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December 13, 2017

IMF published its staff report and selected issues report in the context of the 2017 Article IV consultation with Finland. The staff report reveals that the banking system is adequately capitalized and profitable, while progress has been made to reduce some key vulnerabilities. Solvency levels of insurance companies are well above requirements: the recent EU-wide stress tests indicate that they would withstand adverse scenarios.

However, the staff notes that Nordea, which is a global systemically important institution, plans to relocate its headquarters to Finland (from Stockholm to Helsinki) by October 2018. The relocation of Nordea’s headquarters to Finland will considerably increase the size of the Finnish banking sector under supervision. This increases the importance of adequate supervisory resources, discretion to increase capital requirements if needed, close regional cooperation, and completion of the Banking Union in the EU. The authorities recognize the challenges presented by Nordea’s move. The authorities are committed to introducing the Systemic Risk Buffer (SRB) in early 2018. They aim to provide the macro-prudential authority considerable discretion to apply the SRB, while maintaining the high transparency and predictability of the regulatory environment. They expressed strong support for completing the Banking Union, while acknowledging the need to first address weaknesses in some European banks. In light of Nordea’s move, the FIN-FSA’s resources would be increased; the FIN-FSA and ECB are committed to continuing close supervisory collaboration with other Nordic authorities.

In addition, in the staff report notes that increased resource allocation to supervision to reflect higher regulatory complexity and supervision intensity is a positive. Moreover, structural vulnerabilities in the banking system require continued close monitoring. The 2016 FSAP identified that low risk-weights used in banks’ internal risk models exaggerate capital adequacy. While the sector’s aggregate leverage ratio has improved since 2016, low risk-weights on mortgage loans remain a concern. The Finnish authorities have appropriately introduced a minimum risk-weight of 15% on residential mortgage loans, which will take effect in January 2018. The selected issues report evaluates pension and aging costs not reflected in standard net debt figures, leading to recommendations for fiscal stance. It also looks at exports and the labor market, to see whether recent experiences reveal structural weaknesses.

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Keywords: Europe, Finland, Banking, Insurance, Article IV, Stress Testing, SRB, Banking Union, IMF

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