FIN-FSA Examines Capital Position of Banking Sector Amid Pandemic
FIN-FSA assessment reveals that the Finnish banking sector faced the COVID-19 pandemic with strong capital buffers. The capital ratios of the banking sector—that is, the ratio of own funds to total risk exposure—weakened in early 2020, due in particular to strong volatility in market prices. However, the decisions taken in Spring to lower the additional capital requirements, with the purpose of ensuring lending capacity, increased the surplus of own funds in the banking sector. The macro-prudential decisions increased the imputed lending capacity of the banking sector to Finnish businesses and households by nearly EUR 30 billion.
The capital ratios of the banking sector declined in the first quarter of 2020 compared with the situation at the end of 2019. At the end of March, the Common Equity Tier 1 (CET1) capital ratio was 16.8% (December 31, 2019: 17.6%) and the total capital ratio was 20.2% (December 31, 2019: 21.3%). The weakening of capital ratios reflected, in particular, strong volatility in market prices at the end of March, which increased the risk-weighted assets for market risk and decreased the amount of own funds, due to negative value changes in financial assets measured at fair value. Capital ratios were also weakened by changes to the definitions used for the purpose of calculating own funds requirements (application of the definition of default in accordance with the new EBA Guidelines) by some of the banks.
In March, ECB allowed the directly supervised banks with a flexibility in the fulfillment of certain additional capital and liquidity requirements, due to the exceptional situation created by the COVID-19 pandemic. The measures announced in the decision supported banks’ ability to provide credit to the real economy. The measures provided by ECB are for the most part available also to banks directly supervised by FIN-FSA, if necessary. ECB and FIN-FSA also issued a recommendation to banks to refrain from dividend distribution until October 01, 2020. The FIN-FSA Board also decided to lower the additional capital requirements that are within the scope of national decision-making. These decisions removed the systemic risk buffer of Finnish credit institutions. The FIN-FSA Board also decided to lower the additional capital requirement for other systemically important institutions (the O-SII buffer) in the case of OP Financial Group. The Finnish banking sector’s additional capital requirements were also decreased by decisions taken by other Nordic supervisors to ease the countercyclical capital buffer requirements.
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Keywords: Europe, Finland, Banking, Regulatory Capital, Basel, COVID-19, Own Funds, Macro-Prudential Measures, FIN-FSA
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