## 1finea2023007 ## Source details **Canonical URL:** [1finea2023007](https://www.imf.org/-/media/files/publications/cr/2023/english/1finea2023007.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1finea2023007.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1finea2023007.pdf.json) --- ### Executive Summary — Scope and context - FSAP focused review assessed banking regulation and supervision of Finland’s less significant institutions (LSIs). - LSIs account for around 16 percent of Finland’s banking sector. - Regulation and supervision of significant institutions (SIs) takes place within the ECB’s Single Supervisory Mechanism (SSM). - FIN-FSA is the national supervisor for LSIs and is under ECB oversight. - Review reflects regulatory and supervisory frameworks as per April 2022. - Focus narrowed to Finnish LSIs to avoid duplication with the 2018 Basel Core Principles (BCP) assessment for the euro area. ### Executive Summary — Financial position and risks of Finnish banks - Capital adequacy ratio: 21.4 percent as of December 2021. - CET1 ratio: 17.8 percent as of December 2021. - NPL ratios as of December 2021: - Household loans: 1.3 percent. - Non-Financial Corporations loans: 2.1 percent. - Loan loss coverage: - Household loans: 19 percent. - NFC loans: 43 percent. - Loan-to-deposit ratio: around 140 percent as of December 2021 (euro area average around 100 percent). - RWA density: around 30 percent (noted as lower than EU average). - Wholesale funding high; high asset encumbrance due to covered bonds. - Mortgage lending concentration in LSIs: - Mortgage lending: 59 percent of total and 78 percent of HH loans. - 95 percent of these loans are variable rate loans linked to EURIBOR with a 0 percent floor. - FIN-FSA recommended borrower affordability checks: interest rate set at least at 6 percent and loan maturity shorter than 25 years for new housing loan applicants. - FIN-FSA estimate of exposures to Russian clients: less than 0.1 percent of total assets. ### Legal, regulatory, and institutional issues - Finnish legal framework limits FIN-FSA’s power to issue binding regulations; implementation details often reference non-binding EBA Guidelines. - Importance of supervisory action increased due to non-binding nature of guidance. - Progress since 2016 BCP assessment: - Loan-level data collection improved via regulatory report on new household mortgage loans introduced in 2016. - Legal process for a Credit Registry (initially consumer loans) near completion; expected operationalization in Spring 2024. - Pending issues: strengthen operational independence of FIN-FSA and legal protection of staff. - FIN-FSA funding and resource risks: - Supervised entities provide 95 percent of FIN-FSA financing; Bank of Finland provides 5 percent. - FIN-FSA pays BoF for administrative services (~16 percent of total expenses). - Staff expenses: 66 percent of the budget; staff expenses increased around 20 percent in 2018–2019, then around seven percent in the last two years. - FIN-FSA sees a risk that, starting in 2024, fees might not cover expenses and that the budget may lack a financial buffer. ### Institutional setting and governance - FIN-FSA Board limited to a maximum of six members; Board members appointed by Parliamentary Supervisory Council for three-year terms. - Ministries (MoF, Ministry of Social Affairs and Health) and Bank of Finland each nominate one board member; Parliamentary Supervisory Council chooses at least two further members. - Concerns: presence of Ministry officials on the Board may create appearance of lack of independence and potential conflicts. - Director General (DG) term: five years with reappointment possible; appointed/dismissed by Parliamentary Council upon Board proposal; no specific justification for removal required under law. - Administrative connection to Bank of Finland: Deputy Governor of BoF chairs FIN-FSA Board; IT and HR services supplied by BoF; FIN-FSA employees in public-service employment relationship with BoF; FIN-FSA budget approved by BoF Board in practice without adjustments. ### Supervisory approach, tools, SREP, and reporting - FIN-FSA adopted SSM LSI SREP methodology in 2019–20; SREP used to steer supervisory process and determine capital and liquidity needs. - SSM LSI SREP built on four elements: Business model assessment; Internal governance and risk management assessment; Risks to capital; Risk to liquidity. - LSI classification and assessment frequency: - ECB changed LSI classification framework effective 2022; HI LSIs identified once a year; NCAs must identify at least three HI LSIs. - FIN-FSA classified three HI LSIs in 2022. - SREP frequency: - HI LSIs: all components annually; comprehensive or base SREP annually so each risk category assessed comprehensively at least once in three years. - Non-HI LSIs: comprehensive SREP every three years. - NHI SNC LSIs: comprehensive SREP every three years. - ICAAPs and ILAAPs assessed with same frequency as SREP. - SREP process workload and governance: - Comprehensive SREP resource-intensive; takes around half a year. - Review chain: Senior Risk Experts and Heads of AML/Operational Risk Divisions → Head of Off-site Supervision Division → SREP assessment council → Management Group → final decision by DG. - SREP report shared with bank; includes P2R decision, main observations, recovery plan, ICAAP/ILAAP; banks asked for action plans. - Pillar 2 and supervisory engagements: - Pillar 2 Capital add-on (P2R) prevailing period: three years for LSIs. - P2R updates triggered by important developments (business model change, acquisition/merger, change in ownership, renewal of core systems). - On-site inspection frequency: - HI LSIs: every three years. - NHI LSIs: every five years. - NHI SNC LSIs: every ten years. - FIN-FSA rarely meets with banks’ boards; meets external auditors every 2-3 years. Recommendation: meet annually with HI LSIs’ boards and external auditors. - Stress testing: - Stress testing carried out every second year; pandemic postponed latest exercise to 2021. - FIN-FSA has not yet used stress test results to determine P2G but plans implementation during late 2022–23. ### Supervisory gaps and recommended enhancements - Increase number and scope of on-site inspections, especially on corporate governance and risk management; broaden loan portfolio on-site inspections to corporate loans, SME loans, related-party exposures, collateral valuation, loans not modified, lending processes. - Meet with banks’ boards and independent board members and external auditors at least once a year for HI LSIs. - Include assessments on board and senior management competence, collective suitability of boards, and group structure/related-party risks in SREP reports. - Assess amalgamations and their owned entities as a group from supervisory perspective even where not consolidated for accounting. - Continue regular analysis of IFRS-9 implementation (staging of exposures and ECL models); use results for targeted on-site inspections, deep-dive analysis, and dialogues with institutions and external auditors. - Investigate wider FIN-FSA use of AnaCredit data in credit risk analysis. - Ensure SREP assessments cover Supervisory Board structures in Governance and Risk Management Assessment where applicable. - Increase use of external experts in areas requiring specific expertise. ### Corporate governance, fit and propriety, and internal control functions - Law 233/2021 amended ACI: introduced collective suitability requirements and responsibility on credit institutions to ensure continuous collective suitability of boards and management qualifications/time commitment. - Gaps remain: - No explicit FIN-FSA power to request board composition change based on collective suitability assessment. - Legislation lacks rules on appointment of sufficient independent directors and independency criteria. - Audit and Risk committees for LSIs: ensure committees chaired by independent members who are not chair of the board or other committees. - Amalgamations: - Central institutions’ Supervisory Boards perform some board tasks; members had not been subject to fit and propriety assessments nor collective suitability assessment by FIN-FSA as of the review; FIN-FSA planned to complete these assessments by end-2022. - Internal control functions: - ACI requires risk supervisory, compliance, and internal audit functions with adequate position, powers, and resources. - FIN-FSA found shortcomings in LSIs’ independent control functions, notably in internal model development, ESG risks, and ICT/digitalization expertise. - FIN-FSA recommends adherence to EBA/GL/2021/05 for organizational and task details; EBA guidelines non-binding in Finland so findings reflected via P2R and supervisory recommendations. ### Data, provisioning, credit monitoring, and credit registry - Existing loan-level data: - Loan-level flow data on new housing loans to natural persons collected quarterly by FIN-FSA since 2016. - AnaCredit data on loans to legal entities collected monthly/quarterly by Bank of Finland; FIN-FSA access limited. - Positive Credit Registry: - Legal act submitted to Parliament in early 2022. - Planned launch: spring 2024. - Lenders start reporting: February 1, 2024; use of register from April 1, 2024. - Initial data coverage: consumer loans; expansion to housing company loans earliest in 2025. - Data to include borrower income information and be used in credit origination processes. - Recommendation: once operational, FIN-FSA should use Credit Registry data for supervisory purposes and consider broader use of AnaCredit. - IFRS-9 and ECL: - FIN-FSA conducted IFRS-9 ECL analysis during pandemic using EBA indicators until end-2020; found significant heterogeneity in management overlays and movements between stages. - Recommendation: conduct regular IFRS-9 analyses (e.g., annually) and use results for deep-dive reviews and discussion with external auditors. - Embedded forbearance: - Some loan agreements include automatic payment holiday options (embedded forbearance clauses); FIN-FSA recommends guiding banks to assess borrower situations when such options exist. ### Operational risk, ICT, cyber resilience, and staffing - Several LSIs renewing core banking systems; most LSIs lack sufficient IT-risk specialists in second and third lines of defense. - Operational risk supervision: - FIN-FSA carried out 12 targeted on-site inspections over 2019–21: six by Digitalization and Analysis Department on operational risk; six by Banking Supervision Department (household loans, operational risk management, IRBA models). - One inspection reviewed ECL models and staging processes with emphasis on validation, monitoring, and forward-looking information (FLI) in SICR identification. - On-site inspections in 2020–21 conducted remotely where necessary. - Staffing and capacity: - FIN-FSA currently has three specialists (soon to be two) conducting operational risk supervision (on-site and off-site) of all LSIs and insurance companies. - Rate of staff turnover in banking supervision: 18 percent. - Cooling-off periods generally not required except for DG and deputy (due to ECB SSM involvement). - Recommendation: increase FIN-FSA budget envelope to recruit and retain staff with skills across ICT, cyber, climate, and other emerging risks; broaden use of external experts while internal capacity built. ### Resolution, home-host cooperation, and supervisory colleges - FIN-FSA cooperates closely with Finnish resolution authority (FFSA); MoU updated and signed on December 21, 2021. - During early intervention FIN-FSA remains responsible authority but FFSA has joint powers (e.g., request sale prior to resolution; prepare FOLTF assessment). - Once FOLTF assessed, FFSA must decide on resolution under Resolution Act or initiate insolvency proceedings under Banking Act. - Finland hosts 44 foreign branches and representative offices; FIN-FSA is member in supervisory colleges for Svenska Handelsbanken, SEB, and Danske Bank. - Nordic MoU (December 2016, expanded 2017) covers supervisory coordination for significant branches among Finland, ECB, Denmark, Sweden, Norway; MoUs