## 1finea2023005

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### Executive summary — progress, toolkit, and key messages
- Since the 2016 FSAP, authorities have:
  - Introduced a systemic risk buffer (SyRB) and a minimum risk weight for mortgage loans.
  - Begun developing a positive credit register to record individual borrower data.
  - Expanded Nordic cooperation via an updated Memorandum of Understanding (MoU) to promote financial stability and common procedures for information sharing and coordination.
- Institutional/operational highlights:
  - FIN-FSA is designated macroprudential authority; its Board has decision-making powers over instruments including the counter-cyclical capital buffer (CCyB), systemic risk buffer (SyRB), and loan-to-value (LTV) cap on housing loans.
  - Bank of Finland (BoF) provides supporting analyses; Deputy Governor of BoF serves as Chair of the FIN-FSA Board in practice.
  - Decisions are prepared jointly by BoF and FIN-FSA staff, discussed with the MoF and FFSA, and the ECB is consulted for an opinion before final Board decision.
- Communication and reporting:
  - Policy recommendations and staff outcomes summarized in a semiannual Macroprudential Report; BoF Bulletin covers topical financial stability issues annually.

### Institutional framework, mandate, governance, and powers (Section 9)
- Legal framing and mandate:
  - Act on the FIN-FSA: lists macroprudential objective (“to ensure the stability of the financial system as a whole” Chapter 1, Article 3) but Chapter 1, Article 1 focuses on microprudential supervision (“in charge of regulations and supervision of the individual credit institutions”).
  - Recommendation: explicitly include a primary objective such as “maintaining the stability of the financial system as a whole” in Chapter 1, Article 1 of the Act on the FIN-FSA (requires MoF involvement).
  - Recommendation: avoid appointing officials from MoF and MoSAH to FIN-FSA Board to enhance independence.
- Governance and chairing:
  - Practice: BoF Deputy Governor chairs the Board since 2009, but not formalized in legislation.
  - Recommendation: formalize BoF representative as Chair (requires legislation) or consider alternative governance such as separate Board committees or a financial stability council outside FIN-FSA.
- FIN-FSA powers:
  - Hard powers: Board can issue, amend, revoke instruments under Act on Credit Institutions; calibrate CCyB and SyRB; designate systematically important institutions and set surcharges; introduce instruments outside CRDV/CRR2 (e.g., LTV).
  - Nonbinding powers: Board can issue recommendations (e.g., DTI/DSTI).
  - Information-gathering: FIN-FSA and BoF have statutory rights to request information from supervised entities.
  - Recommendation: consider granting Board regulatory powers to adopt new instruments or, if infeasible, semi-hard “comply or explain” powers.
- Internal capacity:
  - FIN-FSA has few staff fully dedicated to macroprudential analysis; currently supplemented by BoF resources.
  - Recommendation: leverage FIN-FSA strengths (supervision, NBFI oversight) and enhance cross-department collaboration.

### Systemic risk monitoring, data initiatives, and regional cooperation (Sections: Systemic risk monitoring; 26)
- Monitoring framework and methods:
  - BoF and FIN-FSA jointly use broad indicators and quantitative methodologies: institution-level bilateral exposure analysis, stress testing, early warning models, asset price and real estate valuation models, contagion models, scenario analysis.
  - Quarterly Macroprudential Report and annual financial stability reports support decision making.
- Data initiatives and gaps:
  - Positive credit register:
    - Will cover broad exposures and loans by all companies issuing loans to private individuals and the self-employed.
    - Legal act submitted to Parliament in early 2022.
    - First stage (consumer credit) expected from the first half of 2024.
    - Second stage (broader reported items) expected in Spring 2026.
    - Reported items include: amount of credit granted and drawn; currency; method and interval of repayment; last due date; total interest charged; interest margin; basis for determining interest; length of interest rate determination period; end date of fixed interest period and its basis; interest hedging (cap or tube); whether credit is secured; type of collateral; personal identification number of guarantor; start and end dates of repayment period agreed; amount of installment paid; amount of interest paid; paid credit costs other than interest; and credit balance after repayment.
    - Shortcoming: collateral value will not be included — important for estimating LTV ratios.
    - Housing company loans (~16 percent of housing loans in 2021) are not included because debtor is the housing company; recommendation: add housing company loans urgently.
  - Other gaps/recommendations:
    - Develop a comprehensive commercial real estate (CRE) price index (Statistics Finland pilot launched; publication timeframe open).
    - Improve collection of cross-border exposures (syndicated loans, international bonds, institutional investors, REIFs); enhance EU and Nordic-Baltic data sharing.
- Regional cooperation:
  - MoU (updated 2018) signed by Nordic-Baltic central banks, supervisors, resolution authorities, and relevant ministries to enhance cooperation.
  - MoU between Nordic supervisors and ECB (2016) contains principle of full reciprocity of macroprudential tools per ESRB recommendations.
  - Recommendation: expand Nordic-Baltic cooperation (e.g., joint stress tests).

