bank of finland bulletin 2/2014: financial stability
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Bank of Finland Bulletin 2/2014: Financial stability. Pentti Hakkarainen, Deputy Governor. Themes of the stability report. Owing to the weak outlook for the real economy, particular attention needs to be devoted to the vulnerabilities of the domestic financial system. - PowerPoint PPT PresentationTRANSCRIPT
Themes of the stability report
• Owing to the weak outlook for the real economy, particular attention needs to be devoted to the vulnerabilities of the domestic financial system.
• Risks can be created by: housing price developments and households’ considerable debt levels, effects of low interest rates and transmission of bank lending.
• As demonstrated by the financial crisis, Finland also needs internationally comparable instruments for prevention of systemic risks.
• Banking union marks an important step forward. Supervision and resolution should be on the same cross-border level as the actual operations of financial institutions.
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415.5.2014
-200
0
200
400
600
800
2007 2008 2009 2010 2011 2012 2013 2014
Basis points
Public sector*, peripheral countries**Public sector*, Countries with good credit ratingsFinancial institutions, peripheral countries**Financial institutions, countries with good credit ratings
* Public-sector bonds refer to bonds issued by local government and centralgovernment-guaranteed bonds.** Peripheral countries: Italy, Spain, Greece, Ireland and Portugal.Sources: Bloomberg and BofA Merrill Lynch.
Risk premia on bonds issued by financial institutions andpublic-sector entities*
Improved access to finance supports euro area’s gradual recovery from the crisis
515.5.2014
0
100
200
300
400
500
0
5
10
15
20
25
1998 2001 2004 2007 2010 2013
Numer of issues (right-hand scale) Risk premium
%
Source: Bloomberg.
Number
Issues of bonds by high-risk non-financial corporations and risk premia on yields
Increased risk appetite may distort prices on securities markets
6
Share prices on the increase
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60
100
140
180
220
2009 2010 2011 2012 2013 2014
S & P 500 index Tokyo, Nikkei 225 index Total euro area: Dow Jones Euro Stoxx (Broad) index MSCI emerging markets index
Beginning of period = 100
Source: Bloomberg.
Stock indices of major countries
Risks transmitted from abroad to Finland
• The development of the international economy and financial markets has a great impact on the prospects and risks for the Finnish economy and financial system.
Risks of key concern for Finland: Emergence of renewed instability on international financial markets. Long-sustained low level of interest rates and excessive rise in
asset prices. Impact of geopolitical tensions on the Finnish economic outlook.
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Makrotalous
Asuntojen hinnat
VelkaantuneisuusRiskipreemiot
Pankkien kestävyys
IV/2009 I/2012 III/2012
Suomen rahoitusjärjestelmän vakauskartta
Lähteet: NASDAQ OMX Helsinki, pankit, Tilastokeskus ja Suomen Pankki.
Makrotalous
Asuntojen hinnat
VelkaantuneisuusRiskipreemiot
Pankkien kestävyys
IV/2009 I/2012 III/2012
Suomen rahoitusjärjestelmän vakauskartta
Lähteet: NASDAQ OMX Helsinki, pankit, Tilastokeskus ja Suomen Pankki.
June 2012 June 2013 May 2014
Makrotalous
Asuntojen hinnat
VelkaantuneisuusRiskipreemiot
Pankkien kestävyys
IV/2009 I/2012 III/2012
Suomen rahoitusjärjestelmän vakauskartta
Lähteet: NASDAQ OMX Helsinki, pankit, Tilastokeskus ja Suomen Pankki.
The outer values reflect higher systemic risks.Sources: NASDAQ OMX Helsinki, banks, Statistics Finland and Bank of Finland.
9
Housingprices
Real economy
Banks’viability
IndebtednessRisk premia
Indebtedness and development of the real economy pose the main risks to the Finnish financial system
15.5.2014
1015.5.2014
-20
-10
0
10
20
30
0
2
4
6
8
10
2005 2007 2009 2011 2013
1 Average interest rate on corporate loan stock* (left-hand scale) 2 Average interest rate on new corporate loans* (left-hand scale) 3 Corporate loans, annual growth rate** (right-hand scale)
12
3
%
* Includes housing corporations. ** Excludes housing corporations.Source: Bank of Finland.
Average interest rates on MFI corporate loans and annual growth rate in Finland
%
Growth rate of MFI corporate loans has remained subdued
11
Interest rates on corporate loan stock in euro area countries
15.5.2014
0
1
2
3
4
5
6
7
2009 2010 2011 2012 2013 2014
Finland Germany France Italy Spain Euro area
%
Sources: European Central Bank and Bank of Finland calculations.
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0
20
40
60
80
100
2009 2010 2011 2012 2013 2014
Got everything Got part of itRefused to withdraw because cost too high Application rejectedDon't know
Source: European central bank.
%
* October–March.** April–September.
* *** ** * **
Access to finance has remained good in the corporate sector in Finland
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Bankruptcies increasing slightly, but still at a moderate level
0
2
4
6
8
0
2
4
6
8
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Bankruptcy filings for non-financial corportaions, 12-month moving sum (left-hand scale)Banks' non-performing assets* (right-hand scale)
Number, 1,000
* Assets due and unpaid for at least 90 days.Sources: Statistics Finland, Financial Supervisory Authority and Bank of Finland calculations.
Bankruptices and non-performing assets in Finland
EUR billion
1415.5.2014
0
1
2
3
4
5
6
7
0
20
40
60
80
100
120
140
2000 2002 2004 2006 2008 2010 2012
Other loans (left-hand scale)Housing corporation loans* (left-hand scale)Housing loans (left-hand scale)Interest expenditure (right-hand scale)
% of disposable income
* Statistics Finland’s estimate of the loan stock of household-owned housing corporations.Sources: Statistics Finland and Bank of Finland calculations.
