supervisory Authority (FIN-FSA) and legal protection for FIN-FSA (and Financial Stability Authority (FFSA)) staff remain pending.
- Resource and capability needs:
  - Financial resources across prudential and resolution regimes should be increased to cover traditional and emerging risks (including ICT, cyber, and climate).
  - Resources for FIN-FSA and FFSA should be commensurate with responsibilities; options include reallocation, efficiency gains (including suptech), higher fees, or greater public contributions.
  - FFSA needs sufficient budget to procure external advisory support to carry out statutory functions.

### Key FSAP findings and priority policy directions
- Cross-cutting governance and resourcing:
  - Legal protection for officials, staff, and agents of all financial oversight agencies should be strengthened.
  - Ensure FIN-FSA independence and legal safeguards for dismissal processes and board composition.
  - Increase FIN-FSA, FFSA and other oversight agencies’ resources to cover traditional and emerging risks.
- Macroprudential framework and tools:
  - Expand the macroprudential toolkit (including consideration of DTI and DSTI limits).
  - Strengthen systemic risk monitoring, disaggregated data analysis, and corporate sector vulnerability analysis.
  - Consider introducing a positive rate for the Counter-Cyclical Capital Buffer (CCyB) in a standard risk environment (requires legislative amendment).
- Banking supervision:
  - Conduct further analysis on banks’ IFRS-9 implementation, specifically staging of exposures and expected credit loss models.
  - Include rules on appointment of a sufficient number of independent directors and independency criteria in legislation.
- NBFI and PICs:
  - Amend PIC solvency regulations to remove remaining procyclical effects and develop new short-term liquidity rules.
  - Enhance public disclosure of analysis and assessment of macroprudential risks in the NBFI sector.
- Crisis management and resolution:
  - Publish a policy on bail-in and transfer mechanics addressing valuation, issuance of new instruments, and change in control requirements.
  - Ensure Emergency Liquidity Assistance processes, procedures, and operational capabilities support rapid provision of temporary collateralized liquidity for FIs in resolution; test these internally and with external counterparties annually.
  - Centralize cross-authority crisis cooperation and coordination in the Crisis Management Cooperation Group.
  - Ensure the Deposit Guarantee Fund (DGF) has sufficient funds to ensure financial autonomy and minimize dependency on borrowing from banks for payouts.
- Financial integrity:
  - Enhance AML/CFT supervision by improving the risk-based approach and tools for AML/CFT sectoral and institutional risk assessments, focusing on cross-border and non-resident transaction risks.

### FSAP Key Recommendations (selected items and timing)
- Timing legend: C = Continuous; I = Immediate (within one year); NT = Near Term (within 1–3 years); MT = Medium Term (within 3–5 years).

- Oversight—Cross cutting
  1. Strengthen the legal and operational framework for legal protection of officials, staff, and agents of all financial oversight agencies. — MOF — NT
  2. Secure FIN-FSA's independence: (i) amend law to ensure future Board members are not officials of Ministries; (ii) require a statement of reasons for Director General dismissal to be laid down in law and publicly disclosed if a dismissal occurs; and (iii) ensure Board members have diverse backgrounds and experience in FIN-FSA’s purview. — MOF — NT
  3. Increase the resources available to the FIN-FSA, FFSA and other financial oversight agencies so they are commensurate with responsibilities and allow coverage of traditional and emerging risks like ICT, cyber, and climate. — BoF, FFSA and MOF — NT

- Macroprudential Policy
  4. Consider providing the FIN-FSA Board hard powers to issue regulations on macroprudential policy, including adoption of new instruments; and/or semi-hard powers to issue recommendations on a comply-or-explain basis. — MOF — MT
  5. Add DTI and DSTI limits to the macroprudential policy toolkit; and introduce a positive rate of CCyB in the standard risk environment. — MOF — MT
  6. Enhance systemic risk monitoring by strengthening disaggregated data analysis, corporate sector vulnerability analysis and addressing existing data gaps. — BoF and FIN-FSA — MT

- Systemic Risk Assessment
  7. Enhance liquidity buffers to cover a predetermined threshold of wholesale funding outflows over a five-day horizon. — FIN-FSA — NT
  8. Lead an effort to conduct a Nordic-wide stress test coordinated exercise. — FIN-FSA and BoF — MT

- Banking Regulation and Supervision
  9. Conduct further analysis on banks’ IFRS-9 implementation, specifically staging of exposures and functioning of expected credit loss models. — FIN-FSA — NT
  10. Include rules on appointment of a sufficient number of independent directors (supervisory board members) and independency criteria in legislation. — MOF, FIN-FSA — NT

- Nonbank Financial Institutions
  11. Amend PIC solvency regulations to remove remaining procyclical effects and develop new short-term liquidity rules. — MoSAH, FIN-FSA — NT
  12. Enhance public disclosure of analysis and assessment of macroprudential risks in the NBFI sector. — BoF, FIN-FSA — NT

- Crisis Management
  13. Publish a policy on bail-in and transfer mechanics addressing policy choices on valuation, issuance of new instruments and change in control requirements. — FFSA — NT
  14. Ensure emergency liquidity assistance processes, procedures and operational capabilities are sufficient to support rapid provision of temporary collateralized liquidity for FIs in resolution, tested internally and with external counterparties annually. — BoF — NT, C
  15. Centralize cross-authority crisis cooperation and coordination in the Crisis Management Cooperation Group. — FFSA, FIN-FSA, BoF, MoF, MoSAH — I, C

- Financial Integrity
  16. Enhance AML/CFT supervision by improving the risk-based approach and tools for AML/CFT sectoral and institutional risk assessments, focusing on cross-border and non-resident transaction risks. — FIN-FSA — I

### Concluding assessment
- The Finnish financial system shows resilience to severe macro-financial shocks in baseline stress tests, but important vulnerabilities remain—particularly liquidity risk in banks, concentrated banking sector exposures in the Nordic region, high household indebtedness, and procyclicality risks in PICs.
- Addressing these vulnerabilities requires a stronger macroprudential toolkit, enhanced systemic monitoring, increased resourcing and legal protections for oversight agencies, targeted PIC regulatory reform, improved crisis preparedness, and stronger AML/CFT supervision.

*Source: IMF Financial Sector Assessment Program — Finland (Executive Summary).*

### 4.      The Finnish financial system is large, highly concentrated  and dominated by a few credit

### 4.      The Finnish financial system is large, highly concentrated  and dominated by a few credit institutions.

### Financial system structure and size
- Total banking sector assets were close to 350 percent of GDP at end–2021.
- Nordea’s redomicilation in 2018 increased banking sector assets substantially.
- The banking system remains highly concentrated: the three largest banks—Nordea Bank, OP Financial Group, and Municipality Finance—are designated as significant institutions (SIs) and supervised by the Single Supervisory Mechanism (SSM) within the European Central Bank (ECB).
- Subsidiaries and branches of foreign banking groups in Finland amount to 44 percent of GDP.
- Together, the banking sector, fund management, insurance, and pensions are 518 percent of GDP.

Key balance-sheet figures (2016 and 2021, as reported)
- Banking Sector (consolidated): Assets 2016 = 537,397 (Percent of GDP 46247.1?), Assets 2021 = 870,440 (Percent of GDP 42346.2) [table formatting preserved from source].
- Domestic banking groups: Assets 2016 = 185,366 (Percent of GDP 1085.2?), Assets 2021 = 759,029 (Percent of GDP 11301.9).
- Three largest banking groups: Assets 2016 = 157,360 (Percent of GDP 372.3?), Assets 2021 = 707,190 (Percent of GDP 3281.3).
- Subsidiaries and branches of foreign banking groups operating in Finland: Assets 2016 = 352,031 (Percent of GDP 36161.8?), Assets 2021 = 111,411 (Percent of GDP 3144.3).
- Insurance and Pension Sector: Assets 2016 = 194,252 (Percent of GDP 6889.3?), Assets 2021 = 250,847 (Percent of GDP 5999.8).
- Investment Funds: Assets 2016 = 119,963 (Percent of GDP 78355.2?), Assets 2021 = 179,883 (Percent of GDP 98271.5).
- Stock Market Capitalization: 2016 = 203,265 (Percent of GDP 14593.4), 2021 = 345,689 (Percent of GDP 184137.5).
- Corporate Debt Outstanding loans and debt securities: 2016 = 229,054 (Percent of GDP 105.3), 2021 = 263,744 (Percent of GDP 104.9).
- Of which: issued in Finland: 2016 = 155,344 (Percent of GDP 71.4), 2021 = 176,777 (Percent of GDP 70.3).