are non-binding. ### Covered bonds, exemptions, and large exposures - Covered bond issuance structures: separate mortgage bank, authorized deposit bank, or another credit institution carrying out mortgage banking. - Finland drafting new Mortgage Banks and Covered Bonds Act to replace Mortgage Banking Act; main changes include: - Collateral value increase from 70 percent to 80 percent of fair value. - Removal of maturity restrictions on covered bonds. - Inclusion of soft bullet conditions. - Clarification on balance sheet commitment assessment for consolidation group entities in other EEA states. - Use of member state option (Article 493(3) CRR) in Finnish law provides for a 90 percent exemption of nominal value of covered bonds — not aligned with Basel regime floor of no less than 20 percent. - Finnish legislation also allows full or partial exemption of exposures to parent/subsidiaries based on Article 493(3), which is not present in the Basel regime. ### Related parties, interconnectedness, and valuation practices - Interconnectedness criteria not binding in Finland; absence of binding rules may yield inconsistent interpretations by institutions. - FIN-FSA references EBA/GL/2017/15 on connected clients in non-binding national regulations. - Recent ACI changes expanded related party definition; ACI requires Board approval for loans to related parties but scope for other transactions unclear. - FIN-FSA ceased regular collection of LSIs related-party lending data; will request information during SREP. - Thematic review on valuation practices (2021) main findings: - Some banks use deed of sale or statistical model without final valuation by internal/external valuer. - Statistical models not always validated. - Shortcomings in application of international valuation standards and internal guidelines for commercial real estate. - Insufficient frequency of monitoring/revaluation for residential and commercial real estate in some banks. - In some banks, valuers not independent of credit decision-making. - FIN-FSA required entities to correct shortcomings and issued supervisory letters where needed. ### COVID-19 measures, supervisory adjustments, and data collection - Key supervisory measures and timeline: - 03/17/2020 — FIN-FSA removed SyRB and adjusted credit institution-specific requirements; structural buffer requirements fell by 1 percentage point. - 03/30/2020 — FIN-FSA recommended refraining from dividend distributions until October 1, 2020; extended to January 1, 2021, then to September 30, 2021; measure unwound on September 30, 2021. - 06/25/2020 — FIN-FSA incorporated EBA Guidelines on treatment of public and private moratoria. - 06/29/2020 — Loan cap for residential mortgage loans (other than first-home) increased to 90 percent from 85 percent; on June 29, 2021 it was decreased to 85 percent. - Supervisory activity adjustments: - FIN-FSA intensified off-site supervision in 2020–21; on-site inspections stopped at pandemic start and had not fully resumed; virtual techniques developed for inspections. - Payment holidays and forbearance: - Banks voluntarily granted significant payment holidays with durations between 3-12 months. - By September 30, 2021 most repayment holidays expired without widespread asset quality deterioration. - Heterogeneity in banks’ treatment of payment holidays and forbearance; in some banks automatic payment holiday clauses embedded in contracts led to non-identification of forbearance. - IFRS-9 and ECL during pandemic: - FIN-FSA analysis showed wide variability in management overlays and staging/coverage ratios between banks. - Recommendation: conduct such IFRS-9 analyses regularly and use findings for deep-dive analysis and dialogue with external auditors. - Data collection during pandemic: - March–December 2020: BoF, FIN-FSA, MoF conducted biweekly surveys on corporate lending. - August 2020–September 2021: FIN-FSA collected monthly credit risk surveys for all credit institutions (NPLs, forborne loans, loans under payment relief measures) not available in regular reporting. ### Key recommendations (selected, with priorities and timeframes from source) - Strengthen legal protection of FIN-FSA staff to protect against costs of defending actions/omissions in good faith. (MoF) — Priority: H, Timeframe: NT. - Secure FIN-FSA’s independence by ensuring future Board diversity, excluding Ministry officials as Board members, and require public disclosure of reasons for DG dismissal. (MoF) — Priority: H, Timeframe: NT. - Increase FIN-FSA budget envelope to recruit and retain staff across traditional and emerging risks (ICT, cyber, climate). (MoF) — Priority: H, Timeframe: NT. - Broaden use of external experts where specific expertise required. (FIN-FSA) — Priority: H, Timeframe: I. - Meet with banks’ boards and independent board members and external auditors at least once a year for HI LSIs. (FIN-FSA) — Priority: H, Timeframe: I. - Assess amalgamations and entities owned by institutions in amalgamations as a group from supervisory perspective. (FIN-FSA) — Priority: H, Timeframe: I. - Investigate wider FIN-FSA use of AnaCredit data for credit risk analysis. (BoF, FIN-FSA) — Priority: H, Timeframe: I. - Increase number and scope of on-site inspections and expand loan portfolio on-site inspection scope. (FIN-FSA) — Priority: H, Timeframe: NT. - Strengthen SREP by including assessments of board/senior management competence, collective suitability, group/related-party risks, and deeper analysis of IFRS-9 implementation (staging and ECL models). (FIN-FSA) — Priority: H, Timeframe: I. - Ensure SREP covers Supervisory Board structures in Governance and Risk Management Assessment. (FIN-FSA) — Priority: H, Timeframe: I. - Require host no-objection letters for credit institutions from non-EEA member states applying to establish subsidiaries in Finland via changes in national regulation. (MoF, FIN-FSA) — Priority: M, Timeframe: M. - Include rules for sufficient independent directors and independency criteria in legislation. (MoF, FIN-FSA) — Priority: H, Timeframe: NT. - Conduct fit and propriety and collective suitability assessments for Supervisory Board members where Board duties assigned to Supervisory Boards. (FIN-FSA) — Priority: H, Timeframe: I. - Consider binding rules on economic dependency criterion to enable FIN-FSA case-by-case decisions on groups of connected counterparties and align related-party exposures with BCP 20. (MoF, FIN-FSA) — Priority: H, Timeframe: NT. - Guide banks to assess borrower situations when automatic payment holiday options are embedded in loan agreements. (FIN-FSA) — Priority: H, Timeframe: I. - Build internal capacity for supervision of climate risks and initiate supervisory dialogue to raise LSI awareness of C&E risk impacts. (FIN-FSA) — Priority: H, Timeframe: NT. - Encourage LSIs to perform cyber security self-assessments to understand cyber preparedness. (FIN-FSA) — Priority: H, Timeframe: NT. *International Monetary Fund — Extracts from the FSAP Technical Note on LSI regulation and supervision in Finland (assessment reflecting frameworks as of April 2022).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Scope and context - The Financial Sector Assessment Program (FSAP) conducted a focused review that primarily assessed banking regulation and supervision of Finland’s less significant institutions (LSIs). - LSIs account for around 16 percent of Finland’s banking sector and the regulation and supervision of the rest of the banking sector takes place within the European Central Bank’s (ECB) Single Supervisory Mechanism (SSM). - The Finnish Financial Supervisory Authority (FIN-FSA) is under the oversight of the ECB, responsible for the supervision of LSIs. - The review reflects the regulatory and supervisory frameworks as per April 2022. - To avoid duplication with the 2018 Basel Core Principles (BCP) assessment for the euro area, the current review focuses on the regulation and supervision of Finnish LSIs. ### Financial position and risks of Finnish banks - Banking sector capital adequacy ratio: 21.4 percent as of December 2021. - CET1 ratio: 17.8 percent as of December 2021. - Non-Performing Loan (NPL) ratios as of December 2021: - Household (HH) loans: 1.3 percent. - Non-Financial Corporations (NFC) loans: 2.1 percent. - Loan loss coverage: - HH loans: 19 percent. - NFC loans: 43 percent. - Banks' high investments in digital services and population preference for digital services resulted in reductions in number of branches and personnel, supporting profitability. - Emerging supervisory challenges and skill requirements include: ICT/cyber resilience, fintech opportunities, growing sophistication of criminal threats (money laundering and terrorist financing), and environmental and climate (E&C)-related risks. - A couple of LSIs are renewing core banking systems; most LSIs lack sufficient IT-risk specialists in their second and third lines of defense. ### Legal, regulatory, and institutional issues - The legal framework in Finland limits FIN-FSA’s power to issue binding regulations; high-level provisions are stated in Acts and implementation details frequently refer to EBA Guidelines (which are non-binding). - This system increases the importance of supervision to ensure alignment with best practices. - Progress since the 2016 BCP assessment: - Loan-level data collection was improved by the introduction of a regulatory report on new household mortgage loans in 2016. - The legal process for establishing a Credit Registry (initially covering data on consumer loans) is about to be completed, and it is expected that the Credit Registry will be operationalized in Spring 2024. - Important issues remain pending: strengthening operational independence of the FIN-FSA and legal protection of its staff. - Availability of resources is a challenge for the FIN-FSA: - Under SSM arrangements, although the ECB directly supervises significant institutions (SIs), a significant share of supervisory resources come from the FIN-FSA. - The 2018 Euro Area Policies FSAP stated that around ¼ come from the ECB and rest from the NCAs. - FIN-FSA’s activities are mainly financed by supervision fees and the FIN-FSA sees a risk that, starting in 2024, fees might not cover expenses. - Recommendation: increase the budget envelope for the FIN-FSA to recruit and retain quality staff across a full range of skills and experience in both traditional and emerging risks like ICT, cyber, and climate. ### Supervisory approach, tools, and reporting - The authorities rolled out the ECB/SSM approach to the Supervisory Review and Evaluation Program (SREP) to all LSIs in 2019–20. - FIN-FSA’s SREP assessments are comprehensive and reflect a thorough analysis of LSI’s risk profile and capital requirement. - Areas for further strengthening: - Increase the number and scope of on-site inspections, especially on corporate governance and risk management frameworks of banks; broaden scope of loan portfolio on-site inspections (corporate loans, SME loans, related-party exposures, collateral valuation procedures and practices, loans that are not modified, lending processes and procedures). - Meet with banks’ board of directors and bilaterally with independent board members and external auditors at least once a year for high-impact (HI) LSIs. - Include assessments regarding board and senior management competence, collective suitability of boards, and overall group structure and risks from related parties in SREP reports. - Assess amalgamations and entities that are owned by institutions in amalgamations as a group from a supervisory perspective (even where the broader group does not constitute a group in the meaning of accounting consolidation). - Given the principle-based nature of IFRS-9 provisioning and its relative novelty, continue regular analysis on banks’ implementation (staging of exposures and functioning of ECL models) and use results for targeted on-site inspections, deep-dive analysis, and regular dialogues with credit institutions and external auditors. - Investigate whether AnaCredit data could be used more widely by the FIN-FSA in credit risk analysis. - Specific