A stable financial system
The Bank of Finland promotes the stable functioning of the financial system, i.e. financial stability. A financial system is stable when it is resilient and there are no major disruptions to the functioning of financial institutions, financial markets or the systems supporting their functioning, even if they are exposed to severe risks. Moreover, a stable financial system does not cause severe risks or disruptions and does not spread and amplify them in other parts of society. A stable financial system is able to provide key financial and payment services in all circumstances.
The financial system is composed of banks and other financial institutions, money and capital markets as well as payment systems and securities settlement systems. The task of the financial system is to channel funds from savers and investors to consumers and businesses making investments and to transfer payments and manage risks.
The Bank of Finland promotes the stability, reliability and efficiency of the financial system. The ultimate goal is to ensure the availability of financial and payment services needed by households, companies, other private entities and the public sector in all circumstances. A stable financial system prices risks properly and supports economic growth and wellbeing.
A financial system is stable when it is resilient to risks and disruptions. In addition, a stable financial system does not cause serious risks or does not spread and amplify them in other parts of society. A stable financial system is able to perform its key tasks, for example, provide financial and payment services in all circumstances.
When can the stability of the financial system be threatened?
The stability of the financial system may be jeopardised if the risks and disruptions to which it is exposed are so serious that they threaten the functioning of the entire financial system or its key components and thus the real economy. It may, in the worst case, lead to a financial and economic crisis and cause large economic and social costs.
Risks threatening the stability of the financial system are referred to as systemic risks. The probability of systemic risks is small, but if materialised, their impact is substantial. Systemic risks are caused by cyclical and structural vulnerabilities in the financial system. Financial stability may be threatened also by cyber risks and climate change-related risks.
Cyclical vulnerabilities typically increase during an economic and credit and real estate market expansion and may cause losses in a downturn. Examples of cyclical vulnerabilities are excessive growth in household and corporate borrowing and indebtedness and a surge in asset prices.
Structural vulnerabilities are independent of cyclical fluctuations, but they may amplify cyclical fluctuations and deepen recessions and crises. Structural vulnerabilities are, for example, high household indebtedness, the banking system's large size and high degree of concentration, and the financial and operational interconnectedness between the various financial system entities.
Systemic risks may materialise, triggered by expected or unexpected events. The Bank of Finland and other authorities seek to identify in a timely manner the vulnerabilities in the financial system and the potential systemic risks caused by them. In this way, the authorities can reduce in advance the probability and impacts of risk materialisation by, for example, introducing macroprudential measures.
A stable financial system channels funds, transfers payments and enables the reliable and effective management of risks.