SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Bank of Finland Bulletin 2/2013: Financial stability Deputy Governor, Pentti Hakkarainen 23/05/2013 11.1.20151

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Bank of Finland Bulletin 2/2013: Financial stability

Deputy Governor,

Pentti Hakkarainen

23/05/2013

11.04.23 1


Themes of the Financial Stability publication

International operating environment

Domestic operating environment and the financial sector

Infrastructure

Measures to ensure financial stability

11.04.23 2


International operating environment

11.04.23 3


Twofold situation:financial markets picked up,real economy deteriorating

CDS spreads on European government bonds have declined

GDP developments have deteriorated also in countries with high credit ratings

11.04.23 4

0

2

4

6

8

10

12

14

16

2008 2009 2010 2011 2012 2013

Portugal Italy Spain Ireland Finland

Percentage points

Source: Bloomberg.

CDS spreads on European government bonds

98

100

102

104

106

108

110

112

114

2005 2006 2007 2008 2009 2010 2011 2012

Countries with good credit rating* FinlandEuro area GIIPS countries**

2005/I = 100

* Austria, Belgium, Finland, France, Germany and the Netherlands.** Greece (2011-2012, est.), Ireland, Italy, Portugal and Spain.Sources: Eurostat and Bank of Finland calculations.

GDP


Factors outside Finland causing uncertainty

Weaker-than-expected economic development– Negative influence on domestic corporations and households– Financial sector profitability pressures and disturbed transmission of

financing– Threat from growing problems in public sector

Re-emergence of European financial crisis– Weakening confidence, renewed escalation of debt crisis– Potential negative impact on Finnish government and banking sector

funding, as highly dependent on foreign sources

Negative side effects of low interest rates

11.04.23 5


Negative effects of long-term low interest rates

Rates kept low for protracted period reduce banks' net interest income and insurance companies' investment income and put pressure on their profitability

Debt service burden eased, increases loan forbearance, delays deleveraging

Search for yield affects allocation of investment, can distort pricing of risk and overheat prices

611.04.23


Domestic operating environment and the financial sector

11.04.23 7


Indebtedness and macroeconomic development pose greatest risks to Finnish financial system

Banks'currentviability

Macroeconomy

Housingprices

IndebtednessRisk premia

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


Pankkien kestävyys

IV/2009 I/2012 III/2012



June 2011 June 2012 May 2013

Makrotalous

Asuntojen hinnat


Pankkien kestävyys

IV/2009 I/2012 III/2012



The outer values reflect higher systemic risks.Sources: NASDAQ OMX Helsinki, banks, Statistics Finland and Bank of Finland.

11.04.23 8


Growth of non-financial corporations' stock of loans decelerated

11.04.23 9

-20

-10

0

10

20

30

0

2

4

6

8

10

2004 2006 2008 2010 2012

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

%

* Also includes housing corporations.Source: Bank of Finland.

Average interest rates on MFI corporate loans and annual growth rate in Finland

%


Interest rate margins widened most for small corporate loans

11.04.23 10

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2011 2012 2013

New drawdowns of up to EUR 50.000New drawdowns of up to EUR 250.000New drawdowns of over EUR 50.000 and up to EUR 250.000New drawdowns of over EUR 250.000 and up to EUR 1 millionNew drawdowns of over EUR 1 million

Percentage points

Excluding account and repo agreements.Source: Bank of Finland calculations.

Average margins on new corporate loans granted by Finnish MFIs, by loan size


Companies increasing bond financing

11.04.23 11

0

10

20

30

40

50

60

70

0

20

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012

1 Loans from MFIs 2 Overseas loans (excl. direct investments)3 Loans from other OFIs 4 Loans from employee pension companies5 Loans from other public-sector entities 6 Short-term debt securities7 Long-term debt securities 8 Debt relative to GDP (right-hand scale)

Sources: Statistics Finland and Bank of Finland

EUR bn

Finnish corporate sector's interest-bearing debt structure

% of annual GDP8

7

6543

2

1


Household debt accumulation continues – the bulk of which for housing or renovation

11.04.23 12

0

2

4

6

8

10

12

14

0

20

40

60

80

100

120

140

1986 1991 1996 2001 2006 2011

Housing-related loans*, % of disposable income (left-hand scale)Other loans, % of disposable income (left-hand scale)Total loans*, % of GDP (left-hand scale)Total interest expenditure, % of disposable income (right-hand scale)

% %

* Housing loans and households' estimated share of housing corporation loans.Sources: Statistics Finland and Bank of Finland calculations.

Household indebtedness and interest burden in Finland


Debt burden and risks distributed unevenly

11.04.23 13

0

60

120

180

240

300

0

10

20

30

40

50

0% (no debt)

Over 0 %and up to

100 %

Over 100 %and up to

200 %

Yli 200 %and up to

300 %

Over 300 %and up to

400 %

Over 400 %and up to

500 %

Over 500 %

Share of households (left-hand scale)Share of household debt (left-hand scale)Average debt per household (right-hand scale)

% EUR, Thousands

* Horizontal axis: household debt, % of disposable monetary income 2011.Sources: Statistics Finland and Bank of Finland calculations.