supervisory governance gap: - Amalgamations’ central institutions’ supervisory boards perform some tasks of boards of directors but members have not yet been subject to fit and propriety assessment, nor has collective suitability been assessed by FIN-FSA. The FIN-FSA plans to complete these assessments by 2022 year-end. ### Corporate governance - Law 233/2021 amending the Act on Credit Institutions (ACI) introduced enhancements: - Responsibility assigned to credit institutions to ensure continuous collective suitability of boards and that management fulfills qualification, time commitment, and fitness and propriety requirements. - Further recommendations: - Ensure that boards (or supervisory boards where applicable) include enough independent members who meet clearly determined independency criteria, particularly for central institutions of amalgamations whose boards are mostly composed of managing directors of member institutions. - Ensure supervisory boards are covered by the regulatory and supervisory framework; conduct fit and propriety assessments and collective suitability assessments where duties of the board of directors are assigned to supervisory boards. - Ensure Audit and Risk committees are chaired by independent members who are not the chair of the board or other committees. ### Data, provisioning, and credit monitoring - Continued work on IFRS-9 ECL methodology analysis is important, including benchmarking, peer review analysis, and targeted on-site inspections. - Guide banks to assess borrower situations when automatic payment holiday options are embedded in loan agreements (embedded forbearance clause). ### Capacity building and emerging risks - Strengthen FIN-FSA internal capacity for supervision of climate risks and start supervisory dialogue to raise LSI awareness of potential E&C risks on financial conditions. - Encourage LSIs to perform cyber security self-assessments to improve understanding of cyber preparedness. - Broaden use of external experts in areas requiring specific expertise. ### Key recommendations (selected, with priorities and timeframes as in source) - Strengthen the legal protection of FIN-FSA staff and ensure staff is adequately protected against the costs of defending their actions and/or omissions made while discharging their duties in good faith. (MoF) — Priority: H, Timeframe: NT. - Secure FIN-FSA's independence by ensuring that: (i) future Board members have diverse background and experience in FIN-FSA’s purview; (ii) they are not officials of Ministries; and (iii) a statement of the reasons for the dismissal of Director General is clearly in the law and publicly disclosed if a dismissal should ever take place. (MoF) — Priority: H, Timeframe: NT. - Increase the budget envelope for the FIN-FSA to recruit and retain quality staff across a full range of skills and experience in both traditional and emerging risks like ICT, cyber, and climate. (MoF) — Priority: H, Timeframe: NT. - Broaden the use of external experts in areas that requires specific expertise. (FIN-FSA) — Priority: H, Timeframe: I. - Meet with banks’ board of directors and bilaterally with independent board members and external auditors at least once a year for HI LSIs. (FIN-FSA) — Priority: H, Timeframe: I. - From a supervisory perspective, assess amalgamations and entities that are owned by institutions in the amalgamations as a group. (FIN-FSA) — Priority: H, Timeframe: I. - Investigate whether AnaCredit data could be used more widely by the FIN-FSA in credit risk analysis. (BoF, FIN-FSA) — Priority: H, Timeframe: I. - Increase the number and scope of on-site inspections, include banks’ corporate governance in on-site inspections, and expand the scope of loan portfolio on-site inspections. (FIN-FSA) — Priority: H, Timeframe: NT. - Further strengthen the supervisory approach by (considering proportionality): (i) including assessment regarding board and senior management competence, continuing collective suitability of the boards, and overall group structure and risks stemming from related parties in SREP reports; (ii) conducting further analysis on banks’ IFRS-9 implementation, more specifically regarding staging of exposures and functioning of ECL models (regular dialogue with credit institutions, bilateral meetings with credit institutions’ external auditors, benchmarking and peer review analysis and targeted on-site inspections). (FIN-FSA) — Priority: H, Timeframe: I. - Ensure that SREP assessments cover “Supervisory Board” structure in “Governance and Risk Management Assessment” and (as necessary) in other components. (FIN-FSA) — Priority: H, Timeframe: I. - Make necessary changes in national regulations to request a “no objection letter” from host authorities in case a credit institution from a non-EEA member state applies to establish a subsidiary in Finland. (MoF, FIN-FSA) — Priority: M, Timeframe: M. - Include rules on the appointment of a sufficient number of independent directors (supervisory board members) and independency criteria in the legislation. (MoF, FIN-FSA) — Priority: H, Timeframe: NT. - Conduct fit and propriety assessment and other assessments (time commitment) for supervisory board members and collective suitability assessment of supervisory boards in central institutions where and in the extent the duties of the board of directors are assigned to the supervisory board. (FIN-FSA) — Priority: H, Timeframe: I. - Consider issuing binding rules on economic dependency criterion to enable FIN-FSA to decide a group of connected counterparties and banks’ related parties on a case-by-case basis, and further align related party exposures with BCP 20. (MoF, FIN-FSA) — Priority: H, Timeframe: NT. - Guide banks to assess the situation of the borrowers in case they use automatic payment holiday options embedded in the loan agreements (embedded forbearance clause). (FIN-FSA) — Priority: H, Timeframe: I. - Build internal capacity for supervision of climate risks and start supervisory dialogue to increase the awareness of LSIs of the potential impact of C&E risks on their financial conditions. (FIN-FSA) — Priority: H, Timeframe: NT. - Encourage LSIs to do cyber security self-assessments to gain a better understanding of their level of cyber preparedness. (FIN-FSA) — Priority: H, Timeframe: NT. *International Monetary Fund — EXECUTIVE SUMMARY (selected content from the FSAP review of Finland, April 2022).* ### 5. This Technical Note (TN) discusses the main observations and recommendations of the ### 1finea2023007 - 5. This Technical Note (TN) discusses the main observations and recommendations of the assessment on LSI regulation and supervision in Finland ### Overview - The Technical Note (TN) discusses the main observations and recommendations of the assessment on LSI regulation and supervision in Finland. - The TN begins with a brief overview of the market structure and the review of the institutional setting in Finland. - The TN then discusses the main observations and recommendations regarding the supervisory approach, tools and reporting relevant to LSIs, and the legal and regulatory framework. - The final section discusses the impact of COVID-19 on credit institutions and regulatory and supervisory measures taken to alleviate the impact. ### Market Structure — key findings - The Finnish banking sector is characterized by high concentration: - "The three largest banking groups account for approximately 80 percent of the sector measured by total assets." - The banking sector is large relative to the size of the Finnish economy: - "The assets-to -GDP ratio of the Finnish banking sector is among the highest in Europe with 380 percent." - Structural changes: - Nordea Financial Services Group changed legal structure to operate most non-Swedish activities through branches; in January 2017 several Nordea subsidiary banks were changed to branches of the Swedish parent Nordea Bank AB. - "With the reverse merger and relocation in headquarters, Nordea Bank AB (domiciled in Sweden) became Nordea Bank Abp (domiciled in Finland)." - Systemically Important Institutions (SIs) and Less-Significant Institutions (LSIs): - Number of SIs increased to four after Danske Bank’s Finnish branch was classified as an SI starting from 2022. - Other SI banks: Nordea Bank, OP Group, and Municipality Finance (a non-deposit taking institution formed jointly by the municipalities). - "Although the asset size of Nordea is three times larger than OP Group, OP Group has a higher market share in Finland in main balance sheet items." - "Around 70 percent of Nordea’s balance sheet is outside of Finland." - Credit institutions composition: - "Although the number of credit institutions is nearly 230, most of these are cooperative banks and savings banks belonging to amalgamations of deposit institutions." - Among amalgamations: OP Group is an SI; POP Group, and Savings Bank Group are LSIs. - "There are seven other LSIs, five of which have the FIN-FSA as home supervisor." - "There are also 44 foreign branches and representative offices in Finland, with Danske Bank’s Finnish branch and the three branches of Svenska Handelsbanken being the largest ones." - Amalgamations of deposit banks (statutory features summarized): - Formation: by a co-operative central institution, companies in its consolidation group, member credit institutions and related companies. - General conditions include: central institution control and supervision of member credit institutions; minimum consolidated capital and liquidity control at amalgamation level; central institution liability for member credit institutions’ debts and participation in support measures; majority of member credit institutions must be deposit banks. - Central institution licensed by the FIN-FSA; obligations include supervising member credit institutions, issuing instructions on risk management, corporate governance, internal control, and standardized accounting policies. - FIN-FSA may grant exemptions to member institutions on LCR, NSFR, and for internal exposures; in practice such waivers have been granted. - Boards of amalgamations: members appointed by Supervisory Board and are mostly Managing Directors (CEOs) of member institutions, but include non-CEO members. - Financial conglomerates: - "There are three financial conglomerates led by banks." - Nordea and OP Financial Group (amalgamation) are SIs considered as financial conglomerates. - Aktia Bank, an LSI, has wholly owned subsidiaries in life insurance and fund management. - Savings Bank Group and POP Bank Group are not legally considered financial conglomerates because they are below determined thresholds. - "Although the accounts of all entities would not be consolidated since there is not a holding company that owns shares of the entities within the group, these institutions should be assessed as a group from supervisory perspective." - Financial indicators (as of December 2021 and other specified observations): - Capital adequacy ratio: "21.4 percent" - CET1 ratio: "17.8 percent" - RWA density: "around 30 percent" (noted as lower than EU average) - NPL ratios: Household loans (HH) "1.3 percent" and NFC loans "2.1 percent" as of December 2021 (also referenced as 2.2 percent in Figure 1 for NFC loans) - Loan loss coverage: HH loans "19 percent"; NFC loans "43 percent" - Loan-to-deposit ratio: "around 140 percent" as of December 2021 (euro area average "around 100 percent") - Wholesale funding is high for SIs and LSIs, largely due to a high share of covered bonds, resulting in high asset encumbrance levels. - Covered bonds and mortgage banking: - Covered bonds may be issued by a separate mortgage bank, by a deposit bank authorized for mortgage banking, or by another credit institution carrying on mortgage banking. - Most banks either established a separate mortgage bank or received authorization to engage in mortgage banking activities. - Maturities of the bonds are largely close to 10-year maturities. - Finland is in the process of issuing a new law, The Mortgage Banks and Covered Bonds Act, which will abolish the current Mortgage Banking Act and reflect changes from the Covered