Notes from source table
- Nordea is the largest bank in Finland by total assets (EUR 552 billion), and OP by market share (around 35 percent).
- Municipality Finance is a non-deposit taking credit institution jointly owned by the municipalities (total assets EUR 44 billion end-2020).
- In January 2022, the Finnish branch of Danske Bank was also designated an SI.

### Non-bank financial institutions (NBFI)
- PICs and fund managers are the most significant part of the NBFI sector, followed by insurance.
- Each NBFI industry is highly concentrated and some have significant links to major banking groups.
- The top four providers in each NBFI sector typically have 80 percent market share, and 100 percent in the PIC market where only four providers now remain.

### Capital adequacy, profitability, and funding vulnerabilities
- Regulatory capital position (CET1) of Finnish banks is strong at 21.2 percent.
- Leverage ratio is 6.2 percent.
- Liquidity coverage ratio (LCR) is 171 percent.
- Gross interest margins are 47.6 percent.
- Return on assets (ROA) is 0.6 percent.
- Return on equity (ROE) is 8.2 percent.
- Banks are reliant on wholesale funding: wholesale funding is 43 percent of total liabilities.
- Banks retain significant derivatives exposure.

### Macrofinancial challenges and external shocks
- Authorities are monitoring impacts from the war in Ukraine, including additional liquidity needs for energy companies due to margin calls; public liquidity guarantees and bridge financing have been provided to avoid risks spilling into the financial sector.
- Population ageing and low productivity trends weaken medium-term growth prospects; combined with intermunicipal migration this could reduce bank profitability and create regional risks, potentially affecting smaller cooperative banks.
- The COVID-19 pandemic impact on the commercial real estate (CRE) sector remains uncertain as lifestyles and working patterns evolve.
- Nordea changed domicile from Sweden to Finland in October 2018; this increased banking sector assets from 250 to 350 percent of GDP and deepened exposure to other Nordic countries, particularly Sweden.
- Cyber risks are elevated; transition and physical climate risks are low (Finland among the lowest risk countries in climate change vulnerability indices).
- Finnish Government legislation in July 2022 expanded crisis management responsibilities of the FFSA and BoF to establish a backup system for continuity of daily banking payments.

### Household and corporate indebtedness and related risks
- As of August 2021, at least 93 percent of total loans to euro area households by Finnish banks were variable rate.
- Many households purchased rate collars which generally mitigate near-term impact of higher interest rates.
- Banks are recommended to stress DSTI of mortgage applications using an interest rate of 6 percent and banks seem to follow this recommendation.
- More than half of bank lending is to households as mortgages to households or to housing companies, and unsecured consumer lending.
- Loans to housing corporations are 40 percent of total non-financial corporate (NFC) debt but to some extent represent household liabilities.
- The FIN-FSA board recommended that housing loans be granted to applicants whose total loan-servicing costs are assessed to remain below 60 percent of their net income under stress conditions.
- Finnish banks’ net foreign assets are 26.5 percent of GDP; largest cross-border exposures are to the Nordics and euro area; largest trade exposures to Germany, Sweden, the United States, and the Russian Federation.

### Stress testing — solvency analysis and results
- A top-down solvency stress test covered seven banks representing 95 percent of the banking system’s total assets; cross-border exposures were considered.
- Baseline scenario aligned with October 2022 World Economic Outlook projections.
- Adverse scenario: higher-than-expected inflation in the U.S. and advanced European economies, persistent geopolitical tensions, continued pandemic-related shortages, Eurozone policy rates increased to bring inflation back to target, resulting in a recession, tighter financial conditions, and spiking risk premiums.
- In the adverse scenario, the aggregate CET1 capital ratio declines by 7.4 percentage points to 12 percent at end-2025.
- Key drivers of capital reduction: credit impairments and increases in risk-weighted assets (RWA).
- Credit risk increases significantly in the last two years of the adverse scenario; main drivers: increased unemployment, fall in property prices and investment for consumer and SME lending; for wholesale credit, drivers are lower GDP growth, increases in the interbank rate, and higher output gap.
- Highest rate of impairments observed in unsecured household lending, followed by SME lending, secured household lending, and large corporate lending.
- Market risk losses are high during the first year; heterogeneity exists across banks in drivers of capital depletion.
- Net interest margins (NIM) increase because of higher pass-through rates on lending than on deposits; sharp increase in policy rate in adverse scenario allows banks to offset valuation losses and impairments through higher NIM.
- Sensitivity analysis: if interest rates in the adverse scenario remained at baseline levels, total capital adequacy ratios would drop to a low of 10.1 percent; CET1 ratios remain sufficient on average, but two banks would be unable to meet their minimum capital requirements in 2025.

Pass-through rates from effective interest rates (reported)
- Retail lending: 50.7 percent
- Corporate lending: 65.9 percent
- Interbank lending: 46.8 percent
- Term deposits: 35 percent
- Overnight deposits: 29.4 percent
- Risk-free rate to effective interest rate of debt securities in the banking book: 78.2 percent
- Effective interest rate of debt liabilities: unsecured 60.6 percent; secured 49.4 percent

### Liquidity analysis and vulnerabilities
- Three top-down liquidity exercises: LCR stress test; cashflow-based analysis; qualitative NSFR analysis in euros.
- LCR measures 30-day liquidity needs coverage with high-quality liquid assets (HQLA); cashflow analysis considers maturities of inflows/outflows; NSFR evaluates longer-term funding capability.
- Liquidity analysis reveals significant vulnerabilities due to reliance on short-term wholesale funding.
- Under the most severe liquidity stress scenarios, banks’ HQLA are insufficient because LCR falls well below the 100 percent threshold in scenarios with a rise in outflows; more adverse scenarios show larger gaps.
- By mid-2022, unsecured wholesale funding is 40 percent of total available funding, mostly sight deposits of corporate and financial institutions.
- Large share of short-term wholesale funding amplifies cash outflows across maturities, generating a large negative cumulative net funding gap.

Liquidity-related recommendations from the analysis
- Authorities should direct Finnish banks to enhance liquidity buffers to cover a predetermined threshold of wholesale funding outflows over a five-day horizon.
- Banks should restructure wholesale funding over time, aiming to increase the proportion of longer-term and demand deposits, to the extent feasible.
- Targets for minimum requirement of own funds and eligible liabilities (MREL) set by resolution authorities encourage longer maturities (only debt with maturity greater than one year can be used to meet the requirement).
- Authorities are recommended to run more frequent liquidity stress test exercises and require banks to hold a higher stock of HQLA to withstand stress test results.

### Access-to-funding second-round stress test
- A second-round effect stress test estimated how solvency deterioration affects bank bond yields and access to wholesale funding.
- 5-year bank bond yields at end-2021 were 0.5 percent and rose to 2.8 percent in Q2 2022.
- Over the stress scenario, there is an 11.3 percentage point increase in the five-year bond yield on average, of which a 5.4-percentage point increase is due to credit spreads (mainly from the last two years of the stress scenario).
- Main driver of spread increases: deterioration of asset quality and increases in credit provisions.
- Bank-specific yield changes depend on individual bank stress-test performance.

Notes on the bond-yield analysis
- The analysis focuses on marginal funding cost only (cost of a bank issuing new debt); these yields do not affect banks’ NIM as they do not affect interest payable on existing debt.
- Semi-elasticities used in the funding-cost model: profitability -3.47; asset quality 0.95; liquidity -0.004.

*Italic: IMF staff summary of chapter content as provided in the source document.*

### 27.      Finnish banks are very well capitalized and have large loss absorption capacity under

### 1finea2023002 - 27.      Finnish banks are very well capitalized and have large loss absorption capacity under

### Banking resilience and stress testing
- Finnish banks are "very well capitalized and have large loss absorption capacity under stress."
- A reduction in portfolio quality may reduce access to funding; this impact may not be observable in solvency stress testing due to banks’ high level of capitalization.
- Recommendation: Introduce smaller in-year stress test exercises focused on specific risks (e.g., credit risk, interest rate risk), with multiple scenarios and sensitivity analyses to highlight specific impacts on bank funding access.

### Domestic interbank interconnectedness
- Domestic interbank contagion risks are small: interbank positions are small compared to banks’ capitalization.
- No single failure of a domestic bank would trigger the failure of another bank in either scenario (no “cascade effect”).
- No bank is undercapitalized relative to its regulatory minimum after a shock to one/several of its interbank exposures.
- All banks have low vulnerability to spillovers, despite some variability.
- The index of contagion (average percentage of loss of other banks due to the failure of a given bank) is low.