### Main vulnerabilities — household sector, housing market, funding, and structural features (Sections 41 and related)
- Household sector and housing market:
  - Household debt reached the highest level of disposable income on record in 2021.
  - Average loan maturities rose prior to Q2 2022.
  - Share of housing company loans rose from 6 percent in 2004 to 16 percent in 2021.
  - 95 percent of housing loans are variable rate.
  - Only 28 percent of variable-rate housing loans come with interest rate caps.
  - High indebtedness and prevalence of variable-rate loans expose borrowers to interest rate increases and could jeopardize debt repayment capacity with systemic implications.
  - House prices: little aggregate increase in Finland since 2008, but significant increases in Greater Helsinki and other metropolitan areas; regional divergence with declines in rural areas.
- Housing company loans:
  - Finance renovations and new construction; have lower average interest rates than loans to construction companies.
  - Higher complexity and opacity; FIN-FSA lacks observation of lending standards and shareholder information.
  - If one shareholder cannot pay, remaining households may be jointly liable — risk to household repayment capacity.
- Funding, liquidity, structural concentrations:
  - Retail deposits ≈ 50 percent of banks’ funding; remainder is wholesale funding (covered bonds, unsecured bonds, interbank).
  - Loan-to-deposit ratio ≈ 147 percent in Q1 2022.
  - Deposits were around 38 percent in 2014 (improved reliance since then).
  - Average liquidity coverage ratio (LCR) ≈ 182 percent as at Q4 2021 (requirement: 100 percent).
  - Average net stable funding ratio (NSFR) ≈ 117 percent as of Q4 2021 (requirement: above 100 percent as of June 28, 2021).
  - Bank liquidity stress testing indicates possible insufficient liquidity under adverse funding shocks.
  - Total banking sector assets EUR 870.4 billion at end-2021 = 346 percent of GDP.
  - Three largest banks (Nordea, OP Financial Group, Municipality Finance) account for 93 percent of domestic banking assets.
  - O-SII buffers (June 28, 2022 decisions, effective January 1, 2023): Nordea 2.5 percent (from 2.0 percent); OP Financial Group 1.5 percent (from 1.0 percent); Municipality Finance 0.5 percent (unchanged).
  - Basel III leverage ratio ≈ six percent (regulatory minimum: three percent).
- Corporate sector:
  - Bank loans to NFCs ≈ 20 percent of GDP since pre-GFC; concentrated in real estate, manufacturing, electricity and gas (~half of such loans).
  - Real estate sector ≈ 25 percent of corporate loans.
  - Intercompany loans increased from 10 percent to 40 percent of GDP between 1995 and 2021.
  - Direct bank exposure to Russian corporates < 0.1 percent of total loans.
  - Around 6 percent of exports and 12 percent of imports related to Russian trade (declining since 2014); war in Ukraine can have indirect effects on firm profitability.

### Macroprudential toolkit, recent measures, and crisis response
- Current tool settings (as presented):
  - CCyB: Set at 0 percent.
  - CCoB: Set at 2.5 percent (introduced January 1, 2015).
  - Cap on LTV (LTC cap used by FIN-FSA): 85 percent (95 percent for first-time home buyers) — lowered by 5 percentage points as of October 1, 2021.
  - Household sector capital requirements: Inactive — a minimum risk weight level of 15 percent for mortgage loans expired on January 1, 2021.
  - O-SII buffers: Nordea 2.5 percent; OP Group 1.5 percent; Municipality Finance 0.5 percent (see above).
  - SyRB: Inactive — all SyRB released April 6, 2020; not reimposed due to weakened outlook from the war in Ukraine (June 2022 decision).
  - Note: LCR and NSFR are in place but not considered macroprudential instruments by authorities.
- Measures taken:
  - LTV cap reduced to 85 percent (except first-time buyers) on October 1, 2021.
  - MoF legislative proposal (June 16, 2022) includes: (i) maximum maturity of 30 years for housing loans and housing company loans; (ii) LTV cap of 60 percent for housing company loans (new buildings); (iii) amortization requirement for housing company loans (new buildings) in initial years. New regulation expected mid-2023.
  - FIN-FSA nonbinding recommendation (June 27, 2022) on stressed DSTI ratio: total loan-serving costs no more than 60 percent of net income (stressed), with maturity ≤ 25 years and interest rate ≥ 6 percent (except long-term hedges and fixed-rate loans). Recommendation effective January 1, 2023. Speed limit: stressed DSTI > 60 percent should account for no more than 15 percent of new housing loans by each lender.

### Recommendations and policy options (key items)
- Expand macroprudential toolkit:
  - Add debt-to-income (DTI) or debt-service-to-income (DSTI) caps to better contain leverage among households and at lower economic cost than LTV caps.
  - Redefine loan-to-collateral (LTC) limit to narrow collateral scope (limit collateral to mortgage on dwelling in line with ESRB recommendation).
- Countercyclical capital buffer:
  - Consider introducing a positive neutral CCyB (requires legislative amendments) to provide a releasable buffer for asymmetric shocks; estimated positive neutral CCyB ≈ 0.75 percent of risk-weighted assets (residual estimate from stress test calibration).
- SyRB activation:
  - Reactivate SyRB once circumstances allow; sensitivity analysis suggests estimated SyRB ≈ 2.0 percent (from the 2022 FSAP stress test calibration).
- Systemic risk monitoring improvements:
  - Develop granular data analysis capacity for corporate sector vulnerabilities and funding/liquidity risks.
  - Improve positive credit register by broadening scope (add collateral values and housing company loans).
  - Continue development of comprehensive CRE price index and cross-border exposure data collection.
- Powers and governance:
  - Consider granting FIN-FSA Board powers to issue regulations on macroprudential policy or adopt a “comply or explain” semi-hard power to increase effectiveness of recommendations.
- Communication:
  - Publish biannual financial stability reports with consistent charts and concise sectoral chapters; use tiered and targeted communication when introducing new tools to explain distributional consequences.

### Calibration of capital buffers using stress test results (CRDV/CRR2 context; Section 60, Box 1)
- Conceptual definitions:
  - SyRB: covers noncyclical systemic risks (e.g., high household indebtedness).
  - Positive neutral CCyB: cyclical component of releasable buffer when economy is in neutral phase; can be released to prevent credit crunches even without excessive credit growth signs.
- Calibration method and numeric results:
  - 2022 FSAP solvency stress test: largest capital reduction is in year 4 = 7.4 percent (in terms of risk-weighted assets).
  - Sensitivity analysis isolating household credit and property price exposures indicates capital reduction in year 4 relative to year 0 ≈ 2.0 percent → indicates SyRB amount.
  - Given other buffers (CCoB = 2.5 percent; O-SII buffer for consolidated bank in stress test = 2.1 percent), the residual positive neutral CCyB ≈ 0.75 percent.
- Cross-border reciprocity consideration:
  - Calibration assumed domestic exposures only; reciprocity reduces domestic coverage for CCyB when foreign exposures exist.
  - Example: if foreign exposure = 40 percent and country X sets 1.0 percent CCyB, reciprocity implies 0.4 percent capital; to cover remaining domestic exposure CCyB should be set higher (example suggests setting ≈ 0.6 percent for domestic coverage).

