Bank of Finland Calls for Extra Capital Buffers to Match Sweden

Finland needs to tighten capital standards to eliminate discrepancies within the Nordic region’s banking system, according to Pentti Hakkarainen, deputy governor at the Bank of Finland.

“As the same companies operate in all the Nordic countries, tools should be the same across borders,” he said in an interview. “If a bank operating in four countries faces higher capital requirements in three and lower requirements in one, the question is whether it’s a good thing for that one country, or even for the bank.”

Sweden, which imposes some of the world’s strictest bank standards, plans to raise capital requirements further in an effort to contain record private debt and protect taxpayers from future financial crises. Banks deemed systemically important will need to set aside 5 percent of their capital in Sweden and Norway, compared with 2 percent in Finland, which doesn’t impose the systemic-risk buffer.

Requirement for as much as 3 percent additional capital could potentially affect the three largest banks operating in Finland, Sweden’s Nordea Bank AB, Danske Bank A/S, based in Copenhagen and OP-Pohjola Group, according to Hakkarainen.

“We’re not requesting these tools to be used today, we’re preparing for changes in the future,” he said at the central bank headquarters in Helsinki. “Different structural reforms, mergers and alliances are an integral part of the banking industry.”

Boosting Requirements

Finland’s government in April proposed boosting risk-weighted capital requirements to 7 percent and adding an extra buffer of 3 percent for systemically important banks. In Sweden and Norway, systemically important banks face capital requirements of 13 percent to 19.3 percent, when all buffers are taken into account.

The central bank today said that Finland’s financial sector’s resilience to risk remains “solid” even as low interest rates and a stagnant economy have strained banking profitability in the northernmost euro member.

As Swedish policy makers are concerned over risks stemming from a buildup in consumer credit growth and house price gains, Finland’s central bank is now contending with declines.

Housing loan stock growth has slowed since last year as real housing prices declined, according to the central bank and Statistics Finland. About half of Finland’s household debt is held by 10 percent of the households with debt levels of more than 300 percent, according to Bank of Finland calculations.

Potential Decline

“Potential decline in house prices would negatively impact household spending behavior,” Hakkarainen said. “This would be negatively reflected in the fragile real economy -- especially if combined with external shocks.”

Finland’s economy has contracted in three of the past five years and may also have shrunk in the first quarter, the nation’s statistics office said today, citing preliminary data.

Extra pressure is added by the conflict in Ukraine, which threatens about 10 percent of Finnish exports to neighboring Russia. Finland has seen little boost from exports even as the European economic recovery is slowly picking up speed.

“The gradual recovery in Europe combined with strong capital flows and narrowed risk premiums introduces a danger of over-optimism and complacency,” Hakkarainen said. “Potential disturbances in the European financial markets would have an adverse effect in Finland.”

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