Transcript Banking union about to start

Bank of Finland Bulletin 2/2014:
Financial stability
Pentti Hakkarainen, Deputy Governor
15.5.2014
Themes of the stability report
• Owing to the weak outlook for the real economy, particular attention
needs to be devoted to the vulnerabilities of the domestic financial
system.
• Risks can be created by: housing price developments and
households’ considerable debt levels, effects of low interest rates
and transmission of bank lending.
• As demonstrated by the financial crisis, Finland also needs
internationally comparable instruments for prevention of systemic
risks.
• Banking union marks an important step forward. Supervision and
resolution should be on the same cross-border level as the actual
operations of financial institutions.
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Risks related to economic and credit cycles
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Improved access to finance supports euro
area’s gradual recovery from the crisis
Risk premia on bonds issued by financial institutions and
public-sector entities*
800
Public sector*, peripheral countries**
Public sector*, Countries with good credit ratings
Financial institutions, peripheral countries**
Financial institutions, countries with good credit ratings
Basis points
600
400
200
0
-200
2007
2008
2009
2010
2011
2012
2013
2014
* Public-sector bonds refer to bonds issued by local government and central
government-guaranteed bonds.
** Peripheral countries: Italy, Spain, Greece, Ireland and Portugal.
Sources: Bloomberg and BofA Merrill Lynch.
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Increased risk appetite may distort prices on
securities markets
Issues of bonds by high-risk non-financial corporations and risk
premia on yields
Numer of issues (right-hand scale)
Risk premium
Number
25 %
500
20
400
15
300
10
200
5
100
0
1998
0
2001
2004
2007
2010
2013
Source: Bloomberg.
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Share prices on the increase
Stock indices of major countries
S & P 500 index
Tokyo, Nikkei 225 index
Total euro area: Dow Jones Euro Stoxx (Broad) index
MSCI emerging markets index
220
Beginning of period = 100
180
140
100
60
2009
2010
2011
2012
2013
2014
Source: Bloomberg.
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Risks transmitted from abroad to
Finland
• The development of the international economy and
financial markets has a great impact on the
prospects and risks for the Finnish economy and
financial system.
Risks of key concern for Finland:
 Emergence of renewed instability on international financial markets.
 Long-sustained low level of interest rates and excessive rise in asset
prices.
 Impact of geopolitical tensions on the Finnish economic outlook.
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Domestic economy, non-financial
corporations, households, public finances
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Makrotalous
Makrotalous
Makrotalous
Indebtedness and development of the real economy
pose the main risks to the Finnish financial system
Real economy
kestävyys
nkkien
kestävyys
n kestävyys
Asuntojen
hinnat
Asuntojen
hinnat
Asuntojen
hinnat
Banks’
viability
Housing
prices
Riskipreemiot
Riskipreemiot
Riskipreemiot
Risk premia
Velkaantuneisuus
Velkaantuneisuus
Velkaantuneisuus
Indebtedness
June
2012
IV/2009
IV/2009
IV/2009
May 2014
III/2012
III/2012
III/2012
June
2013
I/2012
I/2012
I/2012
The outer values reflect higher systemic risks.
Sources: NASDAQ OMX Helsinki, banks, Statistics Finland and Bank of Finland.
: NASDAQ
OMX
Helsinki,
pankit,
Tilastokeskus
ja ja
Suomen
Pankki.
et:
NASDAQ
OMX
Helsinki,
pankit,
Tilastokeskus
Suomen
Pankki.
ähteet:
NASDAQ
OMX
Helsinki,
pankit,
Tilastokeskus
ja Suomen
Pankki.
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Growth rate of MFI corporate loans has
remained subdued
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
%
%
30
8
20
6
10
4
3
2
2
1
0
0
-10
-20
2005
2007
2009
2011
2013
* Includes housing corporations. ** Excludes housing corporations.
Source: Bank of Finland.
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Interest rates on corporate loan stock in euro
area countries
Finland
7
Germany
France
Italy
Spain
Euro area
%
6
5
4
3
2
1
0
2009
2010
2011
2012
2013
2014
Sources: European Central Bank and Bank of Finland calculations.
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Access to finance has remained good in the
corporate sector in Finland
Got everything
Refused to withdraw because cost too high
Don't know
100
Got part of it
Application rejected
%
80
60
40
20
0
2009
2010
* October–March.
** April–September.
*
**
*
2014
2013
2012
2011
**
*
**
Source: European central bank.
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Bankruptcies increasing slightly, but still
at a moderate level
Bankruptices and non-performing assets in Finland
Bankruptcy filings for non-financial corportaions, 12-month moving sum (left-hand scale)
Banks' non-performing assets* (right-hand scale)
8
Number, 1,000
EUR billion
8
6
6
4
4
2
2
0
0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
* Assets due and unpaid for at least 90 days.
Sources: Statistics Finland, Financial Supervisory Authority and Bank of Finland calculations.
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Household indebtedness continued to grow
but at a slower pace
Household indebtedness and interest burden in Finland
Other loans (left-hand scale)
Housing corporation loans* (left-hand scale)
Housing loans (left-hand scale)
Interest expenditure (right-hand scale)
140
% of disposable income
% of disposable income
7
120
6
100
5
80
4
60
3
40
2
20
1
0
0
2000
2002
2004
2006
2008
2010
2012
* Statistics Finland’s estimate of the loan stock of household-owned housing corporations.
Sources: Statistics Finland and Bank of Finland calculations.
