Press release 19 December 2022:

Macroprudential decision: Loan cap and countercyclical capital buffer requirement remain unchanged, FIN-FSA preparing to activate systemic risk buffer

The Board of the Financial Supervisory Authority (FIN-FSA) has decided to keep the loan cap, i.e. the maximum loan-to-collateral (LTC) ratio, unchanged. The countercyclical capital buffer (CCyB) requirement for banks will also be kept at its standard level. The Board is preparing to make a decision on a systemic risk buffer (SyRB) in early 2023 to strengthen the banking sector’s risk resilience.

The economic outlook has deteriorated during the autumn in Finland, the euro area and globally. Europe is being strained by an energy crisis and an upsurge in cost-push inflation. The rapid tightening of monetary policy and financing conditions in all major economic areas is weakening global economic growth. In its warning issued in September 2022, the European Systemic Risk Board (ESRB) stated that the probability of the risks to financial stability materialising simultaneously has increased.[1] According to the ESRB, the combined effects of these risks could be substantial.

The structural risks and vulnerabilities surrounding the Finnish banking sector provide a justification for the imposition of a systemic risk buffer (SyRB) requirement. The FIN-FSA Board deactivated the SyRBs set for Finnish banks in spring 2020 to mitigate the effects of the COVID-19 pandemic. As a result, the combined level of the Finnish banking sector’s macroprudential buffers is currently below the level assessed as sufficient based on stress tests and other grounds for setting macroprudential buffers.

The FIN-FSA Board has assessed developments in the operating environment and the needs and possibilities for strengthening the national financial system’s risk resilience with an SyRB of no more than 1%.

“The FIN-FSA Board is preparing to make a decision on the activation of a systemic risk buffer in the first quarter of 2023. Before its final decision, the Board will assess the fulfilment of the grounds for activating the buffer and also the impacts of the buffer and of projected economic developments on the credit institutions sector and lending,” says Marja Nykänen, Chair of the FIN-FSA Board.

Based on the current calculations, the potential decision would not considerably weaken the banking sector’s lending capacity, but would instead strengthen credit institutions’ risk resilience. The decision can be postponed if it is assessed to have a very negative impact on the operation of the credit markets in the short term.

The loan cap will be kept at the tightened level

House sales have moderated since spring 2022. The level of new housing-loan drawdowns is currently lower than in previous years. Drawdowns of buy-to-let mortgages, in particular, have fallen considerably from a year earlier.

Total household debt as a ratio of disposable income remains historically high, however, and the share of long-term loans in new housing loans is increasing. The debt-to-income ratio is estimated to grow in 2023, too.

Tightening financing conditions, increasing living costs and the weakening economic environment are eroding households’ capacity to service their debts and maintain consumption. In these circumstances, it is important to contain the growth of household debt and ensure that new mortgage borrowers have sufficient financial buffers against higher loan-service burdens and living costs and lower collateral values.

For these reasons, the FIN-FSA Board has decided to keep the maximum LTC ratio for new residential mortgage loans other than first-home loans at the tightened level of 85%.

The recommendation on housing loan applicants’ maximum debt-servicing burden, taken in June 2022 and effective from the beginning of 2023, also serves to safeguard households’ capacity to service their loans and maintain consumption under stressed conditions.

Banks’ countercyclical capital buffer requirement remains at standard level

The set of risk indicators for imposing a CCyB requirement on banks and the related supplementary indicators are not pointing to overheating in the Finnish financial cycle. Hence, the CCyB rate will not be raised from its standard level of 0%.

The Board of the Financial Supervisory Authority assesses on a quarterly basis the short- and long-term risks to the stability of Finland’s financial system. If necessary, the Board may tighten or relax its macroprudential instruments to promote stability. The Board decides on a quarterly basis the level of the countercyclical capital buffer (CCyB) requirement and the level of the maximum loan-to-collateral (LTC) ratio for housing loans. The levels of the additional capital requirements for nationally systemically important institutions (O-SII buffers) are reviewed at least annually and the level of the systemic risk (SyRB) buffer at least every second year.

For further information, please contact:

Marja Nykänen, Chair of the Board of the Financial Supervisory Authority, tel. +358 9 183 2007

View this link to access the appendices listed below

• Board’s decision on the application of macroprudential instruments (pdf)
• Proposal of the Director General of the FIN-FSA, circulated for comment, on the application of macroprudential instruments (pdf, in Finnish)
• Opinions on the Director General’s proposal on the application of macroprudential instruments (pdf, in Finnish)
  • Bank of Finland
  • Ministry of Finance
  • Ministry of Social Affairs and Health
• Macroprudential report 2/2022 (in Finnish)

[1] https://www.esrb.europa.eu/pub/pdf/warnings/esrb.warning220929_on_vulnerabilities_union_financial_system~6ae5572939.en.pdf