### Cross-border linkages and contagion
- 80 percent of cross-border exposures are to Denmark, Norway, and Sweden; these typically involve intragroup exposure.
- Among Finnish banks, Nordea holds 74 percent of its assets in Denmark, Norway, and Sweden.
- Significant exposures also exist to:
  - United Kingdom (derivatives at London Clearing House)
  - Germany (debt securities, derivatives)
  - United States (Federal Reserve)
- Index of vulnerability:
  - Scenario A (banks’ exposures to foreign banks only, considering both credit and funding shocks): overall vulnerability is low at 6.6 percent.
  - Scenario B (impact of a credit shock on total exposure of the banking sector, including claims to banks, governments, and the nonfinancial sector): vulnerability is significantly greater at 39.8 percent and could imply a total loss of Finnish banks’ capital under an economy-wide default in any Scandinavian country.
- Index of contagion:
  - Sweden, Denmark, and Norway are the most contagious countries in both scenarios.
  - The magnitude of impact in Scenario B is significantly greater than in Scenario A.

### Policy recommendation: Nordic-wide stress testing
- Authorities should lead a Nordic-wide stress test (as recommended in the 2016 FSAP) because of high financial interconnectedness in the Nordic region.
- Proposed design:
  - A top-down exercise covering interlinkages and spillovers, liquidity-solvency interactions.
  - Over time expand coverage to both banks and NBFIs.
  - Focus on cross-border interconnectedness analysis at an institutional level (rather than system level) to better map cross-border exposures.
  - Complement, not replicate, euro area stress tests; coordinate as appropriate.

### Nonbank Financial Institutions (NBFIs)
- NBFI sector: faced fewer challenges during COVID-19 pandemic and the war in Ukraine than during the GFC, helped by improved risk management, lower customer withdrawals, increased demand for savings products, and recovery in financial markets after Q1 2020.
- Recovery in financial markets significantly boosted the capital of Insurers and PICs ahead of negative shocks in H1 2022.
- Fund suspensions occurred during the COVID-19 pandemic and the war in Ukraine; current regulation permits temporary suspensions led by fund managers (positive development relative to the GFC and 9/11).
- Insurance sector: strong solvency overall, but vulnerable to a sharp change in interest rates, further falls in equity markets, or a local real estate correction.
- Concern: potential domino effects triggered by the war in Ukraine via indirect linkages not captured by standard modelling (example: indirect exposure chains involving energy companies, banks, construction companies, energy-intensive firms).
- Recommendation: FIN-FSA should publish more public material on macroprudential analysis of NBFI issues and consider additional resources and expertise for NBFI supervision.
- Recommendation: FIN-FSA should publish a detailed annual supervisory plan to help industry prepare for regulatory changes and EU Common Supervisory Actions.

### Pension Insurance Companies (PICs)
- PICs are part of the mandatory social security system; they are not subject to IORPII or Solvency II, giving authorities significant domestic regulatory freedom.
- PICs have performed well despite shocks from COVID-19 and the war in Ukraine; over the last 20 years the sector has generated decent investment returns with geographic and asset diversification into higher yielding illiquid asset classes.
- Investment performance is lower than regional comparators and lower between 1998–2021 (particularly 1998–2017) than the local government fund KEVA.
- Evidence of past procyclical and herding behavior in PIC portfolio allocation due to domestic solvency regulations:
  - Major PICs previously acquired or sold listed equity in a highly correlated manner; correlation between them has surpassed 80 percent.
  - As investment restrictions were loosened (in 2014 and 2017), PIC allocation became closer to KEVA, with over 90 percent correlation since 2015.
  - Since 2010, cyclicality is estimated to have ranged between -0.01 to -0.15 for PICs.
- Recommendations for PICs:
  - The PIC solvency regime should focus on stress testing governance, investment strategies, and long-term risk.
  - Limit or remove the ability of employers to borrow past pension contributions from PICs to reduce liquidity risk.
  - Introduce a liquidity regulation to ensure stability during extreme events.
  - Authorities should run crisis simulation exercises of a large PIC failure to cover policy response, market impact, funding response, and operational implications.
  - Increase FIN-FSA resources for PIC supervision, with regular on-site and off-site supervision of governance, investments, and operations.

### Financial sector oversight and FIN-FSA governance and resourcing
- FIN-FSA’s overall macroprudential strategy includes the NBFI sector but would benefit from more published material.
- FIN-FSA could benefit from additional resources and expertise for NBFI supervision; the pace of new EU-driven regulation can create significant costs and uncertainty.
- Financial sector oversight requires more resources; options include reallocation, efficiency gains (e.g., suptech), increased fees, and/or increased public financing.
- Outstanding governance and legal issues:
  - Strengthen operational independence and legal protection of FIN-FSA staff: third parties may take legal action directly against FIN-FSA officials and staff without a dedicated provision to protect against defense costs when discharging duties in good faith.
  - Board composition: Board of FIN-FSA should not include the Ministry of Finance (MoF) or the Ministry of Social Affairs and Health (MoSAH); require board members with more diverse backgrounds and experience.
  - Director General (DG) governance: DG term is five years, reappointment possible; Parliamentary Council appoints and dismisses DG upon proposal by the Board without a specified justification for removal. Recommendation: require a statement of reasons for dismissal and define ineligibility criteria for the DG clearly in law and publicly disclose if a dismissal occurs.

### Supervisory practice improvements for banks
- Progress made implementing 2016 BCP recommendations; loan-level data collection improved with a regulatory report on new household mortgage loans introduced in 2016.
- The Positive Credit Register covering data on all personal loans is expected to be completed in Spring 2024.
- FIN-FSA under SSM arrangements: although ECB directly supervises SIs, a significant share of supervisory resources come from FIN-FSA.
- Resource pressures: FIN-FSA activities mainly financed by supervision fees; risk from 2024 that fees calculated with current schedule may not cover expenses. Need to increase resources to recruit and retain staff with skills across traditional and emerging risks (cyber resilience, fintech, ML/TF, climate and energy-related risks).
- Recommended supervisory enhancements:
  - Increase number and scope of on-site inspections (especially corporate governance and risk management).
  - Meet banks’ board of directors and independent board members and external auditors at least once a year for high-impact LSIs.
  - Include assessments of board and senior management competence, collective suitability of boards, and group structure/related-party risks in SREP reports.
  - Assess amalgamation institutions as a group from a supervisory perspective.
  - Conduct analysis of banks’ IFRS-9 implementation focusing on staging of exposures and expected credit loss models, with regular dialogue with institutions, bilateral meetings with external auditors, benchmarking and peer review, and targeted on-site inspections.
- Corporate governance improvements:
  - Boards of all banks should include enough independent members meeting clearly determined independency criteria, especially for central institutions of amalgamations.
  - FIN-FSA needs to complete supervisory coverage of supervisory boards of amalgamations (members not yet subject to fit and proper assessments; collective suitability not yet assessed).

### Fintech landscape and data collection
- Finland is the second most digitalized EU Member State.
- Around 200 fintech companies with 1.2 billion EUR total revenues, mainly in fintech platform financing, payments, investments, and financial software.
- Digital lending and platform statistics:
  - Household consumer credit at end-Q1 2022 is estimated to be around 24 billion EUR, 40 percent of which is lent by digital banks (local and cross-border) and lending platforms (peer to peer consumer lending platforms and pay-day lenders).
  - The 20 percent interest rate ceiling on consumer loans introduced in 2019 has reduced credit to households via digital platforms and led lenders to redesign business models or apply for banking licenses or focus on corporate lending.
- Digital banks and non-bank lenders:
  - 15 digital-only banks in Finland, one domestic, operating under a banking license. Their market share is 0.6 percent of total banking assets and 1.3 percent in household lending.
  - Banks from other Nordic countries are active in household lending in Finland through digital platforms, accounting for 3-5 billion EUR of consumer loans.
  - Around 50 non-bank digital lenders (peer-to-peer and pay-day lenders) with an estimated market share of about 2.5 percent.
- Payments and other fintech infrastructure:
  - 19 authorized payment institutions, including three e-money institutions.
  - Card schemes dominate retail payment volumes, with mobile payments on the rise.
  - FIN-FSA has a tool to evaluate risk level of specific institutions; supervision is risk-based and resources are mainly put in AML/CFT related issues.
  - Few virtual-currency service providers subject to registration with the FIN-FSA operate in the country.
  - Equity and business-to-business loan crowdfunding activities are required to be registered (and from November 2022 subject to authorization) with 10 service providers.
  - Mortgage credit intermediary services require registration at the FIN-FSA.
- Data recommendation: BoF and FIN-FSA should ensure comprehensive data collection on lending by platforms/institutions not supervised by the FIN-FSA.