### Extract of prioritized recommendations (time horizons: I = immediate; NT = near term; MT = medium term)
- Institutional arrangements (selected):
  - 1 Clearly define a macroprudential policy mandate for FIN-FSA and its Board. — MoF — MT
  - 2 Formalize that FIN-FSA Board member from BoF serves as the chair in macroprudential policy meetings. — MoF — MT
  - 3 Provide biannual financial stability reports assessing vulnerabilities and stakeholder concerns. — FIN-FSA, BoF — MT
  - 5 Consider providing the Board of the FIN-FSA hard powers to issue macroprudential regulations including adoption of new instruments. — MoF — MT
  - 6 If infeasible, provide Board power to recommend actions with a “comply or explain” principle. — MoF — MT
- Systemic risk monitoring:
  - 9 Enhance systemic risk monitoring with disaggregated data, corporate sector and funding/liquidity analysis. — FIN-FSA, BoF — MT
  - 10 Improve the positive credit register by broadening scope. — FIN-FSA, BoF — NT
  - 11 Develop a comprehensive CRE price index and collect cross-border exposure data. — FIN-FSA, BoF — MT
- Tools and calibration:
  - 12 Consider introducing a positive neutral countercyclical capital buffer. — MoF — MT
  - 13 Add DTI and DSTI limits to macroprudential toolkit. — MoF — MT
  - 14 Redefine the loan-to-collateral limit. — MoF — MT
  - 15 Reactivate the SyRB once circumstances allow. — FIN-FSA, BoF, MoF — NT

_Italic: Source: IMF Finland—Technical Note (1finea2023005)._

### EXECUTIVE SUMMARY _____________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Progress and toolkit enhancements
- Since the 2016 FSAP, the Finnish authorities have:
  - Introduced a systemic risk buffer (SyRB) and a minimum risk weight for mortgage loans.
  - Begun developing a positive credit register to record individual borrower data.
  - Expanded cooperation arrangements with other Nordic countries by signing an updated Memorandum of Understanding (MoU) to promote financial stability, including establishing common procedures for information sharing and coordination.

### Institutional framework and governance
- The domestic framework, formalized in 2014, is mostly in line with IMF guidance:
  - The Finnish Financial Supervisory Authority (FIN-FSA) is the designated macroprudential authority; its Board is assigned decision-making powers.
  - The Board is empowered to issue, amend, or revoke certain macroprudential policy instruments, such as the counter-cyclical capital buffer (CCyB), systemic risk buffer (SyRB), and loan-to-value (LTV) cap on housing loans.
  - The Bank of Finland (BoF) provides analyses to support macroprudential policy; the Deputy Governor of the BoF serves as Chair of the Board of the FIN-FSA.
  - Authorities use various communication tools to ensure accountability and transparency.

- Decision-making practice:
  - Macroprudential decisions are made by the Board of the FIN-FSA, based on a formal proposal of the Director General of the FIN-FSA.
  - The Board includes representatives from the BoF, the MoF, the Ministry of Social Affairs and Health (MoSAH), and two or more independent members (maximum six members).
  - Draft decisions are prepared jointly by BoF and FIN-FSA staff, discussed with the MoF and FFSA, and the ECB is consulted for an opinion before final Board decision.
  - The Board decides by consensus; if there is disagreement, decisions are made by majority voting.

### Systemic risk monitoring
- Monitoring framework and practice:
  - The FIN-FSA and the BoF jointly conduct systemic risk monitoring using a broad set of indicators and multiple quantitative methodologies, including institution-level analysis based on bilateral exposure data and stress testing exercises.
  - Vulnerability analyses and preliminary macroprudential policy proposals are prepared jointly for the FIN-FSA Board.
  - Policy recommendations and staff-level outcomes are summarized in a semiannual Macroprudential Report.
  - The BoF Bulletin summarizes topical financial stability issues once a year with simple charts.

- Focus and data developments:
  - Systemic risk analysis is mainly focused on the household sector because it is seen as a primary source of financial vulnerabilities.
  - The ongoing development of Finland’s positive credit register will provide microdata on household indebtedness and income to analyze vulnerabilities and to calibrate policy.
  - Authorities are encouraged to develop capacity for granular data analysis covering corporate sector risks and to address existing data gaps (e.g., comprehensive CRE price index, granular firm balance sheet data, cross-border exposure).

### Main vulnerabilities identified
- Household sector and housing market:
  - Household debt has steadily increased and, in 2021, reached the highest level of disposable income yet recorded.
  - The average maturity of loans has risen.
  - The share of housing company loans reached 16 percent of housing loans in 2021.
  - Since 95 percent of housing loans are variable rate, and only 28 percent of them come with interest rate hedges, a rise in interest rates could jeopardize debt repayment by households.
  - House prices have not increased as much in Finland as in other Nordic countries, but the sustained increase in residential housing loans is an important systemic concern.

- Funding, liquidity, and structural features:
  - Structural features of the banking sector, such as high reliance on wholesale funding and strong interconnectedness with the rest of Nordic region, pose potential vulnerabilities.
  - An extended period of low interest rates may have encouraged a buildup of systemic risks, especially in household mortgage loans.

### Measures already taken by authorities
- FIN-FSA Board actions and government proposals:
  - Lowered a cap on the LTV ratio for housing loans to 85 percent, except for first-time home buyers.
  - Government published proposals to set the maximum maturity of housing loans and several measures to limit housing company loans.
  - FIN-FSA Board issued a nonbinding recommendation to lenders to originate mortgage loans only if borrowers can keep debt-service-to-income (DSTI) ratios under stressed conditions at, or below, 60 percent.

### Key recommendations and policy options
- Expand macroprudential toolkit:
  - Add caps on debt-to-income (DTI) or debt-service-to-income (DSTI) ratios to better contain leverage increases among certain households and at a lower economic cost than LTV caps.
  - Redefine the loan-to-collateral limit.

- Countercyclical capital buffer (CCyB):
  - Consider introducing a positive neutral counter cyclical capital buffer (positive neutral CCyB), which requires legislative amendments. Rationale: shocks to the banking system can be asymmetric (as during the COVID-19 pandemic), so a releasable buffer would be useful when a sudden credit contraction is possible even without signs of excessive credit build-up.

