Finland Must Cap Mortgages for Stability, Central Bank Says

Finland’s financial regulator needs the power to impose a binding cap on mortgages to prevent household debt growth from threatening financial stability, the central bank said.

“There are good reasons to ensure the readiness to make use of macro-prudential tools in time, such as loan-to-value regulation and a systemic risk buffer,” Deputy Governor Pentti Hakkarainen, who’s in charge of financial stability at the Bank of Finland, told reporters in Helsinki today. “The mortgage cap would be needed in some situations and the authorities should be able to decide it on a case-by-case basis.”

Finland’s financial watchdog recommended in March 2010 that banks cap mortgages at 90 percent of the property value. More than half of first-time buyers exceed that threshold, which isn’t legally binding, according to FSA sample studies in 2010 and 2012. About 30 countries have loan-to-value regulations, according to Hakkarainen.

“It would be a good addition in the toolbox,” he said.

Household debt reached 119 percent of disposable income last year, the highest level since at least 1986, the central bank said. The increase is fueled by record-low interest rates. The European Central Bank this month cut its benchmark rate to 0.5 percent to boost the 17-member euro-area economy that’s shrinking for a second year.

“Ongoing debt accumulation erodes the ability of households and the economy to adapt to negative economic surprises,” Hakkarainen said.

Finland should consider additional regulations on systemically important financial institutions in harmony with the global and Nordic banking industry, the central bank said.

Banks in Finland have enough of their own funds that are “mainly of high quality,” the central bank said. Still, the profitability of lenders is deteriorating as the low level of rates reduces net interest income, it said.

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