*Source: IMF staff calculations and analysis as presented in the IMF FSAP chapter.*

### 55.      Since the 2016 FSAP, the authorities have made steady progress in improving the

### 1finea2023002 - 55.

### Macroprudential policy framework: progress and toolkit
- Since the 2016 FSAP, authorities have expanded the macroprudential policy toolkit with:
  - an SyRB and minimum risk weight for mortgage loans.
  - development of the positive credit register to analyze household indebtedness and calibrate macroprudential tools.
- Cooperation with other Nordic countries has been expanded with an updated Memorandum of Understanding (MoU) to promote financial stability, including common procedures for information sharing and coordination.

### Institutional framework and governance
- The institutional framework formalized in 2014 designates the FIN-FSA as the macroprudential authority; the FIN-FSA Board can issue, amend, revoke, and implement certain macroprudential instruments.
- The Bank of Finland (BoF) provides analysis to support macroprudential policy; the Deputy Governor of the BoF is Chair of the FIN-FSA Board.
- Authorities revised the macroprudential strategy to state the possibility of releasing macroprudential buffers in times of stress to support bank lending.
- Recommendations to strengthen willingness and ability to act:
  - Define a clear mandate for the FIN-FSA (for example, explicitly state the objective as “maintaining the stability of the financial system as a whole” in Chapter 1, Article 1 of the Act on the FIN-FSA).
  - Formalize the practice that the FIN-FSA Board is chaired by a BoF representative to harness central bank expertise and shield policymaking from potential political interference.
  - Consider granting the FIN-FSA Board power to make regulations to achieve macroprudential objectives, or at minimum semi-hard powers to issue “comply or explain” recommendations.
  - Options to resolve governance tensions (e.g., to enhance independence while retaining necessary roles for MoF and MoSAH) include:
    - separate Board committees for macroprudential and microprudential oversight; or
    - a financial stability council outside the FIN-FSA with the same composition and macroprudential powers as the current Board, with FIN-FSA as secretariat.

### Systemic risk monitoring
- Current practice:
  - FIN-FSA and BoF conduct systemic risk monitoring using a broad set of indicators, multiple quantitative methods, institution-level analysis with bilateral exposures, and stress tests.
  - Vulnerability analyses and preliminary macroprudential proposals are jointly prepared and summarized in a bi-annual macroprudential report; the Bank of Finland Bulletin summarizes financial stability issues once a year.
- Household sector vulnerabilities:
  - Household debt reached its highest level in 2021.
  - 95 percent of housing loans are linked to variable rates.
  - Only 28 percent hedged to fixed rates through interest rate collars.
  - Rapid increase of residential housing loans is of systemic concern; average maturity of loans has also risen.
- Data and capacity gaps:
  - Positive credit register will provide microdata on household indebtedness and income.
  - Additional recommended data collection: collateral values and housing company loans.
  - Microdata analysis requires greater staff capacity.
- Corporate sector monitoring:
  - Corporate sector vulnerability analysis should be developed to match household sector coverage.
  - Use of firm-level data is recommended to develop credit quality indicators and assess allocation risk.
  - Ongoing work by Statistics Finland to create a comprehensive CRE price index noted as constructive.

### Borrower-based measures
- Activated measures to contain household-sector systemic risks include:
  - maximum loan-to-value (LTV) ratio for housing loans of 85 percent, except for first-time home buyers;
  - proposals to set the maximum maturity of housing loans;
  - a nonbinding recommendation to lend only if borrowers can keep DSTI ratios below 60 percent in stressed conditions.
- Recommendations:
  - Authorities should include caps on DTI or DSTI in the toolkit; this will require changes to the ACI.
    - The MoF working group proposed a maximum upper limit on DTI ratios in 2019 but the government abandoned legislation due to distributional concerns.
    - Analytical work during the FSAP finds that introducing a DTI is beneficial, even on distributional grounds.
  - If DTI or DSTI caps are not feasible, consider a sectoral SyRB to raise capital requirements on banks lending to high-DTI/DSTI customers, noting that DTI/DSTI caps are preferred because they directly protect borrowers and reduce leakage risks.

### Capital-based measures
- Actions taken:
  - FIN-FSA Board significantly relaxed macroprudential capital requirements during the COVID-19 pandemic: released all SyRB requirements on credit institutions in April 2020.
  - O-SII buffer for OP Financial Group was lowered by 1 percent.
  - Board decided in June 2022 not to re-introduce the SyRB given potential impact of the war in Ukraine.
  - Finland has never activated the CCyB.
- Recommendations:
  - Reactivate the SyRB once circumstances allow and introduce a positive rate of CCyB in a standard risk environment (positive cycle-neutral CCyB). Reintroduction of SyRB is advised to address structural risks from high household indebtedness and Nordic interconnectedness once uncertainty from the war in Ukraine abates.
  - A positive cycle-neutral CCyB can be used as a releasable buffer but will require legislative change.
- Calibration:
  - Estimated positive cycle-neutral CCyB for a representative Finnish bank is around 0.75 percent of RWA.
  - For the typical bank, the positive cycle-neutral CCyB and SyRB are estimated at around 0.75 percent and 2.0 percent, respectively, taking the Capital Conservation Buffer and O-SII buffers as given.
  - These estimates assume all exposures are domestic; foreign exposures and reciprocity mechanisms affect actual requirements.

### Climate risk oversight
- Need to increase capacity on climate risk oversight to comply with forthcoming regulations.
  - EU’s Sustainable Finance Disclosure Regulation imposes ESG disclosure requirements; compliance costs are significant and data robustness is limited.
  - Some financial institutions have in-house ESG risk databases.
- Recommendations:
  - Enhance analysis, extend disclosure of climate risks, and align supervisory practices with expectations.
  - Complement quarterly meetings with LSIs on ESG-related risks by conducting supervisory climate stress tests.

### Financial safety net and crisis management
- Legal and institutional context:
  - Finnish arrangements rest on sound statutory foundations under the EU Banking Recovery and Resolution Directive (BRRD).
  - As EU/Euro Area member, management of distressed institutions occurs within a European framework: the Single Resolution Board (SRB) has primary responsibility for larger and cross-border institutions; FFSA is responsible under SRB oversight for resolution of smaller banks.
  - FFSA has sole responsibility for executing resolution measures for all Finnish banks—both SIs and LSIs.
- Improvements and remaining work:
  - Cooperation has improved resolvability, including compliance with MREL.
  - National crisis preparedness has improved; an updated 2018 MoU with Nordic-Baltic authorities supports regional coordination.
  - Need to fully operationalize crisis management framework and ensure resolution tools can be used quickly and confidently, especially for FFSA and BoF roles as implementers and lenders of last resort.
- Recommendations to strengthen crisis arrangements:
  - Increase centralization of cross-authority cooperation in a Crisis Management Cooperation Group (coordination, not decision making), with responsibilities to coordinate preparations, formalize internal crisis management practices, and monitor resource adequacy.
  - Under SRB guidelines, SIs and LSIs expected to remove remaining resolvability barriers by January 1, 2024; expectations include valuation and funding in resolution reporting capabilities.
  - FFSA should develop a resolvability scoring framework for Finnish LSIs ahead of 2024 to support consistent evaluation, prioritization of verification, and on-going maintenance.
  - Ensure resolution plans for SIs and LSIs with an amalgamation structure can be implemented at speed and with certainty over the resolution weekend, tailored to legal entity structures.
  - FFSA should develop and publish resolution mechanics, prioritizing bail-in mechanics (valuation timelines, treatment of resolved bank shares, issuance of new shares/interim instruments, compliance with change in control and prospectus rules), and explain interaction of crisis management framework with new tools to host authorities.
  - FFSA should consider publishing its approach to assessing the impact on depositors and the financial system of LSI liquidation to inform public interest testing and resolution strategies.
  - BoF should ensure Emergency Liquidity Assistance (ELA) and funding in resolution lending capabilities are fully operational, including defining internal collateral haircuts, pricing assumptions, and regular testing of ELA arrangements; formalize a non-firm specific approach to address liquidity needs for Finnish banks in resolution.
  - FSSA Deposit Guarantee Fund (DGF) should ensure sufficient funds under direct control to preserve financial autonomy and minimize dependency on bank borrowing for payouts; FFSA should outline counterfactual insolvency valuation analysis basis for assessing DGF contribution and take a prudent approach to prefunding for a range of crisis scenarios (e.g., concurrent failure of several mid-size LSIs).

*Source: 1finea2023002 - 55.*

### 81.      An assessment by the Financial Action Task Force (FATF) identified areas of Finland’s

### An assessment by the Financial Action Task Force (FATF) identified areas of Finland’s

### FATF assessment findings
- The 2019 FATF assessment rated AML/CFT effectiveness of Finland’s international cooperation, national coordination, financial intelligence and money laundering investigation and prosecution as substantial.
- Major improvements are needed in other 7 out of 11 assessed outcomes.
- The effectiveness of AML/CFT supervision was assessed as low, with fundamental improvements needed in:
  - supervisors’ ML/TF risk understanding;
  - implementation of a risk-based AML/CFT supervisory model;
  - guidance to obliged entities; and
  - sanctioning for AML/CFT non-compliance by financial institutions.