- Systemic risk monitoring improvements:
  - Develop capacity for granular data analysis covering corporate sector vulnerabilities and funding and liquidity vulnerabilities.
  - Improve the positive credit register by broadening the scope of data collection; consider adding collateral values and including housing company loans.
  - Continue efforts to develop a comprehensive commercial real estate (CRE) price index and to collect data on cross-border exposure.

- Activation of existing buffers:
  - Reactivate the systemic risk buffer once circumstances allow.

### Table of recommendations (extract)
- Time: I = immediate (within one year); NT = near term (within 1 to 3 years); MT = medium term (within 3 to 5 years).

- A. Institutional Arrangements
  - 1 Clearly define a macroprudential policy mandate for FIN-FSA and its Board. (¶9) — MoF — MT
  - 2 Formalize the practice that FIN-FSA Board member from BoF serves as the chair of the Board in macroprudential policy meetings. (¶10) — MoF — MT
  - 3 Refine the accountability of macroprudential policy by providing biannual financial stability reports that assess vulnerabilities and address the interests and concerns of each stakeholder. (¶13) — FIN-FSA, BoF — MT
  - 4 In the context of recommendation 2 in Table 1 of the FSSA (secure FIN-FSA's independence by ensuring that future Board members are not officials of Ministries), reconsider the current macroprudential policy governance to maintain a role for the MoF and MoSAH. (¶14) — MoF — NT
  - 5 Consider providing the Board of the FIN-FSA with hard powers to issue regulations on macroprudential policy, including the adoption of new instruments. (¶17) — MoF — MT
  - 6 If recommendation 5 is infeasible to implement, consider providing the Board of the FIN-FSA with power to recommend actions with a “comply or explain” principle. (¶17) — MoF — MT
  - 7 Continue to enhance the involvement of the FIN-FSA staff for macroprudential policy preparation. (¶18) — FIN-FSA — MT
  - 8 Seek to further strengthen collaboration with Nordic-Baltic macroprudential authorities in joint stress testing exercises. (¶27) — FIN-FSA, BoF — MT

- B. Systemic Risk Monitoring
  - 9 Enhance systemic risk monitoring by strengthening the analysis of disaggregated data, corporate sector vulnerabilities, and funding and liquidity vulnerabilities. (¶31) — FIN-FSA, BoF — MT
  - 10 Improve the positive credit register by broadening the scope of data collection. (¶33) — FIN-FSA, BoF — NT
  - 11 Address existing data gaps by developing a comprehensive commercial real estate price index and collecting data on cross-border exposure. (¶34) — FIN-FSA, BoF — MT

- C. Tools and Calibration
  - 12 Consider introducing a positive neutral counter cyclical capital buffer. (¶40) — MoF — MT
  - 13 Add debt-to-income and debt-service-to-income limits to the macroprudential policy toolkit. (¶46) — MoF — MT
  - 14 Redefine the loan-to-collateral limit. (¶50) — MoF — MT
  - 15 Reactivate the systemic risk buffer once circumstances allow. (¶61) — FIN-FSA, BoF, and MoF — NT

*Source: IMF Finland—Technical Note (Executive Summary).*

### 9.      Strengthening the willingness to act requires a clear macroprudential policy mandate

### 9.      Strengthening the willingness to act requires a clear macroprudential policy mandate

### Mandate and legal framing
- The Act on the FIN-FSA mentions the macroprudential objective as part of its tasks: “to ensure the stability of the financial system as a whole” (Chapter 1, Article 3), while Chapter 1, Article 1 focuses on microprudential supervision: “in charge of regulations and supervision of the individual credit institutions”.
- The greater emphasis on microprudential objectives suggests that the macroprudential mandate is not fully met, especially in “bad times.”
- Recommendation: explicitly include a primary objective for the FIN-FSA such as “maintaining the stability of the financial system as a whole” in Chapter 1, Article 1 of the Act on the FIN-FSA; this could be included in the next revision of the Act (requiring involvement of the MoF).
- To enhance FIN-FSA independence, it would be desirable not having officials appointed by MoF and MoHSA on its Board.

### Governance and chairing of macroprudential decisions
- Practice: The Board has been chaired by the Deputy Governor of the BoF since its creation in the current form in 2009, but this is not formalized in legislation.
- Recommendation: formalize that the Board be chaired by the representative from the BoF to harness central bank expertise and help shield macroprudential policymaking from political interference. Legislation amendments would be needed to codify that the representative of the BoF act as Chair of the Board.
- Alternative governance adjustments to resolve potential conflicts between microprudential independence and macroprudential design:
  - (i) creating separate Board committees for macroprudential and microprudential oversight; and
  - (ii) creating a financial stability council outside the FIN-FSA but with same composition and macroprudential powers as the current FIN-FSA Board and with the FIN-FSA operating as the secretariat of the council.

### Strategy updates and communication
- The macroprudential strategy revision published on June 28, 2022 introduced the possibility to release macroprudential measures in periods of stress to support bank lending; this is a main change compared to the 2018 version.
- Rationale: evolving vulnerabilities, new analytical insights, and toolkits warrant continuously evolving macroprudential strategy; the COVID-19 pandemic demonstrated the importance of macroprudential policy relaxation in response to unexpected negative economic shocks that emanate from outside the financial sector.
- Current transparency and accountability practices:
  - All quarterly macroprudential decisions made by the FIN-FSA Board, together with the press release and the Director General’s proposal, are made public on the FIN-FSA website.
  - The BoF publishes a macroprudential report twice a year that the FIN-FSA Board uses to support macroprudential decisions.
  - An annual stability assessment of the Finnish financial system is published by the BoF; BoF also publishes in the BoF Bulletin, BoF Economic review articles, blog posts, and communicates via interviews, lectures, and university lecture series.
- Communication enhancements recommended:
  - Use the same charts in the biannual financial stability report to show periodic assessments of vulnerabilities so readers can comprehend how risks evolve over time.
  - Consider using one concise chapter per sector’s vulnerabilities in the report to improve readability.
  - Employ tiered and targeted communication when introducing new toolkits—clearly explain advantages, costs, distributional consequences, and net benefits, especially for affected groups (e.g., lower income and younger households facing a DTI cap).
  - Provide tailored communication material explaining distributional consequences and net benefits for each stakeholder.

