Transcript CDS spreads on European government bonds

Bank of Finland Bulletin 2/2013: Financial
stability
Deputy Governor,
Pentti Hakkarainen
23/05/2013
9.4.2016
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Themes of the Financial Stability publication
 International operating environment
 Domestic operating environment and the financial sector
 Infrastructure
 Measures to ensure financial stability
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International operating environment
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Twofold situation:
financial markets picked up,
real economy deteriorating
CDS spreads on European
government bonds have
declined
GDP developments have
deteriorated also in countries
with high credit ratings
CDS spreads on European government bonds
Portugal
16
Italy
Spain
Ireland
GDP
Finland
Percentage points
114
14
112
12
110
10
108
8
106
6
104
4
102
2
100
0
Countries with good credit rating*
Euro area
2005/I = 100
Finland
GIIPS countries**
98
2008
2009
Source: Bloomberg.
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2010
2011
2012
2013
2005
2006
2007
2008
2009
2010
2011
* Austria, Belgium, Finland, France, Germany and the Netherlands.
** Greece (2011-2012, est.), Ireland, Italy, Portugal and Spain.
Sources: Eurostat and Bank of Finland calculations.
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2012
Factors outside Finland causing uncertainty
 Weaker-than-expected economic development
– Negative influence on domestic corporations and households
– Financial sector profitability pressures and disturbed transmission of
financing
– Threat from growing problems in public sector
 Re-emergence of European financial crisis
– Weakening confidence, renewed escalation of debt crisis
– Potential negative impact on Finnish government and banking sector
funding, as highly dependent on foreign sources
 Negative side effects of low interest rates
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Negative effects of long-term low interest
rates
 Rates kept low for protracted period reduce banks' net
interest income and insurance companies' investment
income and put pressure on their profitability
 Debt service burden eased, increases loan forbearance,
delays deleveraging
 Search for yield affects allocation of investment, can
distort pricing of risk and overheat prices
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Domestic operating environment and the
financial sector
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Makrotalous
Makrotalous
Indebtedness and macroeconomic development
pose greatest risks to Finnish financial system
Macroeconomy
kestävyys
kestävyys
Asuntojen
Asuntojenhinnat
hinnat
Banks'
current
viability
Housing
prices
Riskipreemiot
Riskipreemiot
Velkaantuneisuus
Velkaantuneisuus
Risk premia
June
2011
IV/2009
IV/2009
Indebtedness
June
2012
I/2012
I/2012
May 2013
III/2012
III/2012
The outer values reflect higher systemic risks.
Sources: NASDAQ OMX Helsinki, banks, Statistics Finland and Bank of Finland.
t:: NASDAQ
NASDAQ OMX
OMXHelsinki,
Helsinki,pankit,
pankit,Tilastokeskus
Tilastokeskusja
jaSuomen
SuomenPankki.
Pankki.
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Growth of non-financial corporations' stock of
loans decelerated
Average interest rates on MFI corporate loans and annual growth rate
in Finland
1 Average interest rate on corporate loan stock* (left-hand scale)
2 Average interest rate on new corporate loans* (left-hand scale)
3 Corporate loans, annual growth rate (right-hand scale)
10
%
%
8
30
20
6
3
4
10
0
1
2
2
0
-10
-20
2004
2006
2008
2010
2012
* Also includes housing corporations.
Source: Bank of Finland.
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Interest rate margins widened most for small
corporate loans
Average margins on new corporate loans granted by Finnish MFIs, by
loan size
3.5
New drawdowns of up to EUR 50.000
New drawdowns of up to EUR 250.000
New drawdowns of over EUR 50.000 and up to EUR 250.000
New drawdowns of over EUR 250.000 and up to EUR 1 million
New drawdowns of over EUR 1 million
Percentage points
3.0
2.5
2.0
1.5
1.0
0.5
2010
2011
Excluding account and repo agreements.
Source: Bank of Finland calculations.
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2012
2013
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Companies increasing bond financing
Finnish corporate sector's interest-bearing debt structure
1 Loans from MFIs
3 Loans from other OFIs
5 Loans from other public-sector entities
7 Long-term debt securities
140 EUR bn
2 Overseas loans (excl. direct investments)
4 Loans from employee pension companies
6 Short-term debt securities
8 Debt relative to GDP (right-hand scale)
% of annual GDP
70
8
120
60
7
100
50
80
6
5
4
3
40
60
2
30
40
20
1
20
10
0
0
2007
2008
2009
2010
Sources: Statistics Finland and Bank of Finland
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2011
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Household debt accumulation continues – the
bulk of which for housing or renovation
Household indebtedness and interest burden in Finland
Housing-related loans*, % of disposable income (left-hand scale)
Other loans, % of disposable income (left-hand scale)
Total loans*, % of GDP (left-hand scale)
Total interest expenditure, % of disposable income (right-hand scale)
140
%
%
14
120
12
100
10
80
8
60
6
40
4
20
2
0
0
1986
1991
1996
2001
2006
2011
* Housing loans and households' estimated share of housing corporation loans.
Sources: Statistics Finland and Bank of Finland calculations.
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Debt burden and risks distributed unevenly
Households and their debt by debt ratio* in Finland
50
Share of households (left-hand scale)
Share of household debt (left-hand scale)
Average debt per household (right-hand scale)
%
EUR, Thousands
300
40
240
30
180
20
120
10
60
0
0
0%
(no debt)
Over 0 %
and up to
100 %
Over 100 %
and up to
200 %
Yli 200 % Over 300 % Over 400 % Over 500 %
and up to
and up to
and up to
300 %
400 %
500 %
* Horizontal axis: household debt, % of disposable monetary income 2011.