### Progress since the FATF assessment
- The supervisor (FIN-FSA) has increased resources in line with the FATF’s Recommended Actions.
- Progress is being made in relation to:
  - the understanding of ML/TF risks; and
  - development of risk-based AML/CFT supervision.
- Guidance to supervised entities on reporting of suspicious transactions has been issued.
- Finland received upgrades in ratings for three FATF Recommendations, remaining partially compliant with 7 Recommendations.

### Remaining gaps and recommended measures
- Further measures are needed to improve the effectiveness of AML/CFT supervision.
- A banking sector risk assessment, which the FIN-FSA is in the process of developing, will be instrumental in:
  - developing further the ML/TF supervisors’ risk understanding; and
  - informing a risk-based approach to ML/TF supervision.
- Improvements recommended include:
  - improving the variety and quality of the sources of information used to inform ML/TF risk assessments of institutions;
  - additional focus on the residual risk of financial institutions to better focus supervisory resources;
  - particular focus on cross-border transactions and non-resident risks, including collection and incorporation of payments data; and
  - refining the approach to the geographic ML/TF risk.
- These recommendations are made against the backdrop of:
  - increased cross-border payments activity since the Nordea headquarters’ move to Finland; and
  - growing financial flows with offshore financial centers (as in the IMF’s past Offshore Financial Center Assessment Program).

### Authorities’ views
- The Finnish authorities welcomed the FSAP and appreciated the insightful and useful discussions during the FSAP missions.
- They valued the IMF’s extensive work and engagement with a wide range of stakeholders and the insights provided by an external assessment of the financial sector’s resilience and the overall framework for financial sector oversight in Finland.
- The authorities consider the FSAP to be an important tool in assessing financial stability and risks.
- The authorities broadly agreed with the IMF team’s assessment and recommendations.
- They welcomed the IMF’s endorsement of Finland’s continued progress in strengthening regulation, supervision, and the financial oversight framework since the last FSAP in 2016.
- They noted that the financial sector remained resilient through the shocks stemming from the pandemic and Russia’s war in Ukraine, but given the war and subsequent energy crisis, the economic and inflation outlook turned gloomier during the FSAP process.
- The authorities agreed that structural risks and vulnerabilities regarding Finland’s financial stability emanate from:
  - a large and concentrated banking sector;
  - household indebtedness; and
  - interconnections in the Nordic-Baltic region.
- They shared the IMF’s view that the Finnish banking system’s solvency provides resilience to severe macrofinancial shocks, but that there are vulnerabilities relating to the funding structure.
- Regarding macroprudential policy, the authorities agreed with the IMF on the need to enhance Finland’s macroprudential toolkit and welcomed the IMF’s recommendation that:
  - new borrower-based macroprudential tools be introduced to address household vulnerabilities;
  - a positive cycle-neutral countercyclical capital buffer be considered (noting compliance would require legislative changes).
- They committed to enhancing their systemic risk monitoring framework, addressing data gaps and strengthening analysis of disaggregated data.
- They expect the positive credit register, which is to be operational in 2024, to improve the quality of data used for macroprudential analysis and policymaking.
- On pension insurance companies, authorities noted regulatory changes made in 2017 and thereafter have reduced the procyclical nature of the system and emphasized the importance of robust solvency regulation.
- On crisis management and resolution for the banking sector, authorities agreed arrangements have been significantly enhanced since the 2016 FSAP and rest on sound foundations, while noting a need to improve the framework for liquidity in resolution and to account for possible European-level solutions.

### Key statistics (selected excerpts from Tables)
- FATF assessment context:
  - 2019 FATF assessment rated effectiveness of some AML/CFT outcomes as substantial.
  - Major improvements needed in other 7 out of 11 assessed outcomes.
- Table 4. Finland: Selected Economic Indicators (selected lines, percentage change or percent of GDP as presented)
  - GDP: -2.2, 3.0, 2.0, 0.0, 1.3, 1.3, 1.3, 1.3, 1.2
  - Domestic demand: -2.0, 2.8, 3.5, 0.1, 0.8, 1.6, 1.31.3, 1.3
  - Consumer price inflation (harmonized, average): 0.4, 2.1, 7.24.4, 2.52.2, 1.8, 1.81.8
  - Unemployment rate (in percent): 7.8, 7.6, 6.8, 7.3, 7.0, 6.96.9, 6.8, 6.8
  - Overall balance: -5.5, -2.7, -1.5, -2.6-2.2, -2.5, -2.5, -2.7-2.8
  - Gross debt: 74.8, 72.3, 72.1, 73.6, 74.775.9, 77.1, 78.7, 80.3
  - Current account balance: 0.7, 0.6, -2.9-2.9, -1.7, -0.9-0.6, -0.5, -0.3
  - Gross external debt: 222.7, 208.1211.9215.1216.3, 216.1216.5217.4, 217.4
- Table 5. Finland: Financial Soundness Indicators (In Percent) (selected lines)
  - Regulatory Capital to Risk-Weighted Assets: 22.9 23.3 21.4 21.5 20.5 20.6 20.6
  - Regualatory Tier 1 Capital to Risk-Weighted Assets: 21.5 21.9 19.6 19.6 18.3 18.6 18.6
  - Total Capital to Total Assets: 5.8 7.1 6.1 4.8 6.4 6.5 6.8
  - Non-performing Loans to Total Gross Loans 1/: 0.9 1.0 0.7 1.0 1.5 1.5 1.5
  - Return on Assets: 0.6 0.7 0.6 1.8 0.5 0.5 0.8
  - Return on Equity: 9.1 8.9 7.6 26.2 6.5 6.2 9.3
  - Liquid Assests to Total Assets (Liquid Asset Ratio): 17.6 21.3 14.2 8.9 17.7 17.3 18.2
  - Customer Deposits as Percent of Total (non-interbank) Loans: 65.7 72.4 76.6 109.9 57.1 60.0 63.3
  - Total Household Debt (in percent of GDP): 65.2 65.6 65.4 64.4 65.3 68.3 ...
  - Total Household Debt (in percent of disposable income): 125.4 131.7 137.5 144.2 147.3 154.2 ...
  - Household Interest Expenses (in percent of disposable income): 1.9 1.7 1.6 1.6 1.6 1.6 1.5
- Table 6. Finland: Financial Sector Structure (selected lines)
  - Banking Sector (consolidated) assets: 870,440, 423, 46.2 (Asse ts / Number of Institutions / Asse ts (Perce nt of GDP) headings as presented)
  - Domestic banking groups: 759,029, 113, 01.9
  - Three largest banking groups: 707,190, 328, 1.3
  - Subsidiaries and branches of foreign banking groups operating in Finland: 11, 1,411, 314, 4.3
  - Insurance and Pension Sector assets: 250,847, 599, 9.8
  - Employee pension insurance: 161,251, 166, 4.1
  - Investment Funds: 179,883, 982, 71.5
  - Stock Market Capitalization: 345,689, 184, 137.5
  - Corporate Debt outstanding loans and debt securities: 263,744, 104.9
  - of which: issued in Finland: 176,777, 70.3

*Source: IMF staff summary of the FSAP chapter on Finland contained in the provided content.*

### Appendix I.  Status of Key  Recommendations of 2016 FSAP

### Appendix I.  Status of Key  Recommendations of 2016 FSAP

### General
- Recommendation: Increase the FIN FSA and FFSA’s financial and human resources in accordance with the increase in regulatory complexity and supervision intensity in (i) prudential supervision of banks (including systemic branches), (ii) prudential supervision of insurers, (iii) contingency planning/crisis management, (iv) macroprudential policy analysis, and (v) investment funds and their managers.
  - Time: I, C
  - Status: Partially implemented.
  - Details: The FIN-FSA has increased resources since the previous FSAP in different supervisory functions (especially in (i) banking supervision). SSM LSI methodology is derived from the SI methodology which is significantly more comprehensive compared to FIN-FSA’s pre-SSM approach. New risks and challenges require acquisition of new skills (cyber resilience, fintech opportunities, threats from criminal activity (money laundering and terrorist financing), impact of environmental and climate (E&C)-related risks on banking). The FFSA’s resources have been significantly increased since 2016 and with increased resources following Nordea’s re-domiciliation. During 2021 the FFSA’s human resources were 19.6 FTEs (compared to 12.5 in 2016).