Bonds Directive. - Main changes in the new Act include: increase in the collateral value of mortgage loans from "70 percent" to "80 percent" of the fair value of the real collateral of the loan; removal of maturity restrictions on covered bonds; inclusion of soft bullet conditions in the legislation; and clarification of the obligation to assess risks associated with balance sheet commitment for a credit institution belonging to the same consolidation group located in another EEA state. - Footnote: "A bullet condition sets the postponement of the maturity of a covered bond." - Mortgage lending concentration and interest rate risk: - Mortgage lending is the primary business activity in Finnish LSIs: "59 percent of total and 78 percent of HH loans." - "95 percent of these loans are variable rate loans most of which is linked to EURIBOR rate with a 0 percent floor." - Interest rate rise implications: "The rise in interest rates will benefit LSIs directly but will have an indirect adverse effect on them because of a possible deterioration of credit repayment capabilities of borrowers." - FIN-FSA recommendation since 2010: for new housing loan applicants, calculate available funds with interest rate set at least at "6 percent", and loan maturity should be shorter than "25 years." - External exposures and geopolitical risk: - "Finnish banking sector’s direct exposures to Russia, Belarus, and Ukraine are limited." - FIN-FSA officials estimated exposures to Russian clients as "less than 0.1 percent of total assets." - Finnish corporations’ businesses in Russia may pose credit risk; banks and authorities adjusted their 2022 GDP growth expectations downward due to the invasion of Ukraine. ### Institutional setting — supervisory responsibilities, objectives, and powers - FIN-FSA mandate and scope: - FIN-FSA is the supervisory authority for Finland’s financial sectors; Director General participates in the Supervisory Board of the SSM. - Mandated duties: "to ensure financial stability and the necessary smooth operation of credit, insurance and pension institutions, and other supervised entities, to safeguard the interests of the insured and maintain confidence in the financial markets." - Entities supervised include banks, insurance and pension companies, investment firms, fund management companies, payment institutions, virtual currency providers, and the Helsinki Stock Exchange. - Currently, small lending institutions are not subject to supervision by the FIN-FSA but there is a government initiative to include them under the supervision of FIN-FSA. - Role within the Single Supervisory Mechanism (SSM): - The SSM is composed of the ECB and the National Competent Authorities (NCAs) and grants the ECB a leading supervisory role over banks in the EU. - "The ECB, working closely with the NCAs, is directly responsible for the supervision of SIs and oversees the supervision of LSIs as conducted by the NCAs." - FIN-FSA participates in ECB’s SI supervision via joint supervisory teams (JSTs). - ECB has direct responsibility (with proposals drafted by the NCA) for licensing withdrawal of licenses, and qualifying holdings in LSIs. - Authorization of third-country bank branches is the responsibility of the NCAs. - Governance and appointment processes: - FIN-FSA is governed by a Board limited to a maximum of six members; the Board decides overall strategy, sets operational objectives, and supervises achievement. - Board members appointed by Parliamentary Supervisory Council for a three-year term. - The Ministry of Finance, the Ministry of Social Affairs and Health, and the Bank of Finland each nominate one board member; Parliamentary Supervisory Council chooses at least two further members. - Board members appointed at recommendation of the Bank of Finland, the Ministry of Finance, and Ministry of Social Affairs are officials currently serving in these agencies. - The law requires Board members and deputy board members to be conversant with financial markets activities but does not lay out specific qualifications. - Observed governance concerns: - "As expressed in previous FSAPs, the composition of the Board, with officials from Ministry of Finance and Ministry of Social Affairs serving as board members, creates the appearance of a lack of independence." - "This structure could create conflicts between the mandate of the FIN-FSA and agenda of these Ministries." - Director General (DG) of FIN-FSA: - DG term: "five years with an opportunity to be appointed again." - Appointment and dismissal: Parliamentary Council appoints and dismisses, upon proposal by the Board, the Director General; "No specific justification for removal is required, although there had never been a situation where the Parliamentary Council has removed the DG." - Administrative links with the Bank of Finland (BoF): - The FIN-FSA operates administratively in connection with the Bank of Finland. - The Deputy Governor of the Bank of Finland is the Chairman of the FIN-FSA Board. - FIN-FSA’s IT and HR functions are supplied by the BoF. - FIN-FSA employees are in a public-service employment relationship with the Bank of Finland. - Salary level of FIN-FSA employees is determined by the BoF. - The FIN-FSA budget should be approved by the Board of the BoF; in practice no adjustments are made by the BoF Board because it participates in processes prior to FIN-FSA’s submission of the budget to the BoF Board. - Regulatory powers and limits: - Because of the Constitution, FIN-FSA's direct regulatory role is narrow and comprises mainly regulations of a technical nature. - Authorization to issue binding regulations by law is limited and requires a special reason and precise circumscription in the law. - FIN-FSA may issue non-binding guidelines; in practice most non-binding guidelines include FIN-FSA’s recommendations on compliance with guidelines and recommendations issued by the European supervisory authorities. *This Technical Note was prepared by Ebru Sonbul Iskender (IMF).* ### 22. The FIN-FSA’s organizational structure has changed since the previous FSAP. With this ### 1finea2023007 - 22. The FIN-FSA’s organizational structure has changed since the previous FSAP. With this ### Organizational changes and structure - Departments are organized on a sectoral basis: Banking Supervision, Insurance Supervision, and Capital Markets Supervision Departments, plus two supporting Departments (Digitalization and Analysis, Legal Department), and a supporting department for the DG. - Banking supervision organization adapted to conform to the structure of the ECB—with dedicated teams devoted to on-site inspections. - Figure reference: Finland: Organization Structure of the FIN-FSA (Source: FIN-FSA). ### Management, governance, and performance - Department and division heads form a “Management Group” providing an advisory function for the DG. - Internal written procedure (approved by the Parliamentary Supervisory Council): matters essential and important for supervision to be handled by the FIN-FSA Management Group. - The Management Group meets at least weekly. - Decision-making power rests with the DG supported by Management Group members. - The Management Group develops performance targets and performance measurements and submits these to the FIN-FSA's Board for approval. - Performance targets and Key Performance Indicators are public and included in the Board’s yearly report to the Parliamentary Supervisory Council. - Implementation of inspections and thematic reviews were significantly lower than target levels for 2017–19. - Note: These measures were not used in 2020 because of the COVID-19 pandemic. ### Legal protection of staff - Existing framework: Tort Liability Act — the State vicariously liable for damages caused by an employee through an error or negligence at work; public official liable for damages for injury or damage caused by him/her through an error or omission at service. - Third parties may take legal action directly against FIN-FSA officials and staff. - Constitution: officials held liable in case of unlawful act or omission. - Gap identified: no provision protecting staff against the costs of defending their actions and/or omissions made while discharging their duties in good faith. - Recommended: legal protection of FIN-FSA officials and staff should be strengthened (as expressed in the previous FSAP). ### Funding, budget composition, and financial solvency risk - FIN-FSA operations and activities financed mainly by levying supervision fees and various processing fees. - Supervised entities provide 95 percent of the financing needed to cover FIN-FSA activities; remaining 5 percent comes from the Bank of Finland. - FIN-FSA pays the Bank of Finland for its administrative services, which constitutes around 16 percent of total expenses. - Staff expenses account for 66 percent of the budget. - Staff expenses increased around 20 percent in 2018 and 2019 due to Nordea’s change in domicile, then slowed to seven percent in the last two years. - The Board decides supervision fees within maximum limits provided in Act on the Supervision Fees of the FIN-FSA. - Starting from 2024, the FIN-FSA sees a risk that its financial solvency may be uncertain depending on how the economic situation of the financial sector and the supervised entities develop. - If key financial figures of supervised entities do not increase in coming years, even when using the maximum supervision fees allowed by law, there would no longer be a financial buffer in the FIN-FSA’s budget, and a risk that supervision fees won’t cover all FIN-FSA’s costs. ### Resource availability and skills - Creation of the SSM and placement of SIs under ECB direct supervision has not freed resources; supervision has become more intrusive and requires more resources. - Under SSM arrangements, although the ECB directly supervises SIs, a significant share of supervisory resources come from the FIN-FSA. - FIN-FSA directly supervises LSIs under general oversight of the ECB; SSM LSI methodology derived from the SI methodology and is significantly more comprehensive compared to FIN-FSA’s pre-SSM approach. - Emerging risks requiring new skills: cyber resilience, fintech opportunities, threats from criminal activity (money laundering and terrorist financing), and E&C related risks on banking. - Importance stressed: necessary resources should be made available to FIN-FSA, possibly through an increase in the budget envelope, to recruit and retain quality staff across the full range of skills and experience in both traditional and emerging risks like ICT, cyber, and climate. ### Staffing, turnover, and external expertise - Rate of staff turnover in banking supervision: 18 percent. - Redomicilation of Nordea led to hiring new supervisors; many new hires have left for private sector positions. - FIN-FSA generally does not have cooling-off requirements; a cooling-off period applies only to the Director General and her deputy due to ECB SSM Supervisory Board involvement (stipulated in ECB policies). - The Act on the Financial Supervisory Authority (AFA) authorizes FIN-FSA to employ an auditor or other outside expert advisor for supervision requiring special expertise; this option is not commonly utilized. - Suggested consideration: use external experts with specific expertise until FIN-FSA can fill relevant skill gaps. ### Cooperation, home-host relationships, and resolution coordination - FIN-FSA works in close cooperation with Financial Stability Authority (FFSA), the Finnish resolution authority. - Roles: FIN-FSA responsible for supervision of credit institutions on a going-concern basis and has powers to apply Early Intervention Measures (EIM); FFSA conducts annual preparatory measures on going-concern (resolution plans, setting MREL requirements, ensuring resolvability, collecting contributions to the resolution fund). - FFSA must consult FIN-FSA on resolution plans, MREL requirements, and removal of substantive impediments to resolution for LSIs. - During early intervention, FIN-FSA remains responsible authority but FFSA has joint powers (e.g., order institution to search for a buyer prior to