Financial stability

The poor outlook for the economy is weighing on banks, households and firms. Banks have accumulated buffers for a rainy day that should be deployed now as the coronavirus buffets the economy.

Well-functioning trading venues for securities transactions are a necessary component of efficient financial markets.

The current loan-to-value cap on housing loans urgently needs to be accompanied by a new, more comprehensive cap on debt. This would take into account all a loan applicant’s debt relative to their income.

The more debt households take on during an economic upswing, the more likely they are to cut consumption when the economy begins to run out of steam.

The indebtedness of Finnish households relative to income has grown considerably since the turn of the millennium. A proportion of new residential mortgage holders have a heavy debt burden relative to their income.

Consumer credit can drive households into financial difficulties. New measures are needed to prevent increasing debt problems.

Finnish banks have granted relatively little credit to those industries most vulnerable to bankruptcies. This has helped minimise banks’ corporate credit risks.

Foreign investment in the Finnish and other Nordic property markets has increased. As a consequence the Finnish market is more vulnerable to external risks.

Investment in IT will improve banks’ long-term profitability, while weakening short-term profitability.

The accessible summary sums up the solutions presented in the Bank of Finland’s stability assessment that can get a grip on households’ excessive debt levels.

The macroprudential toolkit needs to be replenished with borrower-based instruments that take into account loan applicants’ repayment ability and are able to curtail household indebtedness as a whole.

An extensive materialisation of risks on the Swedish housing market could also have notable effects in the other Nordic countries.

Low risk premia and high valuations have increased global securities markets’ exposure to price corrections and abrupt shifts in risk premia.

Lowering the loan cap will mitigate household indebtedness and strengthen mortgage borrowers’ risk resilience. It will not, however, remove the risks relating to the record-high level of indebtedness.

Housing debt has grown, both in absolute terms and relative to income, especially in growth centres, where housing is more expensive and subject to greater pressures from demand than elsewhere.

The Finnish real estate investment market is lively and large in proportion to the size of the economy, foreign investment and high valuations may expose the Finnish market to economic shocks from abroad. The risks may reflect on banking particularly via lending.