- Recommendation: Expand cooperation arrangements with other Nordic supervisors to include (i) formal region-wide sharing of supervisory data and coordinated inspections, including foreign branches and cross-border management of investment funds, (ii) conduct Nordic stress tests, (iii) strengthen collaboration with macroprudential authorities, and (iv) enhanced CPCM cooperation on systemically important branches and regular crisis simulation exercises.
  - Time: NT
  - Status: Partially implemented.
  - Details: In 2018, an updated MoU on Cooperation and Coordination on cross-border financial stability between relevant Ministries, Central Banks, Financial Supervisory Authorities and Resolution Authorities of Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden (i.e., the Nordic-Baltic MoU). The MoU focuses on coordinating with respect to managing crisis in the regional financial system. The regional NBSG MoU is complemented by FFSA, FIN-FSA, BoF coordination with other foreign authorities in the context of supervisory and resolution colleges as well as other bilateral resolution planning discussions on a firm specific basis. For Finnish SIs with cross-border operations, FFSA staff participate in the SRB internal resolution teams (IRT) of Nordea, OP and Municipality Finland. Establishing cross-border cooperation requires significant investment to develop shared understanding, coordination mechanisms, and analytical methodologies to support coordinated monitoring, stress testing, and analysis in peacetime and crisis. Sustaining such cooperation requires dedicated resources. Discussions are at an early stage and sustained effort over a multi-year engagement strategy is necessary before home and host authorities have the capability to take coordination action in a crisis with acceptable levels of execution risk.

- Recommendation: Strengthen legal protection for staff of all financial oversight agencies.
  - Time: I, C
  - Status: Not implemented.
  - Details: No progress since previous FSAP. Personal accountability and protection of legal protection for staff of financial oversight agencies is established in the general constitutional and administrative law and generally applicable to the staff in all public authorities.

### Risk Analysis
- Recommendation: Ensure banks’ Internal Ratings Based models are calibrated to reflect severe stress.
  - Time: NT
  - Status: Fully implemented.
  - Details: See recommendation on TRIM project.

- Recommendation: Intensify monitoring of banks’ liquidity positions in foreign currencies and crossholdings of covered bonds used as collateral. Perform liquidity stress tests for various time horizons and stand ready to take supervisory action if imbalances emerge.
  - Time: NT
  - Status: Fully implemented.
  - Details: Interconnectedness (e.g., via crossholdings of bonds) between banks and financial sectors is analyzed in microprudential and macroprudential supervision at the FIN-FSA and Bank of Finland and in EA/EU level fora. Since the previous FSAP, FIN-FSA/ECB has carried out several liquidity stress testing exercises and scenario analyses on the Finnish banks.

### Banking Supervision
- Recommendation: Amend law to grant the FSA full Pillar 2 powers for decisions on capital and liquidity requirements and other supervisory measures.
  - Time: NT
  - Status: Partially implemented.
  - Details: Powers granted to the FIN-FSA by the ACI have been strengthened with the latest ACI changes, although there is still room for clarity. Powers granted to the ECB include requiring institutions to apply a specific provisioning policy, restricting or limiting business operations or network of institutions or to request divestment of risky activities, requiring the reduction of the risk inherent in the activities, products, and systems of institutions. The powers given to FIN-FSA are narrower. The FIN-FSA cannot enforce a specific provisioning policy as an early intervention power. FIN-FSA can take early intervention measures (restricting variable remuneration, obligating to change the strategy or administrative structure, limiting distribution of funds) if it assesses that “the adequacy of own funds or liquidity of a credit institution in relation to the total risk cannot be verified in another appropriate manner.” In practice this assessment is done through SREPs. In the CRD and the BRRD, the supervisory powers are not linked to SREP. The wording of the ACI could be clearer when it combines the supervisory powers of the CRD as well as early intervention powers of the BRRD.

- Recommendation: Ensure effective ongoing monitoring of banks’ internal risk models following the upcoming SSM comprehensive review (TRIM project).
  - Time: MT
  - Status: Fully implemented.
  - Details: Internal models are assessed as part of model supervision. The ECB’s TRIM (Targeted Review of Internal Models) project focusing on SI banks has been finalized and the same supervisory principles have been applied to LSIs. Based on supervisory findings, some restrictions and limits have been imposed to Finnish banks’ internal models. FIN-FSA has enhanced its internal model supervision (e.g., a separate division focused on internal models and on-site inspections has been established since the previous FSAP).

### Macroprudential Policy Framework
- Recommendation: Clearly define a macroprudential policy mandate of the FIN-FSA beyond the measures approved in laws.
  - Time: NT
  - Status: Not implemented.
  - Details: No change has been made in the FIN-FSA’s macroprudential policy mandate. The macroprudential authority still has limited powers to introduce new macroprudential tools or issue recommendations (only entitled to issue nonbinding recommendations).

- Recommendation: Create a household loan register.
  - Time: NT
  - Status: Partially implemented.
  - Details: The data content of the upcoming register is almost completed. The legal act was approved and adopted in Summer 2022. The positive credit register is expected to be launched in spring 2024.

- Recommendation: Introduce a systemic risk buffer and a loan-to-income limit.
  - Time: I, NT
  - Status: Partially implemented.
  - Details: A systemic risk buffer was introduced in Finnish legislation on January 1, 2018 and was set for all credit institutions (at levels 3 percent/2 percent/1.5 percent/1 percent) on 29 June 2018 (effective from July 1, 2019 onwards). The buffer requirement was removed for all credit institutions on 6 April 2020 due to the pandemic. A loan-to-income limit (or any other income-based measure) is not available in Finnish legislation and is not expected to be introduced in the near future. The FIN-FSA Board introduced a non-binding recommendation on loan applicants’ lending standards in 2022. The need to introduce a sectoral systemic risk buffer for mortgages with high LTI/DTI/LSTI/DSTI ratios will also be assessed in 2022-23.

- Recommendation: Finalize the plan to introduce floors for the risk-weights used in internal models.
  - Time: I
  - Status: Fully implemented.
  - Details: A 15 percent risk weight floor (pursuant to Art. 458 of the CRR) for Finnish IRB banks’ residential mortgage loans was set on 26 June 2017 (effective from January 1, 2018 for two years). The decision was renewed on 28 June 2019 (effective from January 1, 2020 for one year). On September 30, 2020, the FIN-FSA Board decided not to extend the validity of the risk weight floor due to the marginal and declining impact of the measure. At the banking sector level, the average risk weight for Finnish mortgage loans exceeds the 15 percent limit.

### Contingency Planning and Crisis Management
- Recommendation: Formalize inter-agency cooperation on crisis preparedness and management at the national level, possibly through an expanded mandate for the FFSA Advisory Council.
  - Time: NT
  - Status: Partially implemented.
  - Details: Finnish authorities coordinate BRRD related preparatory work through the FFSA Advisory Board. The legislative mandate of the FFSA Advisory Board has not been expanded beyond this since the last FSAP. Finnish authorities (MoF, MoSAH, FIN-FSA, BoF, FFSA) signed a crisis coordination MoU which established a new Crisis Management Coordination Group which met for the first time in early 2022. Cross-authority coordination has improved since the last FSAP and increased due to COVID and war in Ukraine, but more work is required to fully institutionalize cross-authority crisis coordination to prepare for, and manage, crises.

- Recommendation: Under the oversight of the FFSA Advisory Council, ensure agency-specific and national financial crisis planning.
  - Time: C, NT
  - Status: Partially Implemented.
  - Details: Good coordination among authorities in development of crisis plans for SI and LSI recovery and resolution, and in responding to COVID and Ukrainian crises. Progress made to establish information dependencies between authorities, legal arrangements to support information sharing, and systems for FFSA access to relevant supervisory information. As firm-specific crisis management plans develop, arrangements need further development and expansion including ensuring the BoF can access resolution plans for domestic SIs and LSIs to enable preparation for its function as lender of last resort.

- Recommendation: Expedite resolution planning for systemic financial institutions.
  - Time: NT
  - Status: Partially Implemented.
  - Details: Good progress in resolution planning for SIs and LSI with compliance with national resolution planning and MREL in close cooperation with SRB. FFSA has established clear internal processes and procedures to support resolution planning. Much work remains for SIs and LSI to comply with non-MREL resolvability expectations and for FFSA to assess firms’ actions consistently and verify firms’ capabilities described in self-assessment reports.

- Recommendation: Define strategies for liquidity assistance to banks in resolution and introduce an indemnification arrangement for ELA losses if incurred by the BoF.
  - Time: NT
  - Status: Not implemented.
  - Details: Under the Eurosystem monetary framework, the BoF has statutory responsibility for provision of ELA and bears the costs and risks inherent in doing so. It has developed internal arrangements to define the policy framework and considerations related to the provision of ELA. BoF has not taken additional steps since the last FSAP at a national level to specify publicly its role in ELA or funding in resolution beyond what is set out in the European agreed framework for national central banks. The BoF and the FFSA have not developed formalized agreements, defined scenarios or handling strategies for considering together how to address the risk of banks in resolution needing access to its temporary collateralized liquidity support.