resolution; preparing the Failing or Likely to Fail (FOLTF) assessment). - Once an institution is assessed FOLTF (by FIN-FSA or FFSA), FFSA must decide on resolution according to the Resolution Act or initiate normal insolvency proceedings based on the banking act. - Memorandum of Understanding (MOU) between FFSA and FIN-FSA updated and signed on December 21, 2021; lists information to be exchanged and obligations under recovery and resolution planning, use of EIMs, and crisis management. - FFSA and FIN-FSA meet regularly to discuss LSIs. ### Home-host activity and supervisory colleges - Finland hosts foreign branches and subsidiaries, but Finnish LSIs do not have many operations abroad. Note: Only one LSI has a branch in an EEA country. - FIN-FSA is a member in supervisory colleges of Svenska Handelsbanken, Skandinaviska Enskilda Banken and Danske Bank. Swedish FSA chairs colleges for SHB and SEB; Danish FSA chairs for Danske Bank. - FIN-FSA participates in college work based on risk-based evaluation, providing home authority with risk assessment statements when necessary. - FIN-FSA completed SREP of SHB’s Finland branch and Danske Bank’s Finland branch and provided reports to home supervisors. - Danske Bank’s Finland branch classified as significant institution starting from January 1, 2022 and thereafter to be supervised by the ECB. - Nordic MoU of December 2016 (expanded in 2017) between Finland, the ECB, Denmark, Sweden, and Norway covers supervisory coordination areas for significant branches; MoU provisions include information exchange, communication with the bank, consumer protection supervision, reciprocity of prudential requirements, on-site inspections, consultation of the host supervisor before capital and liquidity SREP decisions and recovery plan assessments, and host supervisors’ right to provide assessments prior to decisions on internal models. - Caveat: MoUs are non-binding and their functionality during crises remains untested in the Nordic context. ### Supervisory approach, organization of banking supervision, and deployment of staff - Redomicilation of Nordea in Finland led to structural change: banking supervision department previously had two divisions responsible for on-site and off-site supervision; now has five divisions. - Two off-site supervision divisions dedicated to ongoing supervision: one responsible for day-to-day supervision of Nordea with the ECB; the other supervises 3 SSM institutions and LSIs, where approximately 9.0 FTEs (out of 18) are allocated to LSI supervision. - On-site Inspections and Models Division assesses banks’ internal models and conducts on-site supervision of SIs and LSIs. - Banking Risk Area division supports LSI supervision horizontally, performs sectoral analysis and thematic reviews for LSIs, and is responsible for reviewing and performing quality assurance for every LSI SREP. - Legal Issues in Banking Supervision Division provides legal support in qualifying holding and fit and proper assessments. - Majority of banking supervision staff are experienced in banking business. - The Digitalization and Analysis department supports Banking Supervision in areas including regulatory reporting, macro-prudential supervision, analysis of the banking sector, AML & CFT supervision, operational risk supervision of LSIs, and all banks’ conduct supervision. - Prospective transfer of regulatory and supervision responsibility of consumer lending institutions would add responsibilities to both departments. ### SREP methodology adoption and implementation - Since the 2016 FSAP, FIN-FSA has adopted the SSM LSI Supervisory Review and Evaluation Process (SREP) Methodology. - SREP is the main tool to steer the supervisory process and assess ongoing nature, impact, and scope of risks for LSIs; it is comprehensive and forward-looking to determine capital and liquidity needs. - SSM SREP for LSIs built on four elements (see Box 2): Business model assessment; Internal governance and risk management assessment; Risks to capital; Risk to liquidity. - Methodology aims to foster convergence among NCAs in SSM, creation of minimum level playing field, and continuum between SI and LSI supervision. - SREP methodology allows flexibility to account for proportionality and specifics of LSI population; areas with notable flexibility include risk-by-risk quantification of capital and liquidity needs and stress tests. - NCAs must define minimum supervisory measures on a risk-based basis, determined by institution ratings and SSM prioritization methodology classifying LSIs as high-priority (HP), medium priority, or non-high priority (non-HP). - FIN-FSA determined three groups for minimum engagement levels: intensified, enhanced, and standard. ### LSI classification, assessment frequency, and workload - ECB changed the classification framework of LSIs effective in 2022: impact and risk criteria assessed separately. - High-impact (HI) LSIs determined once a year for each SSM-participating country. Criteria for HI include: (i) size, (ii) importance for the economy, (iii) potentially significant institution, (iv) cross border activities, and (v) business model. - NCAs must identify at least three HI LSIs; if fewer than three meet criteria, HI status assigned to next largest LSI (by total assets). - FIN-FSA classified three HI LSIs in 2022. - LSI categories in FIN-FSA classification: three HI LSIs; four non-high impact LSIs; two non-high impact, small non-complex LSIs (NHI, SNC LSIs). - Assessment frequency: - For HI LSIs: all components of SREP assessed annually; a comprehensive or base SREP assessment for every risk category annually (MYA) so each risk category assessed comprehensively at least once in three years. - For non-HI LSIs: comprehensive SREP including all material risks every three years. MYA can be applied for NHI-LSIs if appropriate. - NHSNC LSIs: comprehensive SREP every three years. - ICAAPs and ILAAPs assessed during SREP assessments with same frequency as SREP. - For all LSIs, all material risk categories and sub-categories are analysed; for non-high impact LSIs, scoring and narrative provided only at risk category level. - For HI LSIs, scoring and narrative mandatory for credit risk/concentration and operational risk/ICT sub-categories. - Comprehensive SREP assessment is resource-intensive and takes around half a year. - Process involves review of banks’ policies, procedures, regulatory reports, management information, internal audit reports, board and committee minutes, external audit reports, on-site inspection reports, thematic reviews, and interviews with senior management (CEO, CRO, CFO, Head of Internal Audit, Head of Compliance). - Base assessment requires approximately two times less resources than a comprehensive one. - Review and approval chain: Senior Risk Experts and Heads of AML/Operational Risk Divisions (risk-by-risk) → Head of Off-site Supervision Division (whole) → SREP assessment council (Heads of Banking Supervision Divisions and Heads of AML/Operational Risk Divisions) → Management Group for review → final decision by DG. - FIN-FSA shares SREP report with the respective bank; the report includes SREP P2R decision, main observations on four components, the bank’s recovery plan, and ICAAP and ILAAP documents. Banks are asked to deliver an action plan; off-site supervision monitors realization. ### Pillar 2 and supervisory engagements - Pillar 2 Capital add-on (P2R) prevailing period: three years for LSIs. - Change of P2R in under three years occurred once when yearly SREP assessment led to P2R change. - Changes in quantitative key indicators captured through quarterly monitoring. - LSI P2R should be updated in case of important developments (business model change, acquisition/merger, change in ownership, renewal of core systems) that increase institution risks before being reflected in financial results. ### Recovery plans, inspection frequency, and dialogue with management - Recovery plan assessments: annual for all LSIs except NHI, SNC LSIs. - On-site inspection frequency: - HI LSIs: every three years. - NHI LSIs: every five years. - NHI SNC LSIs: every ten years. - Dialogue with management: determined to be every three years for all bank categories. - For HI LSIs: meetings with senior management annual; meetings with auditors bi-annual. - Current practice: FIN-FSA rarely meets with banks’ board of directors, and meets external auditors every 2-3 years. - Recommendation: FIN-FSA is recommended to meet annually with HI LSIs’ Board of Directors and external auditors to discuss risk profile, main developments, and plans. *Source: 1finea2023007 (FINLAND, INTERNATIONAL MONETARY FUND).* ### 43. The FIN-FSA has implemented the LSI stress testing process according to the EBA’s ### 43. The FIN-FSA has implemented the LSI stress testing process according to the EBA’s ### Stress testing, P2G, and supervisory timelines - Stress testing is carried out every second year; the COVID-19 pandemic postponed the latest stress testing one year further to 2021. - The FIN-FSA has not yet used the stress test results for determining the P2G to the LSI sector, but it plans to implement the methodology according to the ECB’s guidelines developed for the LSIs (according to current plan during late 2022–23). - The ECB expected NCAs to implement the P2G by 2021, in line with the revised EBA Guidelines on SREP. ### ECB/SSM oversight and FIN-FSA supervisory priorities - The ECB’s oversight function works closely with national supervisors to foster a common application of rules and consistent application of “joint supervisory standards” across the Eurosystem for LSIs. - For Finnish authorities, ECB/SSM supervisory priorities inform supervisory priorities for Finnish LSIs. - FIN-FSA identified its 2022 supervisory priorities as credit risk, governance, and IT/Cyber risks among others. - Work begun in 2021 on two LSI supervisory priorities (integration of climate risk in supervision, supervision of digitalized banking sector) is planned to continue in upcoming years. - Resource constraints at the FIN-FSA limit dedication for ad-hoc inspections or horizontal ECB projects, although the FIN-FSA delivered all requested data to ECB activities. ### LSI scoring and reporting - LSIs are rated quarterly by the FIN-FSA on a scale from one to four (one being the highest and four the lowest). - Starting point: automatic scores generated by indicators; expert judgement may adjust scores where automatic scoring is insufficient. - The table of scorings and overall rating is attached to the quarterly report prepared by Financial Analysis division. - Any changes to overall ratings or causes for concern are communicated to the Management group when presenting the quarterly results of the banking sector. ### On-site inspections and operational risk supervision - Over 2019–21, the FIN-FSA carried out 12 targeted on-site inspections: - Six by the Digitalization and Analysis Department on operational risk topics. - Six by the Banking Supervision Department on household loans secured by residential real estate, prudential operational risk management and IRBA models. - Household loan inspections focused on review of individual modification of payment programs and reviewed credit files to estimate bank processes for: - recognition of forbearance exposures; - identification, probation, recovery, and link to non-performing identification. - One inspection reviewed documentation related to provisions and ECL models to assess staging process, SICR identification, validity of methods and models to calculate ECL amount and their validation, with emphasis on validation, monitoring, and inclusion of FLI in SICR identification and ECL calculation. - Findings had implications for loan classification and provision amounts but were not directly reflected in accounting. - The Banking Supervision Department launched four on-site inspections in 2019 and 2020. Inspections in 2020 and 2021 were conducted remotely via virtual interviews, walkthroughs, data analysis and documentation received from banks. - Several LSIs are renewing core banking systems, increasing the need to intensify