Macroprudential decision: Countercyclical capital buffer requirement and housing loan cap remain unchanged, credit institutions’ risk weight floor discontinued

“The effects of the coronavirus pandemic on the real economy and financial markets have been significant. It is important to support conditions for economic growth and thus promote stability without jeopardising longer-term stability,” says Marja Nykänen, Chairman of the FIN-FSA Board.

Due to the exceptional situation caused by the coronavirus pandemic, the FIN-FSA Board will place greater emphasis on the cyclical development of the economy and the financial system in its future decision-making on macroprudential instruments. In decisions on the dimensioning of structural macroprudential instruments, the aim is to ensure that their dimensioning supports the recovery of the economy and the financial system in a sustainable manner.

Countercyclical capital buffer requirement and loan cap maintained at standard level

In April 2020, the FIN-FSA Board eased credit institutions’ structural capital requirements and, in June 2020, restored the maximum LTC ratio (i.e. loan cap) for residential mortgage loans other than first-home loans to its statutory standard level of 90%.

Based on the available indicator and statistical data, there are no signs that the credit cycle will overheat in the near future.

This, together with the weak economic outlook, supports maintaining the CCyB rate at 0%. The uncertain economic outlook for the economy and the housing market also support maintaining maximum LTC ratios at their standard levels under the Credit Institutions Act, namely at 95% for first-home loans and 90% for other than first-home loans.

“In the current uncertain situation, careful assessment of borrowers’ ability to pay is important. The FIN-FSA Board urges lenders to exercise restraint in granting loans that are very large in relation to the applicant’s income and have a longer maximum repayment period than usual,” emphasises Nykänen.

Risk weight floor for housing loans discontinued

On 27 June 2017, the FIN-FSA Board decided to set a minimum risk weight level of 15% for residential mortgage loans applicable to credit institutions that have adopted the Internal Ratings Based Approach for the calculation of capital requirements. The decision entered into force from the beginning of 2018. The size of the risk weight determines the amount of own funds that a credit institution must hold on its balance sheet to hedge against credit losses from residential mortgages. 

The macroprudential significance of the risk weight floor has declined and will continue to decline a result of microprudential measures and regulatory changes. At present, Finnish banks’ average risk weights on residential mortgage loans exceed the 15% limit. The FIN-FSA Board therefore does not consider it necessary to extend the validity of the risk weight floor. The current risk weight floor requirement expires on 1 January 2021.

The Board of the Financial Supervisory Authority assesses quarterly the short- and long-term risks to the stability of Finland’s financial system. If necessary, the Board may tighten or relax the so-called macroprudential instruments, which promote stability. The Board decides quarterly on the levels of the countercyclical capital buffer (CCyB) and the maximum loan-to-collateral (LTC) ratio. The levels of the systemic risk buffer and the additional capital requirements for nationally systemically important institutions (O-SII buffers) are reviewed annually.

Appendices

• 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 (in Finnish, pdf)
• Opinions on the Director General’s proposal on the application of macroprudential instruments (in Finnish, pdf)
  • Bank of Finland
  • Ministry of Finance
  • Ministry of Social Affairs and Health

See also

• Macroprudential decisions
• Description of macroprudential instruments