Macroprudential policy promotes the stability of the financial system

Macroprudential policy refers to actions taken by authorities aimed at promoting the stability of the entire financial system. Macroprudential policy complements monetary policy and the regulation and supervision of financial institutions.

The purpose of macroprudential policy is to reduce the likelihood of financial crises and limit their impacts on the financial system and the economy. The objective is to prevent situations in which the financial system could not provide key financial services to citizens and companies.

Macroprudential instruments can be used to reduce both cyclical risks and risks caused by the structural features of the financial system.

What is the purpose of macroprudential instruments?

Macroprudential instruments can be used to address, for example, lending and indebtedness. In Finland, the maximum loan-to-collateral ratio, i.e. so called loan cap, limits the amount of housing loan relative to the value of the purchased property and other possible collateral. In turn, the additional capital requirements imposed on banks strengthen banks’ loss-absorbing capacity and ability to continue lending to households and companies in all economic conditions. 

In Finland, decisions on the use of macroprudential instruments are taken by the Board of the Financial Supervisory Authority. The decisions are based on the analysis of risks that threaten financial stability and the assessment of the necessary actions and their impacts.

Experts from the Bank of Finland and the Financial Supervisory Authority participate in the preparation of quarterly macroprudential decision-making. In addition, the Bank of Finland issues on a quarterly basis an opinion on proposals by the Director General of the Financial Supervisory Authority on the deployment of macroprudential tools.

Financial market disruptions spread across borders

In the integrated European financial system, the problems of financial institutions and financial market disruptions can spread rapidly across countries and financial institutions. The task of the European Systemic Risk Board (ESRB), composed mainly of representatives of central banks and financial supervisors of the EU countries, is to identify cross-border systemic risks and issue to the authorities of the member states macroprudential policy recommendations and warnings.

The Governor of the Bank of Finland is First Vice-Chair of the European Systemic Risk Board. Bank of Finland experts participate extensively in the preparation of issues discussed in the European Systemic Risk Board.

In the field of macroprudential policy, the Bank of Finland also cooperates with Nordic and Baltic authorities and the European Central Bank. Cooperation with neighbouring countries is essential because of the deep integration of the countries' financial systems. The European Central Bank has certain restricted powers to influence the macroprudential policies of euro area countries.