### Nonbanks
- Recommendation: Upgrade legislation to cover the supervisory actions and any other measures required in the event of pension insurer or fund distress and if resolution becomes necessary.
  - Time: I
  - Status: Not implemented.
  - Details: No significant changes in relation to resolution of a major PIC; a crisis simulation exercise and consequential action is recommended. There is recent successful experience of resolving a smaller PIC through merger into one of the largest PICs.

- Recommendation: Ensure adequacy of action plans for life insurers to meet Solvency II requirements, including by conducting regular stress testing under adverse scenarios.
  - Time: NT
  - Status: Partially implemented.
  - Details: Insurers are producing ORSAs as required under Solvency II, and FIN-FSA is reviewing them as part of risk assessment and creation of firm specific ‘heat-map’ risk assessments. FIN-FSA is engaging with EIOPA review of Solvency II and Finnish insurance companies participate regularly in EU-wide stress tests (conducted by EIOPA). FIN-FSA is developing its own tools to review Solvency Capital calculations by insurance companies and conduct stress tests in addition to the companies.

- Recommendation: Monitor fund managers’ risk management processes, increase the use of supervisory data to analyze risks, and improve FIN-FSA’s capability to conduct market surveillance.
  - Time: NT, C
  - Status: Implemented.
  - Details: Risk management inspections and thematic reviews on liquidity risk management have been conducted. FIN-FSA participates in ESMA Common Supervisory reviews and is reviewing liquidity. Participation with market players was praised during recent crises. Questions remain on access to data during periods of extreme stress which does not rely on direct discussion with market participants.

*Appendix I.  Status of Key  Recommendations of 2016 FSAP*

### Appendix II. Risk Assessment Matrix

### Appendix II. Risk Assessment Matrix

### Risk Assessment: Summary of Major Risks, Concern, Likelihood, and Expected Impact
- Intensifying spillovers from Russia’s war in Ukraine.
  - Overall Level of Concern: High
  - Relative Likelihood: High
  - Expected Impact if Materialized:
    - A negative shock would hit imports and exports, which further hit vulnerable sectors in the Finnish economy, weakening investment and growth, an increasing NPLs.
    - Funding costs rise for corporate borrowers, reducing credit availability.
- Commodity price shocks.
  - Overall Level of Concern: High
  - Relative Likelihood: High
  - Expected Impact if Materialized:
    - A negative shock would hit imports and exports, which further hit vulnerable sectors in the Finnish economy, weakening investment and growth, an increasing NPLs.
    - Funding costs rise for corporate borrowers, reducing credit availability.
- Deepening geo-economic fragmentation and geopolitical tensions.
  - Overall Level of Concern: High
  - Relative Likelihood: High
  - Expected Impact if Materialized:
    - Lower economic growth, higher input costs, supply disruptions and changed trade patterns will result in lower real incomes, lower firm profitability resulting in increased NPLs.
- De-anchoring of inflation expectations and stagflation.
  - Overall Level of Concern: Medium
  - Relative Likelihood: High
  - Expected Impact if Materialized:
    - Significant market losses in bank portfolios as asset values fall.
    - Potential significant liquidity impact on banking sector, given high reliance on wholesale funding.
    - Higher funding costs impact corporate borrowers, reducing credit availability, including for households.
    - Higher retail interest rates worsen household indebtedness.
- Local COVID-19 outbreaks.
  - Overall Level of Concern: Medium
  - Relative Likelihood: High
  - Expected Impact if Materialized:
    - Financial conditions tighten.
    - Contraction of consumption and investment impairs financial sector health.
    - Changing work patterns undermine CRE and prime residential house prices.
    - Increased NPLs undermine bank balance sheets.
- Cyberthreats.
  - Overall Level of Concern: Medium
  - Relative Likelihood: Medium
  - Expected Impact if Materialized:
    - Cyberattack on critical banking infrastructure necessitates use of backup payment system and decreases public confidence in the banking system.

*Italic line removed per pipeline — source attribution provided separately.*

### Banking Sector: Solvency Stress Test — Top-Down by IMF (Institutional Perimeter and Coverage)
- Institutional Perimeter Exercise: Top-Down by FSAP team.
- Institutions included:
  - Seven banks subcategorized as SIs (four banks) and LSIs (three banks).
  - Among the SIs:
    - the largest is internationally oriented, and 80 percent of its total exposures are cross-border,
    - one does government guaranteed residential mortgages only,
    - one focuses on retail banking,
    - and one is a subsidiary of a foreign bank (recently become an SI; analysis reduced due to limited data availability).
  - One SI is a branch of a foreign bank; it does not hold capital and is excluded from the solvency analysis, although it is included in the total profitability.
  - All LSIs are domestically focused. One focuses on asset management and two on retail banking.
- Market share:
  - Total coverage is about 93 percent of the banking sector, with 85 percent for SIs and 8 percent for LSIs.

### Banking Sector: Solvency Stress Test — Data, Scope, and Methodology
- Data and baseline date:
  - Multiple data vintages: December 2021 (year end, starting point for Profit and Loss), March 2022 and July 2022 (starting point for balance sheet and capital).
  - Supervisory data: Bank balance sheet and supervisory statistics (including FINREP and COREP), information on interest rate risk in the banking book (IRRBB), liquidity risk and market risk sensitivities (including STE templates) provided by the authorities and the ECB.
  - Expected Default Frequency sourced from Moody’s.
  - Further supervisory information provided, including the probability of defaults by credit portfolios, and a bank-specific stage transition matrix by portfolio from FINREP.
  - Market and publicly available data, such as information from ECB statistical data warehouse on funding and lending rates by type of asset and funding portfolios.
- Scope of consolidation:
  - Banking activities of the consolidated banking group for banks having their headquarters in Finland.
  - Foreign subsidiaries are assessed at the unconsolidated level covering domestic activities only.
- Coverage of sovereign and non-sovereign securities exposures:
  - Debt securities measured through fair value (FVPL and FVOCI) and amortized cost (AC) account.
- Coverage of lending exposure:
  - Credit institutions, nonbank financial institutions, household, and corporate (Finland, Sweden, Norway, Denmark).
- Channels of Risk Propagation and Methodology:
  - FSAP team satellite models and methodologies.
  - Balance-sheet regulatory approach.
  - Market risk treated as an add-on component, with a separate calibration. Market risk stress scenario impacts both capital resources (via profit and loss or via Other Comprehensive Income (OCI)) and capital requirements (RWA).
  - Traded risk impact from revaluation of trading assets (FVPL) and securities classified as FVOCI by counterparty: central government (by country issuers), credit institutions, other financial institutions, and nonfinancial corporates.
  - Credit spreads on sovereign, credit institutions and corporate securities interpolated using bank-specific residual maturity at the book and issuer level; valuation effects assessed using a modified duration approach. Hedges considered ineffective under stress.
  - Losses for securities portfolios based on duration approach. Losses on equities based on stock market price movement specified by the scenario.
  - For internally modelled exposures (IRB): projection of PiT and TTC PDs, LGD, EAD and RWA.
  - For standardized (STA) exposures: projection of new flows of defaulted exposures, coverage ratio for defaulted loans, and risk weight downgrade for performing exposures.
  - Corporate PDs for largest exposures proxied by Moody’s EDFs.
  - Provisioning for IRB and STA modeled using IFRS9 transition matrix approach using COREP data.
  - Funding costs projected at the portfolio level using funding structure by product and maturity bucket; projections capture systematic and idiosyncratic risk. Funding cost projections utilized bank level data on 12 Irish banks from COREP templates.
  - Lending rates projected at the system level and attached to bank-specific interest rates and outstanding amount at cut-off date.
- Stress test horizon:
  - 2022 Q1–2025 Q4 (4 years).