supervision on operational risk, specifically ICT risk. - Operational risk is assessed via SREPs and on-site inspections: - Digitalization and Banking Services Department prepares operational risk assessments in SREPs. - On-site Inspections and Models division conducts on-site inspections. - There is a multi-year interval for operational risk on-site inspections in a single bank; inspections usually focus on specific areas or services rather than full-scope operational risk. - Current resources at the FIN-FSA allow two or three targeted on-site inspections on operational risk annually. - Banks are required to self-assess operational risks annually; this self-assessment does not include cyber risk aspects. - Most LSIs lack necessary resources at second and third line of defense levels for ICT risks, increasing importance of FIN-FSA supervision. - Current specialist staffing: "There are currently three specialists (soon to be two) that conduct operational risk supervision (on-site and off-site) of all LSIs and insurance companies." ### Thematic reviews, sectoral reporting, and SREP enhancements - FIN-FSA conducts thematic reviews covering all banks or just LSIs using questionnaires to detect unwarranted practices or patterns; follow-up can include supervisory letters or discussions with bank management. - The Banking Supervision Department conducted three thematic reviews in the last three years. - FIN-FSA prepares a quarterly banking sectoral analysis report covering all risk areas; a non-bank-specific version is published on FIN-FSA’s website twice a year. - SSM LSI SREP methodology adoption improved comprehensiveness of supervisory approach but further improvements are identified: - SREP assessments could include assessment of board and senior management competence, collective suitability of boards, overall group structure, and risks from related parties. - In some banks, board tasks are assigned to a different body (Supervisory Board) per statutes; SREP must ensure coverage of such structures in “Governance and Risk Management Assessment.” - Supervisory approach could be improved by conducting analysis on banks’ IFRS-9 implementation, specifically regarding staging of exposures and functioning of ECL models. - Suggested measures: regular dialogue with credit institutions, analysis work, bilateral meetings with external auditors, benchmarking and peer review analysis, and targeted on-site inspections. ### Supervisory reporting, credit registry, and loan-level data - FIN-FSA applies Common Reporting (COREP) and Financial Reporting (FINREP) and has national regulatory reporting requirements collected annually, including: - Stock of loans and guarantees, overdue and non-performing assets and impairment losses report (covering only loans to Finnish housing corporations); - Interest rate risk report; - Loan to collateral report; - Calculation and reporting of capital adequacy of financial and insurance conglomerates report; - Reporting of mortgage bank operations. - FIN-FSA collects risk assessment questionnaires (related to AML/CFT supervision) on an annual basis. - Regulatory reporting may vary by LSI classification and legal status: - NHISNC LSIs’ reporting obligations will be simplified after formal classification approval. - Finnish subsidiaries of foreign (non-SSM) banks have more comprehensive solo-level reporting obligations than domestic credit institutions. - Branches of foreign banks have fewer mandatory regulatory reports. - Finland does not have a public credit register; an existing credit bureau is 'negative' (reports only delinquencies). - FIN-FSA does not receive regular reporting on defaults of individual counterparties; such information is requested in connection with credit risk inspections. - Preparatory work for a Positive Credit Registry: - Data content completed and the legal act governing the Positive Credit Registry was submitted to the Finnish Parliament in early 2022. - According to current plans, the Positive Credit Registry will be launched in spring 2024. - Lenders start reporting information on February 1, 2024 and can start using the information in the register from April 1, 2024. - Initial data will cover consumer loans and will be expanded gradually to include housing company loans. - Authorities plan to add housing company loans to the database at the earliest in 2025. - The data will include income information on borrowers and is expected to provide a more comprehensive overview of the credit market (e.g., loan sizes and numbers, repayment methods, interest rate hedges, interest margins and arrears). - Lenders will be required to review the data on their loan applicants during the credit origination process. - Existing loan-level data collection: - Loan-level flow data on natural person’s new housing loans is collected quarterly by FIN-FSA (since 2016) to monitor compliance with binding loan-to-collateral limits. - Loan-level data on banks’ loans to legal entities (AnaCredit) is collected monthly/quarterly by the Bank of Finland and occasionally used by FIN-FSA; access within FIN-FSA is limited and results cannot be shared without corresponding access rights. - It is important that after the credit registry is operationalized its data be used for supervisory purposes by FIN-FSA. ### Climate-related risk supervision - ECB published Guide on climate-related and environmental risks in November 2020; Guide expects institutions to consider C&E risks in strategy, governance, risk management, including stress testing. - In early 2021, ECB asked SI institutions to conduct self-assessments against Guide expectations and draw up implementation plans; ECB assessment found none of the SIs close to full alignment. - ECB and NCAs conducted supervisory dialogue with each SI via Joint Supervisory Teams between August and September 2021. - ECB Banking Supervision in 2022 will carry out a climate stress test as a learning exercise and a thematic review to assess bank progress; supervisors will conduct on-site inspections and engage with institutions with material deficiencies. - FIN-FSA’s approach for LSIs is yet to be decided; FIN-FSA has not started supervisory dialogue with LSIs on C&E risks. - Recommendation: FIN-FSA should build internal capacity for supervision of climate risks and start supervisory dialogue to increase LSI awareness of potential C&E risk impacts. ### Legal and regulatory framework — Basel III, CRR II, CRD V, and Finnish transposition - CRD IV and Capital Requirements Regulations (applicable per January 1, 2014) implemented the June 2011 revised Basel III framework and liquidity coverage ratio. - CRR II (effective June 28, 2021) complements the framework with: - implementation of the Net Stable Funding Ratio (with a proportionate approach for small and non-complex institutions); - leverage ratio (for SIs as well as LSIs); - standardized approach for counterparty credit risk (with a proportionate approach for LSIs); - some Pillar 3 changes; - completion of the 2014 Basel Supervisory framework for measuring and controlling large exposures. - “Basel III: post crisis reforms (December 2017)” and the minimum requirements for market risk (revised by the BCBS in January 2019) have not yet been transposed into European regulations. - The European Union announced in October 2021 that it plans to delay the foreseen implementation per January 2023 to January 2025 (with a 5-year transition period, i.e., full implementation by January 2030). - CRR II and CRD V were transposed into Finnish legislation through amendments to the Act on Credit Institutions (ACI) on April 1, 2021. Most relevant ACI changes involve: - Supervisory measures and powers: specifications on setting a pillar 2 requirement and a new pillar 2 guidance on discretionary own funds requirement. - Recalibration of macroprudential toolkit: - systemic risk buffer applied in addition to higher of the O-SII and G-SII buffers; - possibility of simultaneous use of the requirement for all exposures (general systemic risk buffer) and one or more claims for partial exposures (sectoral systemic risk buffer); - removal of possibility to impose several different additional capital requirements on the basis of the same risk. - Requirements relating to organization and management of credit institutions: - introduction of collective suitability requirements for credit institutions’ board; - explicit requirement for credit institutions to ensure that composition of the Board and members of management have required qualifications. - FIN-FSA given authority to request a new standardized approach for calculating interest rate risk in the banking book (IRRBB) where a bank’s internal model is unsatisfactory. ### Licensing and changes in significant control - Under the SSM Framework Regulation Article 73, an NCA receiving an application to establish a credit institution in a participating Member State must notify the ECB and inform it of the decision time limit; NCAs assess compliance with national authorization conditions and prepare draft decisions proposing ECB grant authorization; the authorization decision is granted by the ECB. - EBA drafted RTS and ITS harmonizing authorization information requirements in 2017; these drafts have not been adopted by the European Commission. - EBA drafted guidelines on authorization of credit institutions in 2021; they entered into force on April 8, 2022. - Acquisition of qualifying holdings: - A Government Decree regulates information required, covering financial strength of acquirers and group structure. - Anyone intending to acquire directly or indirectly shares of a credit institution must notify FIN-FSA in advance if holding is at least 10 percent of share capital. - If holding increases to at least 20, 30, or 50 percent of share capital, or the credit institution would become a subsidiary, advance notification to FIN-FSA is required. - National regulations do not require host authorities to provide no objection when a credit institution applies to establish a subsidiary in Finland. - If the applicant is a subsidiary of a foreign credit institution authorized in another EEA member state, the opinion of that state’s supervisory authority shall be requested. - For branches of non-EEA credit institutions, authorization by the home state to establish a branch is required if such authorization is prerequisite under home state legislation. - Recommendation: expand the requirement to cover when a non-EEA credit institution applies to establish a subsidiary in Finland. *Source: 1finea2023007 - 43. The FIN-FSA has implemented the LSI stress testing process according to the EBA’s* ### 62. The SSM framework for enforcement and sanctioning is based on a combination of ### 1finea2023007 - 62. The SSM framework for enforcement and sanctioning is based on a combination of ### Enforcement and sanctioning framework (SSM, ECB, NCAs) - The SSM framework for enforcement and sanctioning is based on a combination of powers assigned either to the ECB or the NCAs. - Where the ECB lacks the powers to directly impose enforcement measures or sanctions on banks, it can request or instruct NCAs to act, based on the powers available to them. - According to Article 18(7) SSMR and Council Regulation 2532/1998, the ECB may impose pecuniary penalties on LSIs for breaches of ECB regulations or decisions imposing on those entities obligations vis-à-vis the ECB. - For breaches of rules on “common procedures” (granting and withdrawal of bank licenses and acquisition of qualifying holdings) for LSIs, the ECB may request the relevant NCA, pursuant to Article 18(5) of the SSM Regulation (Council Regulation (EU) No 1024/2013), to open national sanctioning proceedings. ### FIN-FSA and ECB supervisory and early intervention powers - ECB powers (Article 16 of the SSMR) can be exercised when: - the institution is breaching requirements; or - the ECB has evidence that a bank is likely to breach applicable legal requirements specified in Article 4(3) of the SSMR within the next 12 months; or - based on the SREP, the ECB considers that the arrangements, strategies, processes, and mechanisms implemented by