### FIN-FSA powers and ability to act
- Legal “hard powers” and instruments:
  - The FIN-FSA Board can issue, amend, or revoke various macroprudential policy instruments based on the Act on Credit Institutions.
  - The Board has hard powers to calibrate the CCyB and the SyRB, designate systematically important institutions, regularly update these lists, and set their additional capital surcharges.
  - The Board can introduce other macroprudential instruments outside the CRDV/CRR2 toolkit, such as an LTV limit.
  - The Board can make nonbinding recommendations to supervised entities on measures not approved by national law or regulations, such as DTI or DSTI limits.
- Information-gathering powers:
  - The FIN-FSA can request information from supervised entities and market participants when needed (Act on the FIN-FSA Chapter 3, Article 18).
  - The BoF has the right to obtain notifications, reports, and other information necessary to carry out its statutory tasks from authorities and credit and financial institutions (Act on the Bank of Finland).
- Recommendation on expanding powers:
  - Consider providing the FIN-FSA Board powers beyond measures approved in law, such as the ability to issue regulations on macroprudential policy including adoption of new instruments, to enable timely action.
  - If full hard powers are infeasible, consider semi-hard powers (allowing recommendations on a “comply or explain” basis) to increase the effectiveness of recommendations via peer pressure and public accountability.

### Internal capacity and analytical role
- The FIN-FSA has only a few staff fully dedicated to macroprudential policy analysis; current resources are sufficient overall thanks to considerable BoF resources.
- Recommendation: FIN-FSA should leverage its own strengths—expertise in supervision of individual institutions, setting financial regulations, and supervision of non-bank financial intermediation (investment funds and pension funds)—and enhance collaboration across departments to inform macroprudential analysis (e.g., microprudential information on institutions’ expected responses; investment portfolio information to assess vulnerabilities related to wholesale funding reliance).

### Coordination and cooperation
- Domestic:
  - FIN-FSA Board composition includes representatives from BoF, MoF, and MoSAH, providing a formal coordination mechanism and multiple layers of review.
  - BoF’s role: formal mandate for financial stability (Act on the BoF Chapter 1, Article 3); primarily responsible for systemic risk analysis and vulnerabilities; prepares the Macroprudential Report and supports macroprudential decision making together with FIN-FSA staff; proposes one representative to the FIN-FSA Board.
  - MoF and MoSAH: each required to have one member on the FIN-FSA Board; responsible for proposing legislative amendments in banking and insurance sectors respectively; contribute to staff-level discussions.
- European:
  - As part of the EU’s SSM, the macroprudential mandate is shared between Finnish authorities and the ECB.
  - For quarterly macroprudential policy meetings on CCyB and other tools, the ECB is provided official notification of intended policy decisions ten working days prior to final decisions; the ECB can object within five working days (SSM regulation). FIN-FSA provides informal information ahead of official notification.
  - ECB assesses systemic risks for the Macroprudential Forum; assessments are discussed in the ECB Financial Stability Committee and substructures.
  - The ESRB: responsible for macroprudential oversight at EU level; can issue nonbinding warnings and recommendations subject to a “comply or explain” procedure; country authorities implement measures subject to notification and coordination with the ECB.
  - Dialogue with the ESRB occurs through preparations for ESRB General Board meetings, Advisory Technical Committee discussions, bilateral written procedures, informal discussions, and a quarterly survey on systemic risk and macroprudential policy.
- Nordic-Baltic cooperation:
  - Finland participates actively in the Nordic-Baltic Macroprudential Forum (held twice a year) due to high interconnectedness and contagion risk across the region; the forum served as an important venue during the COVID-19 pandemic to discuss macroprudential measures.

_Italic: Source: 1finea2023005 - 9.      Strengthening the willingness to act requires a clear macroprudential policy mandate_

### 26.      There was an update on the Memorandum of Understanding (MoU) between the

### 1finea2023005 - 26.      There was an update on the Memorandum of Understanding (MoU) between the

### Memorandum of Understanding (MoU) and regional cooperation
- The MoU updated in 2018 covers Nordic and Baltic authorities responsible for financial stability and was signed by all Nordic-Baltic central banks, financial supervisory authorities, resolution authorities, and relevant ministries.
- Purpose: enhance cooperation and coordination in promoting financial stability, preventing financial crises, and establishing common procedures for information sharing and coordination.
- The MoU between Nordic supervisors and the ECB in 2016 contains the principle of full reciprocity of macroprudential tools in line with ESRB recommendations; these reciprocity measures help mitigate cross-border leakages between Nordic countries.
- Recommendation: authorities should seek to expand Nordic-Baltic regional cooperation arrangements (for example, a joint stress testing exercise to assess banking and nonbank financial intermediation sector vulnerabilities).

