According to the Bank of Finland Bulletin 1/2022, the financial system of the country remained stable. Nevertheless, the uncertainty in the Finnish economy has steadily increased and, thus, the financial system needs to be well prepared to bear new risks.
International financial markets reacted quite strongly to the outbreak of the war in Ukraine, as a result, for example, stock prices fell sharply. This affected particularly the companies, banks and countries with links to Russia. Finland refers to such countries as well.
Increase in the general level of prices, i.e., inflation, has accelerated already during the pandemic. However, as a result of the war, rising energy and food prices are affecting everyone's daily lives and straining families' budgets. The central bank seeks to control inflation by influencing interest rates. The traditional remedy to bring inflation down is to raise interest rates. It is expected rates to climb in Europe, as a result, financial conditions are likely to tighten in the next few years. If there is an increase in interest rate, then the debt-servicing costs rise as well, which in turn will have an impact on the finances of both companies and individuals.
The economic growth is expected to slow down considerably in Europe and, in particular, Finland. High energy and raw materials costs, the ongoing COVID-19 pandemic have cast a shadow over growth forecasts and depresses the economic outlook.
The war will affect Finnish companies, especially manufacturing, agriculture, transport industries, and some companies that had significant trade relations with Russia. The profitability may weaken, very expensive energy could lead to incapacity to manage the debts, in addition, some products and services may not have the same demand as before.
Essential consumer spending is taking an ever-larger share of people’s income, because of the rise in prices of fuel, electricity and food. The debt-servicing expenses of many Finns are also growing. In Finland, the interest rates on housing loans generally rise and fall with the reference rates. The most common reference rate is the 12-month Euribor, which rose above zero in April for the first time since 2016. This will increase the interest expense on loans and therefore either inflate monthly instalments or lengthen the repayment period for the loans.
According to the Bank of Finland and the Financial Supervisory Authority, the level of household’s indebtedness has long been increasing, the new housing loans are become larger than before, and it is increasingly common that the durations of the loans are longer than the previous standard of 25 years. In order to minimise any potential risk to the stability of Finnish financial system the additional measures have to be taken to mitigate risks associated with the household indebtedness. It is proposed by the government to limit the size and duration of housing loans, to set of a debt ceiling that is linked to the borrower’s income, all significant debts should be taken into account as well.
Nevertheless, banking sector in Finland is still profitable and solvent. Based on the stress tests conducted on the banks, they would withstand even a very serious economic and financial crisis. In any case the authorities should be able to ensure that banks survive in difficult conditions: the war, pandemic, financial meltdown or any other national emergency.
The full information and the source text can be found at Bank of Finland website.
Published 13.06.2022, FINREPO