Finland’s Plan to Ignore IMF on Debt Caps Bemoaned by FSA Head

Finland’s financial regulator is questioning a government proposal to enforce a more lenient cap on mortgages than the International Monetary Fund says is needed to support the Nordic region’s only euro member.

The Finance Ministry in February proposed limiting mortgages to 90 percent of all assets pledged as collateral. The draft proposal, due to take effect from July 2016, lets a home buyer finance the gap between a property’s price and a loan by using additional collateral, including credit guarantees sold by banks. The regulator had sought a cap tied only to the market value of a home, in line with a recommendation by the IMF.

Though any cap is “a step forward,” the planned curbs “would have been more effective based on the property value,” Anneli Tuominen, director general at the Financial Supervisory Authority, said in an April 14 interview in Helsinki. “The Finance Ministry proposal allows many other things as collateral.”

Passing the law would make Finland the first Nordic nation to codify a mortgage cap through legislation. Sweden and Norway have non-binding 85 percent limits based on a property’s value. In Denmark, covered-bond legislation limits bond-backed mortgages to 80 percent of home values, while bank lending is unlimited.

‘Sub-Par’ Growth

Standard & Poor’s cut the outlook on Finland’s AAA rating last week, citing “sub-par” economic growth prospects for the Nordic region’s only euro member. Finnish gross domestic product contracted 0.3 percent in the fourth quarter and output hasn’t expanded since the first quarter of 2012, according to the statistics agency.

Yet Finland, like the rest of the Nordic region, has been prone to imbalances in its housing market. The country’s housing market is among western Europe’s riskiest and homes are at least 20 percent overpriced, Commerzbank AG said last year. Prices have risen about 35 percent since 2000, while remaining stagnant for the past four years, statistics office data show.

“It would have been preferable, as the IMF said, to have the LTV calculated like the European Systemic Risk Board does, based on property value and nothing else,” Tuominen said.

Finland’s mortgage cap proposal would treat first-time buyers more leniently than others, setting the limit at 95 percent. The regulator also has the option to tighten the cap by 10 percentage points “if house prices begin to accelerate and lending grows fast in relation to gross domestic product,” Tuominen said.

Debt Trends

About 70 percent of Finland’s homes are owner occupied, according to the statistics agency. The watchdog has called for a binding mortgage cap since discovering in 2010 that banks flouted its recommendation from earlier that year. In 2012, 37 percent of home loans exceeded the FSA’s recommended limit.

Household debt has grown for more than a decade in Finland and reached a record 119 percent of disposable incomes in 2013. That’s still less than elsewhere in the Nordic region and gives the regulator some scope to wait before it enforces lending curbs, Tuominen said.

“In this current situation, with housing loans and house prices growing modestly, we probably wouldn’t even need to use the LTV as a macroprudential tool,” she said. Still, “a housing bubble is not in the interests of the banking sector either. We’ve seen how the industry has fared in many countries after bubbles burst.”

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