### Systemic risk monitoring: framework, indicators, and tools
- Monitoring approach:
  - The Bank of Finland (BoF) and the FIN-FSA analyze a broad set of indicators and use multiple quantitative methodologies for systemic risk assessments.
  - The BoF monitors indicators cited in academic studies to predict banking crises in the medium term, including credit-to-GDP gaps, change in the banking sector balance sheet, real housing prices, and a heat map of vulnerabilities in the banking sector.
  - The BoF uses a financial market stress indicator calculated from various financial market data to assess short-term financial stress (quantified stress during the GFC, European debt crisis, and the COVID-19 pandemic).
  - Quantitative models used by the BoF include: (i) early warning models of financial crisis; (ii) asset price and real estate valuation models; (iii) contagion risk models; plus scenario analyses and stress test exercises jointly with FIN-FSA.
  - The BoF supplements quantitative analysis with regular qualitative information from private banks, financial market participants, and entrepreneurs.
  - The FIN-FSA conducts multi-faceted systemic risk analysis: financial position, risks, resilience of the Finnish financial sector; impacts of capital-based macroprudential measures; institution-level analysis based on bilateral exposure data; granular-data analysis using quarterly data from large deposit-taking banks on large bilateral exposures and quarterly institution-level data on life and non-life insurers’ investment portfolios; security-by-security data to analyze interconnectedness.
- Role of reports:
  - Quarterly Macroprudential Report supports policy decision making; covers macroprudential risks and highlights developments in key indicators including credit-to-GDP ratio, real house prices, private sector credit growth, and current account-to-GDP ratio.
  - Annual financial stability report and Bank of Finland Bulletin cover topical issues and explain key financial stability issues.
- Suggested enhancements:
  - Develop granular data analysis using a positive credit register, AnaCredit, and Securities Holdings Statistics; build capacity by hiring and training staff.
  - Further develop corporate sector vulnerability analysis using firm-level data (indicators such as quantiles of interest rate coverage ratios, leverage ratios, expected default frequencies).
  - Strengthen liquidity and funding analysis: monitor wholesale funding market conditions, high-quality liquid assets held by banks, and FX positions by currency.

### Data initiatives, gaps, and the positive credit register
- Positive credit register:
  - Will cover broad exposures not limited to mortgage loans and include loans by all companies that issue loans to private individuals and the self-employed.
  - Legal act submitted to Parliament in early 2022.
  - First stage (focused on consumer credit) expected to be used in macroprudential analysis and financial market surveillance from the first half of 2024.
  - Second stage (will cover broader reported items) expected in Spring 2026.
  - Reported items include: amount of credit granted and drawn, currency, method and interval of repayment, last due date, total interest charged, interest margin, basis for determining interest, length of interest rate determination period, end date of fixed interest period and its basis, interest hedging (cap or tube), whether credit is secured, type of collateral, personal identification number of guarantor, start and end dates of repayment period agreed, amount of installment paid, amount of interest paid, paid credit costs other than interest, and credit balance after repayment.
  - Shortcoming: collateral value will not be included — important for estimating LTV ratios (the main borrower-based macroprudential policy tool).
  - Housing company loans (~16 percent of housing loans) are not included because the debtor is the housing company; authorities should add housing company loans to the register urgently because households effectively service these debts.
- Other data gaps and recommendations:
  - Develop a comprehensive commercial real estate (CRE) price index; Statistics Finland has launched a pilot but publication timeframe is open.
  - Improve collection of cross-border exposures data (syndicated loans, international bonds, institutional investors, real estate investment funds); enhance data sharing frameworks in the EU and Nordic-Baltic regions.

### Macroprudential policy decisions, toolkit, and vulnerabilities
- Decision process:
  - Macroprudential policy decisions in Finland are based on multiple indicators and expert judgement rather than mechanical rules, consistent with IMF guidelines (IMF, 2014a).
- Current macroprudential tools and settings (as presented):
  - Broad-based Tools:
    - CCyB: Set at 0 percent — Have not imposed a positive buffer requirement.
    - CCoB: Set at 2.5 percent — Introduced as of January 1, 2015.
  - Household Sector Tools:
    - Cap on LTV (LTC cap used by FIN-FSA): 85 percent (95 percent for first-time home buyers) — Lowered by 5 percentage points as of October 1, 2021.
    - Household sector capital requirements: Inactive — A minimum risk weight level of 15 percent for mortgage loans expired on January 1, 2021.
  - Structural Tools:
    - O-SII buffers: Nordea Group: 2.5 percent; OP Group: 1.5 percent; Municipality Finance: 0.5 percent — Increased O-SII buffers of Nordea and OP Group by 0.5 percent, announced on June 28, 2022, and effective on January 1, 2023.
    - SyRB: Inactive — As of April 6, 2020, all the SyRB was released.
  - Note: LCR and NSFR are in place in Finland but authorities do not consider these as macroprudential instruments.
- Assessment of broad-based credit boom vulnerabilities:
  - Credit-to-GDP ratio has been rising gradually mainly due to increasing household indebtedness.
  - Credit-to-GDP gap has been decreasing, reflecting a slowdown of credit growth since the global financial crisis.
  - Basel III leverage ratio in the banking system is around six percent, which is above the regulatory minimum of three percent.
  - CCyB has been kept at 0 percent because credit indicators have not shown signs of excessively rapid credit growth since 2015; the Act on Credit Institutions requires FIN-FSA to set CCyB rate (between 0 percent and 2.5 percent) every quarter in cooperation with MoF, BoF, and FFSA based on the credit-to-GDP gap and complementary information. Criteria and publications are stipulated in MoF Decree 1029/2014.
  - Authorities have revised indicator sets and should remain open to alternative approaches to estimating the credit gap, including recognizing possible structural breaks.
- Crisis response and buffer releasability:
  - During COVID-19, the FIN-FSA released all SyRB requirements applying to credit institutions in April 2020 and lowered the O-SII buffer for OP Financial Group by 1 percent.
  - Observation: releasing CCyB (if available) or SyRB (without releasing O-SII buffers) might have been more appropriate given purpose of those buffers.
- Recommendation on CCyB:
  - Desirable to introduce a positive neutral CCyB in Finland over the medium term to prepare for unexpected downturns and asymmetric shocks.
  - The estimated positive neutral CCyB for the representative Finnish bank is 0.75 percent of risk-weighted assets.
  - Rationale: CCyB serves as a shock absorber of credit cycles and could be released to prevent credit crunches even when credit cycle is neutral.

*Source: 1finea2023005.*

### 41.      Although house prices have not increased much in Finland as a whole since 2008,

### 1finea2023005 - 41. Although house prices have not increased much in Finland as a whole since 2008,

### Housing market developments and regional divergence
- House prices have not increased much in Finland as a whole since 2008, but prices have increased significantly in Helsinki and other metropolitan areas.
- Regional divergence: rapid increases in Greater Helsinki area and other large cities, and declines in rural areas, reflecting increased demand in urban areas consistent with intermunicipal migration.