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Half of household debts held by a tenth of
households
Households and their debt by debt ratio*
Share of households (left-hand scale)
Share of total household debt (left-hand scale)
Average debt per household (right-hand scale)
60
EUR, thousands
%
240
50
200
40
160
30
120
20
80
10
40
0
0
Households with no debt
Households with debt
ratio of over 0 % and
up to 300 %
Households with debt
ratio of over 300 %
* Debt ratio = household debt, % of disposable monteary income in 2012.
Sources: Statistics Finland and Bank of Finland calculations.
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Growth rate of housing loans has decelerated
Annual change in household loan stock* in Finland
Total loans
20
Housing loans
%
15
10
5
0
2005
2007
2009
2011
2013
* Finnish households' euro-denominated loans from MFIs operating in Finland, excluding
household-owned housing corporation loans.
Source: Bank of Finland.
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Real housing prices have declined, regional
differences in price developments
Real housing prices in Finland
Whole country
160
Greater Helsinki area
Rest of Finland
Index, 2000 = 100
140
120
100
80
2000
2003
2006
2009
2012
Nominal housing price indices are converted into real indices, using the consumer price index
for the whole country.
Source: Statistics Finland.
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Financial system risk resilience and
structural risks
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Finnish banking sector’s risk resilience has
remained good
Own funds and capital adequacy in the Finnish banking sector
Loss buffer* (left-hand scale
Minimum requirement for own funds (left-hand scale)
Capital adequacy ratio (Tier 1 and Tier 2) (right-hand scale)
Common Equity Tier 1 ratio (CET1) (right-hand scale)
25
EUR bn
%
25
20
20
15
15
10
10
5
5
0
0
2007
2008
2009
2010
2011
2012
2013
* Own funds surplus = own funds − minimum requirement for own funds.
Source: Financial Supervisory Authority.
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Banking sector performance unchanged and
loan losses small
Finnish banking sector performance
Net interest income
Net income from trading and investment
Expenses and depreciations
Pre-tax profit
8
Net fee income
Other income
Net impairment losses
EUR bn
4
0
-4
-8
2007
2008
2009
2010
2011
2012
2013
Source: Financial Supervisory Authority.
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Low interest rates and slower growth of
lending stock strain profitability
Overall margin and 3-month Euribor
Overall margin (average interest rate on loan stock - average interest rate on deposit stock)
3-month Euribor
6
%
4
2
0
-2
1999
2001
2003
2005
2007
2009
2011
2013
Finnish MFI loans to and deposits from the public.
Sources: Reuters and Bank of Finland.
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Dependency on international wholesale
funding increases vulnerability
Finnish banking sector’s dependency on wholesale funding
200
Issues of long-term debt securities
Issues of short-term debt securities
Loans to households and non-financial corporations
Deposits from households and non-financial corporations
Structural financial deficit (loan stock - deposit stock)
EUR bn
150
100
50
0
2006
2008
2010
2012
2014
Deposit banks, mortgage banks and other credit institutions in the same group.
Source: Bank of Finland.
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Banking sector sensitive to contagion
• Finnish banking sector’s degree of concentration among the highest
in the EU.
• Strong interconnectedness within the Nordic banking system. Large
amount of assets in the Nordic countries, only small amount in the
higher-risk countries.
• Significant share of the Finnish banking sector in the ownership of
Nordic parent banks.
• Domestic banks’ foreign assets and liabilities have increased in the
2000s.
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Insurance sector has maintained its
solvency
• Insurance sector profitability and solvency have
remained good, but considerable differences
between companies can be observed.
• Insurance companies have been able to adjust their
business models in the low interest rate
environment.
• Unexpected shocks in the investment market pose
the main risk to profitability and solvency.
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Infrastructure has operated reliably
• A reliable infrastructure that functions under all
circumstances is a key part of a stable financial
system
– International cooperative oversight plays an important role
• Fragmentation of functions can endanger continuity
– National contingency arrangements important
• Finland migrated to SEPA on schedule, development
continues
– New cooperation groups have been established: the Euro
Retail Payments Board (ERPB) in Europe and the
Payments Council in Finland
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Measures to ensure financial stability
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The macroprudential tools to be
introduced in Finland
• Countercyclical capital buffer requirement: 2015
• Binding maximum loan-to-value (LTV) ratio for housing
loand (loan-to-value cap): 7/2016
• Minimum risk weights for housing loans: 2015
• Additional capital requirement for domestic systemically
important credit institutions (O-SII requirement): 2016
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…. should be supplemented
• Use of the systemic risk buffer should also be made
possible in Finland
– Additional capital requirement permitted by the Capital
Requirements Directive if the national banking sector is
structurally vulnerable
– There should not be big differences in regulation and
supervision in an integrated banking market
– Nearly all EU countries will incorporate the requirement in
their legislation
• An internationally comparable set of instruments is
necessary; use of the instruments to be determined
separately.
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National additional capital requirements for systemically important
credit
institutions
in capital
the Nordic
countries,
National
additional
requirements
for maximum
systemicallyrequirement
important
credit institutions in the Nordic countries, maximum amount
6
%
5
4
3
2
1
0
Sweden
Norway
Denmark
Finland
Source: National central banks.
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Banking union about to start
• The two key elements of banking union – single
supervision of banks and single resolution – are
about to start.
• The resolution mechanism and bail-in
remove/reduce the costs of banking crises to
taxpayers.
• Also in Finland, resolution legislation and the related
powers for authorities must be implemented
promptly in all respects.
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Single Resolution Mechanism
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Thank you!
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