### Banking Sector: Solvency Stress Test — Scenarios, Risks Covered, and Assumptions
- Tail Shocks Scenario:
  - Two Scenarios:
    - A baseline scenario based on the April 2022 World Economic Outlook macroeconomic projections.
    - An adverse scenario that captures the key risks in the RAM. This scenario relies on GFM, a structural macroeconometric model of the world economy, disaggregated into forty national economies, documented in Vitek (2018). Scenarios for foreign countries where Finland has significant exposure is extracted from GFM and is internally consistent with country scenarios of other ongoing FSAPs.
- Risks covered:
  - Credit (on loans and debt securities), market (valuation impact of debt instruments through repricing and credit spread risk as well as the P&L impact of net open positions in market risk factors such as foreign exchange risks) and interest rate risk (IRRBB) on the banking book.
  - Concentration risk by sensitivity analysis.
  - Solvency and liquidity risk interactions, mainly through asset haircut.
- Behavioral Adjustment:
  - Quasi-static approach for balance sheet growth: asset allocation and composition of funding remain the same; balance sheet grows in line with the nominal GDP paths of major geographical exposures and subject to reduced credit demand in material jurisdictions and FX shock from revaluation effects on foreign currency loans specified in the stress test scenario.
  - To prevent banks from deleveraging, the rate of change of balance sheets is set at a floor of zero percent. This constraint is binding in the adverse scenario.
  - In projecting RWAs, standardized and IRB portfolios are differentiated. For standardized portfolios, RWAs change due to balance sheet growth, new inflows of non-performing loans, new provisions for credit losses, exchange rate movements, and conversion of a portion of off-balance sheet items to on-balance sheet items. For IRB portfolios, through-the-cycle-PDs, downturn LGDs and EAD for each asset class/industry are used to project risk weights.
  - Interest income from non-performing loan is not accrued.
  - Banks assumed not to issue new shares or make repurchases during the stress test horizon.
  - Dividends assumed to be paid out at 30 percent of current period net income after taxes (i.e., only if net income is positive) by banks that were in compliance with supervisory capital requirements.
- Regulatory and Market-Based Standards and Parameters:
  - National regulatory framework: Basel III regulatory minima on CET1 (4.5 percent) and include any requirements due to systemic buffers for three other systemically important institution (LSI).
  - Evaluation of total banking capital adequacy ratio against the 8 percent level, Tier 1 capital ratio against the 6 percent benchmark and the leverage ratio during the stress test horizon against the 3 percent Basel III minimum requirement.
  - The same hurdle rate was used for baseline and adverse scenario.
  - The hurdle rate for CET1, T1 and total capital adequacy do not include capital conservation and capital countercyclical buffers as well as pillar 2 requirement.
  - Banks that end the stress test horizon with a capital level or a leverage ratio below the relevant hurdle rates are considered to have failed the test.
- Reporting Form for Results:
  - Output presentation potentially includes:
    - Evolution of capital ratios for the system as a whole and as groups of retail banks and large international banks.
    - Information on impact of different result drivers, including profit components, losses due to realization of different risk factors.
    - Capital shortfall as sum of individual shortfalls; in euros and in percent of nominal annual GDP.
    - Number of banks and corresponding percentage of assets below the regulatory minimum (or below the minimum leverage ratio).

### Banking Sector: Liquidity Stress Test — Top-Down by IMF
- Institutional Perimeter Exercise: Top-Down by FSAP team.
- Institutions included:
  - Six banks subcategorized as SIs (three banks) and LSIs (three banks). One SI not included due to lack of data.
- Market share:
  - Total coverage is about 80 percent of the banking sector, with 73 percent for SIs and 7 percent for LSIs.
- Data and baseline date:
  - Latest data: April 2022.
  - Source: supervisory data (LCR, NSFR, and ALMM Maturity Ladder template).
- Scope of consolidation:
  - Banking activities of the consolidated banking group for banks having their headquarters in Finland. Foreign subsidiaries assessed at the unconsolidated level covering domestic activities only.
- Channels of Risk Propagation and Methodology:
  - Basel III LCR and cash-flow based liquidity stress test using maturity buckets by banks, incorporating both contractual and behavioral (where available) with assumption about combined interaction of funding and market liquidity and different level of central bank support.
  - Liquidity test in EUR, USD, and Sterling.
- Risks and Buffers:
  - Risks: Funding liquidity, Market liquidity.
  - Buffers: The counterbalancing capacity, including liquidity obtained from markets and/or the central bank’s facilities. Expected cash inflows are also included in the cash-flow based and LCR-based analysis.
- Tail shocks — Size of the shock and key assumptions:
  - Run-off rates calibrated to reflect scenarios of system-wide deposit runs and dry-up of unsecured wholesale and retail funding, with additional run-off for non-resident deposits on top of the retail and wholesale run-off, calibrated following historical events, recent international experience in liquidity crisis and IMF expert judgment.
  - Retail scenario key assumptions:
    - (i) 10 percent run-off rates for stable retail deposits and 20 percent for less stable retail;
    - (ii) 10-35 percent for operational deposits and 20-40 percent for non-operational deposits;
    - (iii) no changes in liquid assets weights.
  - Wholesale scenario key assumptions:
    - (i) 5 percent run-off rates for stable retail deposits and 10 percent for less stable retail;
    - (ii) 15-35 percent for operational deposits and 40-60 percent for non-operational deposits;
    - (iii) no changes in liquid assets weights.
  - Combined run-off and price shock scenario key assumptions:
    - (i) 10 percent run-off rates for stable retail deposits and 20 percent for less stable retail;
    - (ii) 15-35 percent for operational deposits and 40-60 percent for non-operational deposits;
    - (iii) liquid assets weights reduction of 0-5 percent for level 1 assets, 3-20 for level 1 covered bonds, 5-15 percent for level 2A assets and 5-25 for level 2B assets.
  - Liquidity shocks simulated for 1–month for both LCR, and 5-days, 1-month, 3-months, and 1-year for the cash-flow based approach.
  - Haircuts of HQLA calibrated against ECB haircuts, past Euro Area FSAPs, and market shock for investment securities and money market instruments in the solvency stress test.
- Regulatory and Market-Based Standards and Parameters:
  - Regulatory standards consistent with Basel III regulatory framework (LCR).
- Reporting Format for Results:
  - Output presentation: Liquidity ratio or shortfall by groups of banks and aggregated (system wide).
  - Number of banks that still can meet or fail their obligations.

### Banking Sector: Interconnectedness Analysis — Top-Down by IMF
- Institutional Perimeter Exercise: Top-Down by FSAP team.
- Institutions included:
  - Cross-border contagion: country-pair bilateral exposure across Nordic/Baltic region, rest of Euro Area, US, and Russia.
- Data and baseline date:
  - BIS consolidated banking statistics.
- Channels of Risk Propagation and Methodology:
  - Balance-sheet model: Network model by Espinosa-Vega and Solé (2010).
- Tail shocks:
  - Size of the shock: Pure contagion: financial distress in foreign countries.
  - Default threshold: banks would default if their CET1 capital ratios fall below 4.5 percent (regulatory minimum).
- Reporting Format for Results:
  - Output presentation: Capital shortfall systemwide, by bank and by group: contagion and vulnerability scores.
  - Amplification and cascade effects, direction, and size of spillovers within the network.

### Banking Sector: Funding Cost Analysis — Top-Down by IMF
- Institutional Perimeter Exercise: Top-Down by FSAP team.
- Institutions included:
  - Two banks that do not issue bonds.
- Market share:
  - Total coverage is about 85 percent of the banking sector.
- Data and baseline date:
  - Publicly available market data on banking bond yields (July 2022), historical bank-specific balance sheet and Profit and Loss data from Bloomberg, and solvency stress-testing projections.
- Channels of Risk Propagation and Methodology:
  - Panel regression between cost of funding and bank specific performance indicators.
- Risks and Buffers:
  - Risks: Credit spreads, Interest rate.
  - Firm behavioral response: Firms are not allowed to raise capital.
- Tail shocks:
  - Size of the shock: Drop in banking profitability and asset quality due to solvency stress test.
- Regulatory and Market-Based Standards and Parameters:
  - Market-based analysis, no capital thresholds are applied.
- Reporting Format for Results:
  - Output presentation: Relationship between banking performance and access to funding.
  - Projection of marginal wholesale funding cost under the alternative scenarios.

### Nonbank Financial Intermediation Sector: Market Risk — Top-Down by IMF
- Institutional Perimeter Exercise: Top-Down by FSAP team.
- Institutions included:
  - Four pension insurance companies, compared with local government pension fund (KEVA) and state government pension fund (VER).
- Market share:
  - Total coverage is about 100 percent of the private pension sector.
- Data:
  - Publicly available market data from TELA.
- Channels and Methodology:
  - Investment portfolio analysis.
  - Decomposing valuation changes in asset prices into return on existing assets and acquisition of new assets.
  - Cyclicality and pairwise correlation analysis of the decomposed components of equity investment for pension funds.
- Risks and Buffers:
  - Risks: Sharp decline in equity prices.
  - Firm behavioral response: Firms sell or acquire new assets, in particular listed equity shares, to comply with the solvency regulations.
- Reporting Format for Results:
  - Output presentation: Correlation between equity investment portfolios of major pension insurance companies.
  - Cyclicality of equity investment in major pension insurance companies compared with that for public pension funds.

*Italic line removed per pipeline — source attribution provided separately.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1finea2023002.pdf_