### Household indebtedness: levels, composition, and vulnerabilities
- Household debt as a percentage of disposable income reached record levels in 2021.
- Loan maturities also rose prior to Q2 2022.
- 95 percent of housing loans are at variable rates.
- Only 28 percent of variable-rate housing loans come with interest rate caps.
- High indebtedness combined with a high share of variable-rate loans makes Finnish borrowers vulnerable to sharp increases in benchmark interest rates and could undermine debt repayment capacity with potentially systemic implications.

### Housing company loans
- The share of housing company loans in the total stock of housing-related loans rose from 6 percent in 2004 to 16 percent in 2021.
- Housing company loans finance renovations to old residential buildings and construction of new residential units, including apartments.
- Average interest rate on loans to housing companies has been lower than loans to construction companies, contributing to higher demand for housing company loans.
- Housing company loans have higher complexity and opacity than traditional mortgage loans and warrant close monitoring.
- The FIN-FSA does not observe lending standards of housing companies such as information on shareholders, increasing potential riskiness of these loans to households.
- If one shareholder is unable to pay monthly charges and other shareholders are jointly liable, loan repayments by remaining households could be jeopardized in a period of financial stress.
- Prevalence of housing companies creates opacity in banks’ monitoring of borrowers’ liabilities and ability to repay loans.

### Macroprudential and regulatory actions taken
- Maximum LTV ratio for housing loans was reduced to 85 percent on October 1, 2021, except for first-time home buyers.
- LTV cap was first introduced as a binding limit in 2016.
- During the COVID-19 pandemic the LTV limit was raised to support credit flow.
- In Finland, the LTV ratio, set by the FIN-FSA Board, must be between 80-90 percent (85-95 percent for the first-home loans).
- On June 16, 2022, the Ministry of Finance (MoF) published a legislative proposal including:
  - (i) a maximum maturity of 30 years for housing loans and housing company loans,
  - (ii) an LTV cap of 60 percent for housing company loans (new buildings),
  - (iii) an amortization requirement for housing company loans (new buildings) during the first years after completion of the building.
- The new regulation is expected to be in force in mid-2023.
- The FIN-FSA Board issued a nonbinding recommendation on June 27, 2022, that mortgage borrowers’ total loan-servicing costs should be no more than 60 percent of their net income (referred to as “stressed” DSTI ratio).
  - In this calculation, maturity of loans should be no more than 25 years and the interest rate no less than 6 percent, except for loans with long-term interest rate hedges and fixed-rate loans.
  - The recommendation will enter into force on January 1, 2023.
  - The recommendation formalizes earlier guidance by: (i) including overall household debt rather than each loan, (ii) setting the DSTI ratio no more than 60 percent, and (iii) setting “speed limits:” a stressed DSTI ratio over 60 percent should account for no more than 15 percent of new housing loans by each lender.

### Recommendation: expand macroprudential toolkit toward borrower-based measures
- The only specific tool in place for the household sector is the LTV cap (and nonbinding recommendations).
- Income-related borrower-based measures such as DTI or DSTI limits are recommended because:
  - In housing boom-bust cycles, housing price fluctuations tend to be larger than income fluctuations; LTV caps may not be effective alone.
  - DTI/DSTI limits bind debt by current income, reducing leverage and mitigating consumption drops in recessions.
- Introducing DTI and DSTI limits for the FIN-FSA Board requires legislative change.
- A sectoral SyRB is an alternative under CRDV (can target high DTI, DSTI, or specific geographic locations) but:
  - DTI/DSTI are preferred as they target borrowers directly and are more effective in preventing leakages.
  - Sectoral SyRB is an additional capital buffer on top of existing buffers, whereas DTI/DSTI do not require additional capital buffers.

### Model-based analysis of borrower-based tools
- Analytical work using a heterogeneous agent model compares two borrowing-limit scenarios: LTV cap and DTI cap.
- When an unexpected negative income shock hits the economy:
  - A larger and persistent consumption drop is observed in the LTV scenario compared to the DTI scenario.
- Findings:
  - DTI limits mitigate the decrease in consumption in recessions by restricting highly leveraged households.
  - LTV caps allow purchase of larger houses regardless of income, enabling higher leverage and larger debt burdens.
  - No significant difference in consumption of lower-income households under LTV or DTI regimes.
  - For middle-income households, a DTI limit is preferred because middle-income households are more likely to become low-income when negative income shocks occur; the resulting consumption decrease is larger under LTV than DTI for middle-income households.
- Details of modeling and results are described in a forthcoming companion IMF working paper.

### Loan-to-collateral (LTC) definition and recommendations
- The LTC cap in Finland is calculated on a lenient value basis: besides the dwelling to be purchased, a wide range of other collateral offered by the borrower (and accepted by the lender) can be taken into account.
- An LTC ratio that includes additional collateral undermines the instrument’s effectiveness to contain a housing market boom.
- The FIN-FSA has proposed to the MoF to limit collateral in accordance with the ESRB recommendation to limit collateral to mortgages in legislation, but there are no specific plans to revise definitions.
- Authorities should assess whether it is appropriate to include collateral other than the dwelling and determine the right limit in the LTC cap based on granular data analysis.

### Corporate sector vulnerabilities
- Bank loans to nonfinancial corporations (NFCs) have held steady at around 20 percent of GDP since the leadup to the GFC; these loans are mainly to real estate, manufacturing, and electricity and gas sectors (half of the loans).
- The real estate sector accounts for a quarter of corporate loans.
- Some corporate sector loans originate as housing company loans; housing company loans are classified as real estate loans to the NFC sector though de facto many are linked to households.
- Intercompany loans increased from 10 percent to 40 percent of GDP between 1995 and 2021, reflecting internal funding.
- Intercompany lending does not increase overall bank exposure to NFCs but the rapid increase warrants more granular data collection and monitoring.
- Direct exposure of Finnish banks to Russian corporates is limited (less than 0.1 percent of total loans in Finland).
- Around 6 percent of exports and 12 percent of imports are related to Russian trade, with shares declining since 2014; indirect effects from the war in Ukraine (higher energy prices, higher raw material costs) could weaken firm profitability, especially energy-intensive firms and pulp and travel industries in eastern Finland.
- Authorities should monitor heterogeneous corporate-sector risks by industry and trade exposure due to the war.

