Download - Bank of Finland Bulletin 2/2014: Financial stability Pentti Hakkarainen, Deputy Governor 15.5.2014
Bank of Finland Bulletin 2/2014: Financial stabilityPentti Hakkarainen, Deputy Governor
15.5.2014
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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315.5.2014
Risks related to economic and credit cycles
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-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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8
Domestic economy, non-financial corporations, households, public finances
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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
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-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)
1
2
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
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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
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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
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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
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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
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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
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Financial system risk resilience and structural risks
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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
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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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Measures to ensure financial stability
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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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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31
Single Resolution Mechanism
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Thank you!