European financial markets have continued to stabilise and the availability of funding has improved. This has eased the management of sovereign debt problems and facilitated banks’ access to funding. The European banking union will play a pivotal role in ensuring financial stability in the longer term. ‘Whilst the situation in the international financial markets has improved, the simultaneous deterioration of the outlook for the Finnish economy exposes the financial system to risks’, said the Deputy Governor of the Bank of Finland, Pentti Hakkarainen, at today’s press briefing on publication of the latest issue of the journal Euro & talous.
Prolonged slow economic growth will also increase the sensitivity of the economy to external shocks. ‘If sustained, the low level of interest rates and ample liquidity may create distortions in financial markets. The increase in potential risks must be closely monitored’, observed Deputy Governor Hakkarainen.
The debt servicing capacity of Finnish non-financial corporations and households has remained good on average. ‘The moderation of household indebtedness and housing price inflation is a positive development, but given the high level of debts and prices the situation is vulnerable overall’, said Deputy Governor Hakkarainen. Negative economic surprises, in conjunction with a decline in housing prices, would be reflected in household spending behaviour and, consequently, depress the fragile economic development. An increase in interest rates would have the same effect. Rather than posing an immediate threat to the stability of banks, this presents a risk to the real economy.
With the Finnish economy currently facing both structural and cyclical problems, it is important to ensure that the financial system operates efficiently and creates the conditions for economic recovery. At the same time, measures must be taken to provide for the risk resilience of the financial system also in weaker-than-expected economic conditions. ‘The tools available to the authorities for the prevention of systemic risks must be sufficient and internationally comparable. The ability and powers to deploy them must be provided for in good time’, Deputy Governor Hakkarainen stressed.
The risk resilience of Finnish banks has remained solid overall and the banks have reported steady performance, but the low level of interest rates and slackening growth in the volume of outstanding loans both weigh on their profitability. The regulatory reforms have coincided with the first shoots of growth in the economy, but given the sound capital adequacy of Finnish banks, the additional measures required by the new regulations and the related potential cost effects have not been as severe in Finland as in many other countries.
Surveys show that non-financial corporations’ access to funding has remained relatively good in Finland. In addition, appropriate conditions have been created for the diversification of funding sources. However, the tightening of corporate lending criteria has met with some criticism. It is important to ensure a sufficient degree of competition between banks in the field of corporate lending, as well as smooth access to funding for non-financial corporations.
The banking union will take supervision and crisis resolution to the cross-border level, to match the level of actual operation of financial institutions. ‘The launch of the Banking Union marks a major step forward in Europe’, Deputy Governor Hakkarainen emphasised. It is important that the bail-in approach is consistently applied in the resolution of banks in order to escape financial market disruptions and costs to taxpayers. ‘The conditions are in place for the efficient functioning of supervision and crisis resolution in practice.’
Euro & talous 2/2014: Rahoitusjärjestelmän vakaus
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