the institution and the own funds and liquidity held by it do not ensure a sound management and coverage of its risks. - Powers available to the ECB include requiring institutions to: - apply a specific provisioning policy; - restrict or limit business operations or network of institutions; - request divestment of risky activities; - require the reduction of the risk inherent in activities, products, and systems of institutions. - The FIN-FSA is given some of these powers with the ACI and FIN-FSA Act, although narrower (footnote: FIN-FSA cannot enforce a specific provisioning policy as an early intervention power). - Under the ACI, the FIN-FSA may take supervisory actions: - (i) if it estimates on the basis of a stress test or has other weighty reasons to presume that, during the next twelve months, a credit institution probably cannot meet the requirements for authorization or its liabilities; or - (ii) if a credit institution, or a company belonging to its consolidation group, violates its obligations provided for in this Act or in the Capital Requirements Regulation. - The FIN-FSA can take early intervention measures (examples: restricting variable remuneration, obligating change in 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. - Note: in the CRD and the BRRD, supervisory powers are not linked to SREP; the ACI wording could be clearer in aligning CRD supervisory powers with BRRD early intervention powers. - These early intervention measures have not been exercised yet. Supervisory judgement is currently reflected through SREP Pillar 2 additional capital requirements and other recommendations, rather than orders/requests. ### FIN-FSA sanctioning powers - Sanctions available to the FIN-FSA: - administrative fines; - public warnings; - penalty payments. - The FIN-FSA may impose an administrative fine on anyone who willfully or negligently fails to comply with or violates specific obligations in the FIN-FSA Act or other financial markets legislation. In practice, administrative fines have been imposed for neglect of minor cases (e.g., companies that failed to submit regular reports by a given deadline). - Public warnings may be issued to supervised entities or other financial market participants that willfully or negligently violate provisions governing financial markets or regulations; public warnings may be issued only in cases other than offences covered by administrative fine and penalty payment. - Penalty payment is the administrative sanction for the most serious offences: - The FIN-FSA will impose a penalty payment on anyone who willfully or negligently fails to comply with or violates the specific provisions or decisions referred to in the FIN-FSA Act or in other legislation (e.g., the Act on Credit Institutions chapter 20). - Penalty payments not exceeding the sum of EUR 1 million are imposed by the FIN-FSA. In other cases, the penalty payment is imposed by the Market Court on proposal of the FIN-FSA. - For SIs, pursuant to Article 18 (5) SSMR, administrative fine, public warning, and penalty payment are applied only upon ECB’s request. ### Corporate governance and risk management: legal changes and gaps - Recent changes: - Law 233/2021 amended the ACI and made enhancements: credit institutions are responsible for ensuring Board composition meets requirements and that management members fulfill qualification and time commitment requirements. - Act on the FIN-FSA gives FIN-FSA power to prohibit a person from acting as a Board member or senior manager if that person: (i) has shown obvious incompetence or carelessness in performance of duties (lack of fitness and propriety) and participation may seriously jeopardize financial supervision objectives; or (ii) fails to fulfil requirements for professional competence and trustworthiness. - Gaps and recommendations: - The acts do not give explicit power to the FIN-FSA to request a change in the composition of the board based on collective suitability assessment. - Rules on appointment of a sufficient number of independent board members and independency criteria should be included in legislation; existing rules do not ensure all credit institutions have sufficient independent board members. - The Corporate Governance Code (apply to listed companies, “comply or explain”) has recommendations but not all banks are listed. - ACI requires G-SIIs, O-SIIs to have an audit committee composed of Board members, with at least one independent member, but independency criteria do not exist in the ACI. - For LSIs, an audit committee is not mandatory; if absent, Board of Directors or Board of Governors performs these tasks. - Where Audit and/or Risk committees exist in LSIs, ensure committees are chaired by independent members who are not the chair of the board or other committees. - Governance bodies in cooperative structures: - Amalgamation Central Institutions and their member banks might have a “Supervisory Board” per the Cooperatives Act; duties of Board of Directors may be assigned to Supervisory Board by statutes. - Members of Supervisory Boards are appointed by Annual General Meeting or Delegates chosen by Annual General Meeting. - ACI requires that if a Supervisory Board is assigned Board of Directors tasks, Corporate Governance and Remuneration provisions apply to the Supervisory Board to the extent of allocated tasks. - FIN-FSA detected that amalgamations’ central institutions have supervisory boards and some Board tasks are assigned to them. Members of supervisory boards had not been subject to fit and propriety assessment in their central institution role, though their roles in member credit institutions have been under supervision. - Collective suitability of Supervisory Boards had not been assessed by the FIN-FSA. FIN-FSA set a deadline of August 31, 2022 for individual applications and collective suitability assessment, and end of 2022 for supervisory assessment, for central institutions to be subject to these requirements. - SREPs would need broadening to assess Supervisory Boards to the extent they have Board of Directors tasks in Governance and Risk Management. ### Internal control functions and SREP findings - ACI requires credit institutions to have: - a risk supervisory function; - a compliance function supervising compliance with regulations and internal principles; and - an internal audit function; - and that these functions have adequate administrative position, powers, and resources. - FIN-FSA recommends supervised entities follow EBA guidelines (EBA/GL/2021/05) for organizational and task details, and roles/qualifications of heads of these functions. - SREP process assesses these functions within the “Internal governance and risk management assessment.” - FIN-FSA assessments revealed concerns in LSIs regarding knowledge and competence of risk management functions related to: - internal model development; - ESG risks; - ICT risks or digitalization. - Resourcing of the three independent control functions in LSIs continues to be a supervisory concern. - Since EBA guidelines are not binding in Finland, findings are considered indirectly in risk assessment scoring and reflected in P2R; FIN-FSA communicates SREP findings as recommendations to credit institutions. ### Credit risk, concentration, valuation practices, and large exposures - Credit risk is the most relevant risk for Finnish LSIs. - Loan advances constitute 78 percent of LSI banks’ assets as of December 2021. - The ACI grants power to the FIN-FSA to issue provisions on Credit Risk; based on this power, the FIN-FSA introduced regulations regarding: - credit analysis; - collateral management; - credit planning process; - measurement of credit risk and management information systems; - mitigation of credit risk; - credit management and customer monitoring. - Some member banks in amalgamations lack an independent credit review function; in some LSIs the independent credit review function is assigned to the risk management department on an overall portfolio basis. - Concentration: - Share of loans collateralized by immovable property in total loans is 80 percent of LSIs and 59 percent for all banks. - The share of these exposures in relation to total exposures has risen in recent years, as highlighted by the FIN-FSA. - High concentration underscores importance of assessing banks’ immovable property valuation processes and procedures. ### FIN-FSA thematic review on valuation practices (2021) — main findings - Thematic review: “Valuation practices for the residential and commercial real estate collateral of banks under its direct supervision” (2021). - Main findings: - For some banks, valuation of residential real estate collateral in connection with granting credit is based solely on a deed of sale or a valuation produced by a statistical model, even though a final valuation should be made by an internal or external valuer, according to EBA Guidelines on loan origination and monitoring. - The statistical model used to assist the valuer is not always validated, nor its reliability verified. - Some banks have shortcomings in use of international valuation standards and in internal guidelines on valuation methods for commercial real estate credit granting. - In monitoring and revaluation of market values of residential real estate, some banks need to ensure monitoring is carried out with sufficient frequency. - For commercial real estate, some banks lack capacity for more frequent monitoring when the market situation changes. - In some banks the residential and commercial real estate valuer responsible for revaluation is not independent of the decision-making process for granting credit. - Supervisory actions: FIN-FSA requires supervised entities to correct shortcomings identified in valuation practices and sent supervisory letters to entities with the most shortcomings. ### Covered bonds and member state exemptions - Finland uses exemptions based on member state option under Article 493(3) of the CRR, implemented in Finnish legislation, which are not compliant with the Basel regime. - Basel regime: a covered bond meeting certain conditions can be assigned an exposure value of no less than 20 percent of the nominal value of a bank’s covered bond holdings. - Member state option Article 493(3) does not mention the 20 percent floor; Finnish national legislation (Decree of the Ministry of Finance 699/2014) based on Article 493(3) provides for an exemption of 90 percent of the nominal value of covered bonds. - Additionally, Finnish national legislation (ACI chapter 10, section 11, subsection 3 and Decree of the Ministry of Finance 699/2014, section 2, paragraph 4) based on Article 493(3) of the CRR provides for a full or partial exemption of “exposures incurred by an institution to its parent undertaking or subsidiaries” which does not exist in the Basel regime. ### Related parties, interconnectedness, and data collection - Interconnectedness: - Absence of binding regulations clarifying criteria for interconnectedness might lead to different interpretations by credit institutions. - CRR Article 4 (1) explicitly defines conditions for grouping counterparties due to control or economic connections. - EBA/GL/2017/15 Guidelines on connected clients give further guidance on applying interconnectedness based on economic dependency criterion. - FIN-FSA referred to this Guideline in its “Regulations and Guidelines on Management of credit risk and assessment of creditworthiness by supervised entities in the financial sector (4/2018)”; the non-binding nature could result in inconsistent interpretations. - Related party definition and data: - The definition of related parties was expanded with recent ACI changes. - ACI requires loans and comparable financing to related parties be approved by Board of Directors, but it is not clear whether this includes all transactions (e.g., service agreements, asset sales) and write-offs regarding related parties. - ACI does not grant power to exercise discretion in applying related party definition on a case-by-case basis. - FIN-FSA has ceased regular collection of LSIs related party lending data; recent ACI amendment provides that information on related party lending will be notified to the FIN-FSA upon request. - FIN-FSA plans to collect this information during LSIs’ SREP assessment and expects LSIs to comply with EBA/GL/2021/05 paragraphs 125-131 (former report assessed as not useful relative to new ACI provisions and EBA/GL/2021/05 paragraphs 120-131). - Inclusion of related party lending in FIN-FSA’s database could enable comparisons across banks to determine outliers and/or increases in risks. *Source: Extract from 1finea2023007 (PDF).