Financial sector solvency provides buffer to face economic problems caused by coronavirus


In early 2020, the coronavirus pandemic has cast significant gloom over global economic prospects and increased uncertainty in financial markets. The Finnish financial sector at the end of 2019 was sound and therefore faces the altered situation from a good foundation.

The coronavirus epidemic has already impacted financial markets directly through changes in risk pricing, which has been reflected in, for example, a very sharp fall in equity prices and lower yields on low-risk government bonds.The coronavirus epidemic is also affecting the financial sector through a weakening of the real economy.The effects include, for example, an increase in impairment and credit losses, a rise in financing costs or weakening of capital buffers and profitability.The extent and depth of the negative economic effects of the coronavirus are very difficult to assess, however.

“The state and outlook of the economy have deteriorated rapidly and significantly.Although the Finnish financial sector faces the altered situation from a good foundation, the coronavirus pandemic places the sector in an exceptionally difficult situation.The authorities must therefore act decisively and quickly to alleviate the situation.The Financial Supervisory Authority, in cooperation with European and Finnish authorities, has launched a number of measures to promote the provision of credit and to minimise disruption to the market,” says Anneli Tuominen, Director General of the Financial Supervisory Authority.

In the pandemic situation, financial services will play a key role in many matters related to livelihoods and business continuity.For the availability of services, it is critically important that businesses are able to ensure the continuity of their operations.  

Banking sector’s resilience stronger than European average - non-recurring cost items weakened sector’s operating profit

Despite the increased risks in the operating environment, the Finnish banking sector’s capital adequacy and the quality of its credit portfolio remained strong in 2019.The banking sector’s average Common Equity Tier 1 (CET1) capital ratio strengthened by 0.4 percentage points (31.12.2018: 17.2%) and the total capital ratio by 0.3 percentage points (31.12.2018: 20.9%).Due to the Finnish banking sector’s voluntary capital buffers and higher macro-prudential requirements (e.g. O-SII buffers and systemic risk buffer) than the average in the euro area, the capacity of Finnish banks to withstand losses caused by sudden and severe disruptions in the operating environment is higher than the European average.

The sharp weakening of economic activity caused by the coronavirus pandemic will impact the liquidity of banks’ business and private customers and thereby increase credit losses.The magnitude of this impact will depend on the success of the measures taken by banks and the authorities to alleviate customers’ liquidity situation.The Finnish banks’ own liquidity situation is currently good.Weakening demand for banking services and lower commission income due to reduced economic activity will also impact banks’ profitability.

Pension sector’s solvency threatened by sharp fall in investments

In 2019, private sector pension assets grew to EUR 136 billion as the average return on assets was 12.1%.The solvency ratio, i.e. the amount of pension assets relative to liabilities, of the pension sector increased to 128.3% (31.12.2018: 125.0 %) and the solvency position (1.7) improved slightly (31.12.2018: 1.6).The solvency limit was increased by a higher proportion of equity investments in the investment mix (46.6%) and by an increase on the average maturity (duration) of fixed income investments.

The solvency position of pension institutions has deteriorated in the early part of the year, however.The coronavirus and the market changes caused by it have significantly weakened the value of equity investments and credit risk-bearing fixed income investments.Government bonds with a strong credit rating have served as a risk diversifier and have yielded positive returns.Due to market changes, the solvency of pension institutions has already weakened, but solvency on average can still be considered to be moderate.

Financial market volatility and uncertainty about the spread of the coronavirus and its effects are so great, however, that the average solvency of pension institutions threatens to decline rapidly and significantly.For this reason, the Financial Supervisory Authority notified the Ministry of Social Affairs and Health on 13 March 2020 of exceptional circumstances in the financial markets.

At the end the year, solvency of life and non-life insurance sectors was at a good level

The solvency of life insurance companies deteriorated in 2019.At the end of the year, the solvency ratio was 190.3% (31.12.2018: 207.3%), i.e. still at a good level.An increase in the risk-based solvency capital requirement contributed to the deterioration of the solvency ratio.In addition, the level of interest rates continued to decline during the year.

The solvency ratio of non-life insurance companies, 224.3% (31.12.2018: 237.6%), weakened compared with the record high level ofthe end of 2018 as the capital requirement for equity risk increased.In addition, the fall in the level of interest rates increased technical provisions and therefore reduced own funds.

The solvency ratios of the life and non-life insurance sectors have also deteriorated since the beginning of the year.The solvency of companies will withstand significant changes in the investment market, however.The impact of the changes will depend on each company’s risk profile; for example equity weighting and balance sheet interest rate risk.The fall in interest rates, in turn, will increase the value of fixed income investments, but at the same time also increase technical provisions valued at market prices.If the impact of interest rates on technical provisions is greater than on the value of fixed income investments, the amount of own funds decreases.


Financial state and risks of supervised entities - page on website (in Finnish)



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Finanssivalvonta, or the Financial Supervisory Authority (FIN-FSA), is the authority for supervision of Finland’s financial and insurance sectors. The entities supervised by the authority include banks, insurance and pension companies as well as other companies operating in the insurance sector, investment firms, fund management companies and the Helsinki Stock Exchange. We foster financial stability and confidence in the financial markets and enhance protection for customers, investors and the insured.

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