Household indebtedness and interest burden in Finland
% of disposable income
Household indebtedness continued to grow but at a slower pace
1515.5.2014
Half of household debts held by a tenth of households
0
40
80
120
160
200
240
0
10
20
30
40
50
60
Households with no debt Households with debtratio of over 0 % and
up to 300 %
Households with debtratio of over 300 %
Share of households (left-hand scale)Share of total household debt (left-hand scale)Average debt per household (right-hand scale)
%
* Debt ratio = household debt, % of disposable monteary income in 2012.Sources: Statistics Finland and Bank of Finland calculations.
Households and their debt by debt ratio*
EUR, thousands
1615.5.2014
0
5
10
15
20
2005 2007 2009 2011 2013
Total loans Housing loans%
* Finnish households' euro-denominated loans from MFIs operating in Finland, excluding household-owned housing corporation loans.Source: Bank of Finland.
Annual change in household loan stock* in Finland
Growth rate of housing loans has decelerated
1715.5.2014
80
100
120
140
160
2000 2003 2006 2009 2012
Whole country Greater Helsinki area Rest of Finland
Index, 2000 = 100
Nominal housing price indices are converted into real indices, using the consumer price indexfor the whole country.Source: Statistics Finland.
Real housing prices in Finland
Real housing prices have declined, regional differences in price developments
1915.5.2014
0
5
10
15
20
25
0
5
10
15
20
25
2007 2008 2009 2010 2011 2012 2013
Loss buffer* (left-hand scaleMinimum requirement for own funds (left-hand scale)Capital adequacy ratio (Tier 1 and Tier 2) (right-hand scale)Common Equity Tier 1 ratio (CET1) (right-hand scale)
EUR bn
* Own funds surplus = own funds − minimum requirement for own funds.Source: Financial Supervisory Authority.
Own funds and capital adequacy in the Finnish banking sector
%
Finnish banking sector’s risk resilience has remained good
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Banking sector performance unchanged and loan losses small
-8
-4
0
4
8
2007 2008 2009 2010 2011 2012 2013
Net interest income Net fee incomeNet income from trading and investment Other incomeExpenses and depreciations Net impairment lossesPre-tax profit
EUR bn
Source: Financial Supervisory Authority.
Finnish banking sector performance
2115.5.2014
-2
0
2
4
6
1999 2001 2003 2005 2007 2009 2011 2013
Overall margin (average interest rate on loan stock - average interest rate on deposit stock)3-month Euribor
%
Finnish MFI loans to and deposits from the public.Sources: Reuters and Bank of Finland.
Overall margin and 3-month Euribor
Low interest rates and slower growth of lending stock strain profitability
2215.5.2014
Dependency on international wholesale funding increases vulnerability
0
50
100
150
200
2006 2008 2010 2012 2014
Issues of long-term debt securitiesIssues of short-term debt securitiesLoans to households and non-financial corporationsDeposits from households and non-financial corporationsStructural financial deficit (loan stock - deposit stock)
EUR bn
Deposit banks, mortgage banks and other credit institutions in the same group.Source: Bank of Finland.
Finnish banking sector’s dependency on wholesale funding
Banking sector sensitive to contagion
• Finnish banking sector’s degree of concentration among the highest in the EU.
• Strong interconnectedness within the Nordic banking system. Large amount of assets in the Nordic countries, only small amount in the higher-risk countries.
• Significant share of the Finnish banking sector in the ownership of Nordic parent banks.
• Domestic banks’ foreign assets and liabilities have increased in the 2000s.
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24
Insurance sector has maintained its solvency
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• Insurance sector profitability and solvency have remained good, but considerable differences between companies can be observed.
• Insurance companies have been able to adjust their business models in the low interest rate environment.
• Unexpected shocks in the investment market pose the main risk to profitability and solvency.
25
Infrastructure has operated reliably
• A reliable infrastructure that functions under all circumstances is a key part of a stable financial system – International cooperative oversight plays an important role
• Fragmentation of functions can endanger continuity – National contingency arrangements important
• Finland migrated to SEPA on schedule, development continues – New cooperation groups have been established: the Euro
Retail Payments Board (ERPB) in Europe and the Payments Council in Finland
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27
The macroprudential tools to be introduced in Finland
• Countercyclical capital buffer requirement: 2015
• Binding maximum loan-to-value (LTV) ratio for housing loand (loan-to-value cap): 7/2016
• Minimum risk weights for housing loans: 2015
• Additional capital requirement for domestic systemically important credit institutions (O-SII requirement): 2016
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…. should be supplemented
• Use of the systemic risk buffer should also be made possible in Finland – Additional capital requirement permitted by the Capital
Requirements Directive if the national banking sector is structurally vulnerable
– There should not be big differences in regulation and supervision in an integrated banking market
– Nearly all EU countries will incorporate the requirement in their legislation
• An internationally comparable set of instruments is necessary; use of the instruments to be determined separately.
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29
National additional capital requirements for systemically important credit institutions in the Nordic countries, maximum
requirement
0
1
2
3
4
5
6
Sweden Norway Denmark Finland
National additional capital requirements for systemically important credit institutions in the Nordic countries, maximum amount
%
Source: National central banks.
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Banking union about to start
• The two key elements of banking union – single supervision of banks and single resolution – are about to start.
• The resolution mechanism and bail-in remove/reduce the costs of banking crises to taxpayers.
• Also in Finland, resolution legislation and the related powers for authorities must be implemented promptly in all respects.
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