The European Systemic Risk Board issues warnings and recommendations to EU countries on macroprudential risks and their mitigation

The European Systemic Risk Board (ESRB) has today published warnings on macroprudential market risks and their mitigation to Bulgaria, Croatia, Hungary, Liechtenstein and Slovakia, and recommendations to Austria and Germany. In addition, the ESRB has published a compliancy assessment on the EU countries that received ESRB recommendations earlier, in 2019. The warnings and recommendations concern medium-term vulnerabilities in the residential real estate market and measures for their mitigation.

In 2019, the ESRB issued recommendations to six EU countries, of which Finland was one. The ESRB recommended that Finland introduce borrower-based macroprudential measures to address medium-term vulnerabilities in the residential real estate market. Accordingly, Finland should amend the relevant legislation and also apply non-legally binding measures such as recommendations by authorities.

In its assessment published now, the ESRB finds that Finland is partially compliant with the ESRB’s recommendation. The assessment is primarily based on the fact that Finland has not included in national law income-based loan limits applicable to borrowers, such as a debt-to-income (DTI) ratio or a debt-service-to-income (DSTI) ratio. On the other hand, the Financial Supervisory Authority (FIN-FSA) has, already in 2010, issued a recommendation to banks urging them to carefully assess loan applicants’ ability to pay even in a situation where the interest rate would be 6% and the repayment period 25 years. In addition, the Board of the FIN-FSA has recommended banks to exercise restraint in granting loans that are large with regard to the borrowers’ income and have a longer than usual repayment period.

The FIN-FSA Board will specify this recommendation in the first half of 2022. In this context, the Board will elaborate on, for example, the types of loans lenders should exercise restraint in granting. The Board will also assess the need to set a sector-specific systemic risk buffer for housing loans where the borrower's DTI or DSTI ratio is particularly high. This requirement may be imposed on the basis of the structural characteristics of the financial system.

See also

• Press release 11 February 2022, ESRB issues new warnings and recommendations on medium-term residential real estate vulnerabilities
• Recommendation of the European Systemic Risk Board of 27 June 2019 on medium-term vulnerabilities in the residential real estate sector in Finland (ESRB/2019/8)
• FIN-FSA press release of 30 September 2020
• FIN-FSA press release of 17 December 2021