IMF published staff report under the 2018 Article IV consultation with Finland. The overall financial sector is sound, although the sector's increased size and regional inter-connectedness have increased the demands on supervision. The banking sector is sound but has distinctive features that pose challenges for supervision. Immediate financial stability risks appear limited, but the system is highly concentrated, interconnected with financial sectors of other Nordic countries, and reliant on wholesale funding.
The report highlights that system-wide capital ratios exceed minimum requirements by a clear margin and leverage ratios have improved to levels above European averages. The quality of the loan stock is very good overall, with low levels of nonperforming loans (NPLs). The main risks to the banking system arise from the exposure to Nordic real estate markets and rollover risks from covered bond funding, which could escalate were there to be an increase in risk premia in global financial markets. Over half of bank lending is directed to real estate (including construction and housing corporations). The Finnish real estate investment market is estimated to be worth over a quarter of GDP in 2017, one of the largest in Europe. Danske Bank is a significant lender in Finland, but its branch activities in Finland are supervised by the Danish competent authority. The macro-prudential toolkit should be expanded to include debt-to-income and debt-service-to-income caps, supported by a comprehensive credit register. More data are needed to adequately monitor lending by non-banks, whose lending practices might also require changes to consumer protection laws.
The report concludes that the size of the banking sector has increased substantially with the recent re-domicile of Nordea to Finland. This has increased demands on supervision and heightened the importance of continued close regional cooperation and preparedness for crises. The responsible authorities have responded to the challenges posed by Nordea’s re-domicile, which has increased the size of the Finnish banking sector to about 3.75 times. FIN-FSA now has in its toolkit a new capital buffer—the bank-specific systemic risk buffer—in addition to global and other systemically important institution (G-SII and O-SII) buffers. These were set for financial institutions in June 2018 and became effective in January 2019; for Nordea, the binding buffer is the 3% set for its systemic risk buffer. ECB and Nordic authorities have reaffirmed their commitments to information exchange and cooperation, mitigating the risks of cross-border discrepancies. Nordea will contribute to the Finnish deposit guarantee fund with annual deposit guarantee fees, as with all banks in Finland. (The target for the Finnish fund is 0.8% of covered deposits by 2024.)
Nordea is also obliged to contribute to the Single Resolution Fund, like other euro area banks. No changes are expected to the single point of entry resolution strategy previously established for Nordea by the Swedish-led Supervisory College; the SRB has made decisions on minimum requirement for own funds and eligible liabilities (MREL) at the consolidated level, but decisions over, for example, subordination and intragroup MREL will be made in 2019. The report looks at digitalization as another growing challenge for supervision and regulation, owing to the rapid changes in services and platforms and the lack of data on activities of non-bank service providers. Since products are morphing quickly and across lines of supervision, approaches that stress regulation of activities might be more successful at managing prudential risks than those that regulate entities.
Furthermore, the report discusses the banking union, which is not yet complete: banking supervision in the euro area has improved significantly following the creation of the Single Supervisory Mechanism (SSM), but bank crisis preparedness and management still face significant transitional challenges. The confirmation of a backstop for the Single Resolution Fund in June is a significant step to boosting market confidence in the resources available to support resolution, especially in systemic cases, but important details still need to be finalized. Establishing a common European deposit insurance scheme would increase the confidence of retail depositors and is important for cases where liquidation would be required. Third-country bank branches are outside the perimeter of ECB banking supervision, creating scope for arbitrage and inconsistent supervisory treatment. The SSM should have supervisory powers over significant third-country branches operating in the euro area.
Related Link: Staff Report
Keywords: Europe, Finland, Banking, Article IV, Systemic Risk, MREL, SSM, Banking Union, IMF
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
Previous ArticlePRA Delays Final Direction on Reporting of Private Securitizations
APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.
ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.
BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.
ECB published a decision allowing the euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio.
ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).
ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.
EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).
EBA has decided to phase out the guidelines on legislative and non-legislative moratoria of loan repayments, in accordance with the earlier specified end of September deadline.
EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).
ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.