Households and their debt by debt ratio* in Finland


Relative housing prices higher than long-term averages

11.04.23 14

50

100

150

200

250

1981 1986 1991 1996 2001 2006 2011

In relation to cost of housing constructionAverage*In relation to housing rentsAverage*In relation to wage and salary earningsAverage*

Index 1981/I=100

* Average of the review period.Sources: Statistics Finland and Bank of Finland calculations.

Relative housing prices in Finland


Finnish banking sector: capital adequacy improved despite slight decline in own funds

11.04.23 15

0

4

8

12

16

20

2006 2007 2008 2009 2010 2011 2012

Return on equity (ROE)* Common Equity Tier 1 (CET1)

Equity ratio (equity/balance sheet ratio)

* Returns in 2006–2007 are affected by certain reorganisation measures in the banking sector.Source: Financial Supervisory Authority.

%


Low level of interest rates weakens banking profitability

11.04.23 16

2302

381137 10 -122

-63 -83 2562

0

500

1 000

1 500

2 000

2 500

3 000

Operating profits2011

Net income from trading

and investmentactivities

Net income from

insurance activities

Other income Net interestincome

Expenses Value adjustments

Operating profits2012

Factors underlying changes in Finnish banking performance

Source: Financial Supervisory Authority.

EUR m


Weak economic development adds to credit risk

11.04.23 17

-1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Corporate bankruptcies filed, 12-month moving total (left-hand scale)

Banks' non-performing assets (right-hand scale)

Banks' net impairment losses, 12-month moving total (right-hand scale)

Number, 1000

Sources: Statistics Finland, Financial Supervisory Authority and Bank of Finland calculations.

Bankruptcies, nonperforming assets and net impairment losses in Finland

EUR bn


High dependency on international market funding

11.04.23 18

0

40

80

120

160

200

2007 2008 2009 2010 2011 2012 2013

Funding deficit of Finnish banking sector

Loans to the public Deposits from the public Funding deficit

The counterparties of loans to the public and deposits from the public are others than financial institutions.Source: Bank of Finland.

EUR bn


Banks increased use of covered bonds

11.04.23 19

0

10

20

30

40

50

60

70

0

4

8

12

16

20

24

28

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Finnish banks' covered bonds1 Stock (left-hand scale)2 Issued (left-hand scale)3 Housing loan encumbrance (right-hand scale)**

EUR bn

* 2013 to end-April and January-April issue.** Covered bonds as collateral for housing loans as share of entire stock of housing loans. Calculation presumes 4.4% of housing loan stock does not qualify for use of bond as collateral.Sources: Bank of Finland, European Covered Bonds Council, Bloomberg and Financial Supervisory Authority.

1

2

%

3


Finland's banking sector is concentrated

11.04.23 20

0

20

40

60

80

100

EE NL FI PL DK CZ CY LT SE HU IE FR ES IT AT DE

Proportion of five largest credit institutions in aggregated credit institutions' balance sheet in 2011

Source: European Central Bank.

The figures for the EU countries also include subsidiaries and branches of foreign banks operating in the country.

%

Concentration of banking system in different EU countries


Infrastructure

11.04.23 21


Payment and settlement systems being reformed

Challenges posed by internationalisation of infrastructure– Increased competition between infrastructure services– Strive for economies of scale– TARGET2-Securities and European harmonisation

Changes and improvement in efficiency in cost of systems’ reliability and service levels?– Importance of market consultation– Continuity and contingency arrangements– Vulnerable groups' requirements: unhindered payments

11.04.23 22


Measures to ensure financial stability

11.04.23 23


1) Finland to consider additional requirements for systemically important banks

Consequences of bank crisis serious in concentrated banking system, such as in Finland

Other Nordic countries significantly tightening regulations concerning systemically important banks

Regulations need to be as harmonised as possible internationally and in Nordic countries in particular

11.04.23 24


2) Finland needs to establish ways of reducing housing loan-related risks

No country is safe from the housing and property crises– In the 2000s: Denmark, Ireland, the Netherlands, Spain, the

United States...– Finland suffered crises in the 1930s and 1990s

International experience: A maximum loan-to-value ratio is a way of dampening excessive growth in housing loans and housing prices

Studies show that FIN-FSA's current loan-to-value ratio recommendations are not adequate– A binding LTV ratio is needed as a macroprudential tool

11.04.23 25


3) Bank liabilities should be used in banks’ crisis resolution

Banks' effective recovery and crisis resolution requires the possibility to write down the liabilities in the balance sheets of troubled banks or convert into equity (bail-in)

Bail-in should be the general rule; bail-out should be considered an exceptional solution and only applied after separate political consideration

Write-downs should first be directed at those debtors with the best ability to evaluate and price risks (market discipline)

Effectiveness of crisis resolution improved by bail-in instruments

11.04.23 26


4) Functioning of business financing must be ensured

Smooth functioning of corporate financing is vital to economic growth

In EU comparison the availability of corporate financing in Finland is good, however lending terms are getting tighter

Small and medium-sized companies dependent on bank financing

Promoting diverse sources of financing, in particular for small and medium-sized companies– Enhancing the domestic bond market – European level measures

11.04.23 27

Documents

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Bank of Finland Bulletin 2/2013: Financial stability Deputy Governor, Pentti Hakkarainen 23/05/2013 11.1.20151