### Funding, liquidity, and resilience
- Retail deposits account for about half of banks’ funding; the other half is wholesale funding including covered bonds, unsecured bonds, and interbank deposits.
- Loan-to-deposit ratio was around 147 percent in Q1 2022.
- Deposits were around 38 percent in 2014 (improved deposit reliance since then).
- Average liquidity coverage ratio (LCR) in the total banking system is around 182 percent as at Q4 2021 (regulatory requirement: 100 percent).
- Average net stable funding ratio (NSFR) is around 117 percent as of Q4 2021 (requirement: above 100 percent as of June 28, 2021).
- Bank liquidity stress testing indicates Finnish banks may have insufficient liquidity to face adverse funding liquidity shocks.

### Structural concentration and systemic buffers
- Total banking sector assets were EUR 870.4 billion at end-2021, which accounts for 346 percent of GDP.
- The three largest banks—Nordea Bank, OP Financial Group, and Municipality Finance—account for 93 percent of domestic banking assets.
- FIN-FSA identifies other systemically important institutions (O-SIIs) annually based on criteria; threshold of systemic importance was lowered from 3.5 percent to 2.75 percent in 2018.
- Three banks exceed the lowest threshold of 2.75 percent and are identified as O-SIIs: Nordea, OP Financial Group, and Municipality Finance Plc.
- FIN-FSA Board decisions on O-SII buffers announced on June 28, 2022:
  - Nordea’s O-SII buffer rate will rise to 2.5 percent (from 2.0 percent).
  - OP Financial Group’s O-SII buffer rate will rise to 1.5 percent (from 1.0 percent).
  - Municipality Finance Plc buffer requirement remains unchanged at 0.5 percent.
  - Decisions enter into force on January 1, 2023.
- No global systemically important institutions (G-SII) in Finland.
- Systemic risk buffers (SyRB) were introduced in legislation from January 2018 to address non-cyclical systemic risks.
  - SyRBs were released in April 2020 to mitigate COVID-19 pandemic effects.
  - In June 2022 the FIN-FSA Board decided not to reimpose the SyRB given the weakened economic outlook from the war in Ukraine, increased uncertainty about banking system operations, and intensified risk of credit losses.

*Source: IMF staff report content (1finea2023005).*

### 60.      The new CRDV/CRR2 framework provides an opportunity to reconsider the

### The new CRDV/CRR2 framework provides an opportunity to reconsider the configuration of capital-based macroprudential tools

### Main findings on SyRB and O-SII under CRDIV vs CRDV/CRR2
- Under the CRDIV framework, the SyRB had been imposed based on “long-term, non-cyclical” risks to the banking system.
- In that regime, the SyRB was to some extent overlapping with the O-SII buffer (“too-big-to-fail” issues), which was capped at 2 percent; and the larger of the two requirements was binding.
- Under CRDV/CRR2, the SyRB is additive to the O-SII buffer, and the use of a sectoral SyRB to build resilience against specific exposures is permitted.
- European legislation explicitly prohibits from the use of O-SII and SyRB to account for the same risks (Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013, Art. 133, 7, 8c, and 9f).
- Authorities need to clarify the use of SyRB to address issues other than those covered by O-SII buffers, namely too-big-to-fail issues, including interconnectedness with the rest of the financial system.

### Policy recommendation on reintroducing SyRB
- It is desirable to reintroduce the SyRB once circumstances allow.
- The authorities’ decision not to reimpose the SyRB under the uncertainties caused by the war in Ukraine is appropriate at this juncture.
- Given macro-financial risks, such as the growing indebtedness of households, the authorities should reactivate the SyRB once economic and financial developments allow.

### Calibration of capital buffers using stress test results (Box 1)
- Purpose: Calibrate a positive neutral CCyB and the SyRB using the FSAP’s bank stress testing exercise.
- Conceptual definitions:
  - The SyRB covers noncyclical systemic risk in Finland, such as high and increasing household indebtedness.
  - The positive neutral CCyB is the cyclical component of the releasable buffer when the economy is in a neutral phase of the financial cycle and could be used as a releasable buffer when a sudden credit crunch is imminent.
- Method:
  - First, the solvency stress test estimates the drop in the CET1 ratio for each year in the simulation horizon; the biggest gap between the CET1 ratio in year 0 and the adverse scenario sets the total amount of required macroprudential capital buffers.
  - The 2022 FSAP solvency stress test results note that the capital reduction is largest in year 4, which is 7.4 percent in terms of risk-weighted assets.
  - Second, the SyRB is estimated using a sensitivity analysis isolating macro-financial vulnerabilities aimed to be covered by SyRB (here exposures to household credit and property prices). The sensitivity analysis shows that capital reduction in year 4 compared to year 0 is around 2.0 percent, which indicates the amount of SyRB.
  - Finally, taking other macroprudential buffers as given and using the estimated SyRB, the positive neutral CCyB is estimated from the residual.

### Key numeric results from the calibration
- Total capital reduction largest in year 4: 7.4 percent (in terms of risk-weighted assets).
- Estimated SyRB (from sensitivity analysis): 2.0 percent.
- Capital conservation buffer (CCoB): 2.5 percent.
- O-SII buffer for the consolidated bank in the stress test: 2.1 percent.
- Positive neutral CCyB (residual estimate): around 0.75 percent.

### Considerations on cross-border exposures and reciprocity
- The calibration assumes (for simplicity) that all exposures are domestic in the consolidated banking capital; in reality banks possess foreign exposures, and capital requirements depend on the reciprocity mechanism for the CCyB.
- Example provided:
  - If foreign exposure to country X is 40 percent of the total, and suppose 1.0 percent CCyB is set at country X, then CCyB reciprocity requires 0.4 percent of capital.
  - This indicates that the positive neutral CCyB should be set at around 0.6 percent to cover the 60 percent of domestic exposure.

*Source: Finland — IMF FSAP chapter text and Box 1 (stress test calibration).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1finea2023005.pdf_