* ### 77. Supervisory relief measures applied to the Finnish banking sector were mostly ### 77. Supervisory relief measures applied to the Finnish banking sector were mostly ### COVID-19 measures in banking regulation and supervision (timeline and measures) - 03/17/2020 — FIN-FSA decided to remove the SyRB and adjust credit institution-specific requirements. As a result of this decision, structural buffer requirements of all credit institutions would fall by 1 percentage point. - 03/30/2020 — FIN-FSA decided to issue a recommendation to credit institutions under its supervision to refrain from dividend distributions until October 1, 2020. Later this was extended until January 1, 2021, and September 30, 2021. This measure is unwound on September 30, 2021. - 06/25/2020 — FIN-FSA incorporated EBA’s Guidelines on treatment of public and private moratoria in light of COVID-19 crisis into its regulations and guidelines. - 06/29/2020 — FIN-FSA increased the loan cap for residential mortgage loans other than first-home loans to 90 percent from 85 percent. Later, on June 29, 2021, it decreased to 85 percent. ### Institutional coordination and coverage of measures - Supervisory relief measures were mostly decided collectively at the European level (ECB, EBA). - Most measures taken by ECB Banking Supervision (and applied directly to SIs) were accompanied by corresponding measures taken by the FIN-FSA and applied to LSIs. - The FIN-FSA’s recommendation to refrain from distributing dividends was not followed by all LSIs. - Several fiscal measures were also taken during the pandemic, although their extent was quite moderate compared to other euro area countries. ### Adjustments in supervisory activities and techniques - The FIN-FSA re-adjusted supervision activities and priorities based on pandemic conditions. - The FIN-FSA intensified off-site supervision activities during 2020 and 2021, and regularly contacted LSI management bodies. - On-site inspections in credit institutions’ premises stopped with the start of the pandemic and have yet to resume. - New techniques were developed with the ECB to mitigate risks from suspending on-site inspections, including: collecting authentic electronic data, arranging virtual process walk-throughs, and reviewing IT-systems. ### Payment holidays, moratoria, and data collection - General or public moratoria were not applied, but Finnish banks voluntarily granted a significant amount of payment holidays to corporate and household customers at the onset of the pandemic. - The duration of payment holidays generally varied between 3-12 months. - Due to legislative moratoria in another country, part of a Finnish bank’s loan portfolio in that country was under EBA compliant moratoria. - On September 30, 2021, most of these repayment holidays had expired without signs of asset quality deterioration. - During March–December 2020, the FIN-FSA, BoF and MoF jointly conducted biweekly surveys on Finnish banks’ corporate lending. - Between August 2020–September 2021, the FIN-FSA collected monthly credit risk surveys for all credit institutions covering monthly credit risk data (NPLs, forborne loans, loans under payment relief measures) that were not available in regular reporting frameworks. - Forborne loans increased slightly though there is high level of heterogeneity in banks’ classification and identification practices. - Finnish banks granted significant amount of repayment holidays voluntarily at the beginning of the pandemic, but the data collection started in August 2020. ### Heterogeneity in treatment of payment holidays and forbearance - There was variable treatment by Finnish banks of payment holidays. - A case-by-case analysis of borrowers’ likeliness to pay was not possible in some banks. - Some banks used flexibility in the recognition of forbearance and have not recognized loans that are benefiting from payment holidays as forborne exposures. - Some banks’ lending agreements provide borrowers automatic payment holiday options embedded in the loan (embedded forbearance clause) and forbearance is not identified/assessed in these situations at all. ### IFRS-9 provisioning, ECL methodology, and supervisory recommendations - The FIN-FSA made an analysis on credit institutions’ IFRS-9 provisioning and the ECL methodology during the pandemic. - The analysis was based on the EBA’s IFRS-9 indicator time series until end-2020 and the disclosures and the supervisory reporting of the banks. - The report revealed that management overlays varied a lot between the Finnish banks: some banks did remarkable overlays, and some stated that there was no need for overlays due to reasoning that the changes to the macro-scenarios or parameters were sufficient. - The analysis regarding the development of ECL and coverage ratios in stages and the development of movements between stages has shown variability existed between banks both in the coverage ratios and development of movements between stages. - Recommendation: It is important that this analysis be conducted regularly (for instance annually), even after the pandemic ends, and results would be used to conduct deep dive analysis in identified practices and banks. - Recommendation: The FIN-FSA might consider discussing the findings with banks’ external auditors. ### Progress on implementing the 2016 FSAP recommendations (selected points) - BCP1 Responsibilities, objectives, and powers - Recommendation 1: Ensure that the Finnish legislation grants the FIN-FSA all the powers it needs according to the CRD to impose decisions on capital and liquidity requirements and supervisory measures on LSIs. (MoF) - Authorities’ response: REC1: Fully implemented. The national act on credit institutions has been amended. - Assessment of the Mission: REC 1: Implemented - BCP3 Cooperation and collaboration - Recommendation 4: Seek a supervisory memorandum of understanding with the Swedish authorities covering large significant foreign branches... (ECB, FSA) - Recommendation 5: Raise with the European Commission the question of how the CRD might be amended... (MoF, ECB) - Authorities’ response: REC4: Fully implemented. EBA Guidelines on supervision of significant branches and MoU on prudential supervision of significant branches in Sweden, Norway, Denmark and Finland has been finalized and are used by Nordic supervisors. - Authorities’ response: REC5: FIN-FSA has sent letter to European Commission. - Assessment: REC4: Implemented; REC5: Action was taken - BCP9 Supervisory techniques and tools - Recommendation 7: Analyze, within the SSM and in collaboration with the other supervisors in the EU, the risks possibly stemming from the crossholding of bonds, in particular covered bonds and consider imposing concentration limits. (ECB, FSA) - Authorities’ response: REC7: In general, interconnectedness (e.g., via crossholdings of bonds) is analyzed in microprudential and macroprudential supervision. However, any specific concentration limits on holdings of covered bonds have not been considered. - Assessment: REC7: Not implemented - Recommendation 11: Update the on-site methodology to ensure that the samples of loan files analyzed during inspections are selected according to statistically robust criteria. (ECB) — REC11: Targeted at the ECB. - Recommendation 15: Ensure that the need for consistency of the supervisory methods and techniques does not distract energy, time, and resources from more risk-focused tasks. (ECB) — REC15: Targeted at the ECB. - Recommendation 16: Improve the communication with the banks, including with respect to the outcome of the SREP. (ECB, FSA) - Authorities’ response: REC16: Fully implemented. Supervisory findings, analyses and decisions are communicated to banks on a regular basis. SREP report is always shared with the respective bank with a request to confirm the findings and to come up with a plan on how to address the potential deficiencies. Supervised institutions have a right to be heard before final decision. - Assessment: REC16: Implemented - Recommendation 17: Improve the external communication strategy to further highlight the specificities of the SSM, especially as regards the difference between SIs and LSIs. (ECB, FSA) - Authorities’ response: REC17: Fully implemented. The specificities of the SSM as well as the distinction between SIs and LSIs are regularly reflected in the FIN-FSA’s external communication. For example, the FIN-FSA clarifies whether the information provided is targeted at LSIs only or all banks. - Assessment: REC17: Implemented - BCP10 Supervisory reporting - Recommendation 8: Implement a regular data collection of individual loan files (e.g., a loan registry system) to better support the analysis of credit risk. (FSA) - Authorities’ response: REC8: Loan-level data on new housing loans is collected quarterly by the FIN-FSA to monitor compliance with binding loan-to-collateral limits. AnaCredit data on loans to legal entities is collected on a monthly/quarterly basis by the Bank of Finland and occasionally used by the FIN-FSA. The data in the upcoming positive credit registry will be used for analysis and supervisory purposes in the future. - Assessment: REC8: Partly implemented - BCP16 Capital adequacy - Recommendation 6: Proceed with the announced comprehensive review of banks’ internal models and devise sustainable ongoing model monitoring. (ECB, FSA) - Authorities’ response: REC6: Fully implemented. Models have been assessed as part of model supervision. ECB TRIM project focused on SI banks; same supervisory principles applied for LSIs. - Assessment: REC6: Implemented - Recommendation 13: Closely monitor the impact on the bank’s loss absorbency of the ‘Danish compromise’ waiver... (ECB) — REC13: Targeted at the ECB. This waiver currently not used by the Finnish LSI banks. - BCP17 Credit risk - Recommendation 10: Continue to closely monitor banks’ loan portfolios to verify the evolution of renegotiated loans. (ECB, FSA) - Authorities’ response: REC10: Fully implemented. Especially during the COVID-19 crisis portfolio development and different credit quality indicators were intensively monitored and additional data requests have been in place. - Assessment: REC10: Requires further work - BCP21 Country and transfer risks - Recommendation 14: Analyze the impact of the proposed law restraining municipalities tax-raising powers on Municipality Finance and the other banks. (ECB, FSA) - Authorities’ response: REC14: Fully implemented. The initially planned four-year cap on municipal tax-raising powers was not implemented in the approved 2021 healthcare and social welfare reform legislation package. Based on preliminary assessment, the approved package does not seem to contain provisions which would call for a reassessment of the CRR risk weight for exposures to municipalities. The topic is being further assessed still. - Assessment: REC14: Implemented - BCP22 Market risk - Recommendation 12: Establish a regular program to directly verify the correct classification and valuation of fair-valued positions and any consequent need for additional valuation adjustments in banks with consistent amounts of Level 2 and 3 assets. (ECB, FSA) - Authorities’ response: REC12: Fully implemented. Assessed as part of ongoing supervision and on-site inspections. However, this is mostly relevant for SIs (supervised by the ECB). - Assessment: REC12: Directed to the ECB *Source: IMF country report excerpt on Finland (COVID-19 measures, supervisory adjustments, and progress on implementing the 2016 FSAP recommendations).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1finea2023007.pdf_