Sources: Statistics Finland and Bank of Finland calculations.
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Relative housing prices higher than long-term
averages
Relative housing prices in Finland
250
In relation to cost of housing construction
Average*
In relation to housing rents
Average*
In relation to wage and salary earnings
Average*
Index 1981/I=100
200
150
100
50
1981
1986
1991
1996
2001
* Average of the review period.
Sources: Statistics Finland and Bank of Finland calculations.
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2006
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2011
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Finnish banking sector: capital adequacy
improved despite slight decline in own funds
Return on equity (ROE)*
Common Equity Tier 1 (CET1)
Equity ratio (equity/balance sheet ratio)
20
%
16
12
8
4
0
2006
2007
2008
2009
2010
2011
2012
* Returns in 2006–2007 are affected by certain reorganisation measures in the banking
sector.
Source: Financial Supervisory Authority.
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Low level of interest rates weakens banking
profitability
Factors underlying changes in Finnish banking performance
3 000
EUR m
10
137
-122
381
2 500
-63
-83
Expenses
Value
adjustments
2562
2302
2 000
1 500
1 000
500
0
Operating
profits
2011
Net income
Net income
from trading
from
and investment insurance
activities
activities
Other income
Net interest
income
Operating
profits
2012
Source: Financial Supervisory Authority.
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Weak economic development adds to credit
risk
Bankruptcies, nonperforming assets and net impairment losses in Finland
Corporate bankruptcies filed, 12-month moving total (left-hand scale)
Banks' non-performing assets (right-hand scale)
Banks' net impairment losses, 12-month moving total (right-hand scale)
7
EUR bn
Number, 1000
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Sources: Statistics Finland, Financial Supervisory Authority and Bank of Finland calculations.
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High dependency on international market
funding
Funding deficit of Finnish banking sector
Loans to the public
200
Deposits from the public
Funding deficit
EUR bn
160
120
80
40
0
2007
2008
2009
2010
2011
2012
2013
The counterparties of loans to the public and deposits from the public are others than
financial institutions.
Source: Bank of Finland.
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Banks increased use of covered bonds
Finnish banks' covered bonds
1 Stock (left-hand scale)
2 Issued (left-hand scale)
3 Housing loan encumbrance (right-hand scale)**
28
EUR bn
%
70
1
24
60
20
50
3
16
40
12
30
8
20
2
4
10
0
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013*
* 2013 to end-April and January-April issue.
** Covered bonds as collateral for housing loans as share of entire stock of housing loans.
Calculation presumes 4.4% of housing loan stock does not qualify for use of bond as
collateral.
Sources: Bank of Finland, European Covered Bonds Council, Bloomberg and Financial
Supervisory Authority.
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Finland's banking sector is concentrated
Concentration of banking system in different EU countries
100
Proportion of five largest credit institutions in aggregated credit institutions' balance sheet in
2011
%
80
60
40
20
0
EE
NL
FI
PL
DK
CZ
CY
LT
SE
HU
IE
FR
ES
IT
AT
DE
The figures for the EU countries also include subsidiaries and branches of foreign banks operating in the
country.
Source: European Central Bank.
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Infrastructure
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Payment and settlement systems being
reformed
 Challenges posed by internationalisation of infrastructure
– Increased competition between infrastructure services
– Strive for economies of scale
– TARGET2-Securities and European harmonisation
 Changes and improvement in efficiency in cost of
systems’ reliability and service levels?
– Importance of market consultation
– Continuity and contingency arrangements
– Vulnerable groups' requirements: unhindered payments
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Measures to ensure financial stability
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1) Finland to consider additional requirements
for systemically important banks
 Consequences of bank crisis serious in concentrated
banking system, such as in Finland
 Other Nordic countries significantly tightening regulations
concerning systemically important banks
 Regulations need to be as harmonised as possible
internationally and in Nordic countries in particular
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2) Finland needs to establish ways of reducing
housing loan-related risks
 No country is safe from the housing and property crises
– In the 2000s: Denmark, Ireland, the Netherlands, Spain, the
United States...
– Finland suffered crises in the 1930s and 1990s
 International experience: A maximum loan-to-value ratio
is a way of dampening excessive growth in housing
loans and housing prices
 Studies show that FIN-FSA's current loan-to-value ratio
recommendations are not adequate
– A binding LTV ratio is needed as a macroprudential tool
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3) Bank liabilities should be used in banks’
crisis resolution
 Banks' effective recovery and crisis resolution requires the possibility to
write down the liabilities in the balance sheets of troubled banks or
convert into equity (bail-in)
 Bail-in should be the general rule; bail-out should be considered an
exceptional solution and only applied after separate political
consideration
 Write-downs should first be directed at those debtors with the best
ability to evaluate and price risks (market discipline)
 Effectiveness of crisis resolution improved by bail-in instruments
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4) Functioning of business financing must be
ensured
 Smooth functioning of corporate financing is vital to
economic growth
 In EU comparison the availability of corporate financing
in Finland is good, however lending terms are getting
tighter
 Small and medium-sized companies dependent on bank
financing
 Promoting diverse sources of financing, in particular for
small and medium-sized companies
– Enhancing the domestic bond market
– European level measures
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