Coronavirus pandemic demonstrates necessity of risk buffers

The European Central Bank and national authorities have introduced extensive measures to guarantee the liquidity of the financial markets and to secure funding for firms. Government has mitigated the business sector's cash flow crisis with direct subsidies and by increasing the provision of collateral. Finnish banks have increased their lending to firms and eased the debt-servicing duties of their customers with amortisation-free periods. ‘Society’s ability to weather crisis is being deeply tested by the coronavirus pandemic. In spite of the relief measures put in place, the human and economic toll of the pandemic will prove significant,’ stated Bank of Finland Deputy Governor Marja Nykänen at the press briefing for the publication of the new issue of the journal Euro & talous.

The stability of the Finnish financial system will, in part, be influenced by how long and how severe the economic crisis is in other countries. The weakening of the global economy has been reflected in financial markets as heightened volatility and the depletion of certain sources of finance. The Nordic banking sector is strongly interlinked, and the Finnish banking sector holds large volumes of receivables from other Nordic countries. This exposes our financial system to disturbances stemming from outside Finland.

Compared with previous crises Finland's and the world's financial systems are in a stronger position to meet the coronavirus pandemic. ‘The solvency and liquidity positions of banks have been strengthened significantly after the global financial crisis,’ noted Deputy Governor Nykänen. Similarly, borrowers are on sounder footing than they were going into Finland's banking and economic crisis of the 1990s or the global financial crisis.

Finland's financial system has remained operational in spite of the shock. The coronavirus pandemic demonstrates the importance of a well-functioning financial sector. ‘It is important that banks, firms and households shore up their finances by building buffers in the good times. Finland must resolutely continue its development of macroprudential instruments that stabilise the financial system. This will enhance society's readiness to confront crises in the future,’ stressed Deputy Governor Nykänen.

The economy's contraction will weaken the solvency of many households and firms. Banks will inevitably see a rise in credit losses on corporate and household loans. The volume of credit losses will especially rise if restrictions are extended and the economy enters a long-lasting recession. However, the current recession is in many respects different from the Finland's depression in the 1990s or the global financial crisis, which makes estimating credit losses more difficult.

• Presentation 5 May 2020, Deputy Governor Marja Nykänen
• Euro & talous publication website