Most Concentrated EU Bank Market Sets Battle Lines on New Buffer

  • Finnish bank lobby says more regulation would hurt investment
  • Finance ministry is preparing systemic risk buffer legislation

No other country in the European Union has as much lending concentrated in as few banks as Finland.

To deal with the risk of one lender bringing down the entire economy, the Finnish Finance Ministry wants to add a systemic risk buffer to the regulator’s toolbox. The idea is that the watchdog should be free to apply an extra layer of capital if it sees non-cyclical, long-term risks building up. More specifically, the Financial Supervisory Authority could force banks operating in Finland to hold between 1 percent and 5 percent core capital on top of existing buffers.

Nordea Bank AB, Danske Bank A/S and OP Group together control 90 percent of the lending market in Finland, which is the Nordic region’s only euro member. Part of the concern authorities in Helsinki are trying to address is that problems surfacing in the rest of the single currency bloc could spill over into Finland.

But Finland’s top bank lobby group says it’s an unreasonable prospect for the industry to face yet another buffer requirement, and warns that any steps in that direction would only hurt lending and economic growth.

“Finland should not punish banks for no good reason,” Piia-Noora Kauppi, who leads the financial sector’s umbrella organization Federation of Finnish Financial Services FK, said in an interview. “It should wait until a good compromise is found on the European level.”

Kauppi says that the ministry’s proposal “gives the regulator a whole lot of freedom” to decide when to impose additional requirements. “A systemic risk buffer would naturally raise the cost of lending to customers.”

Most of Finland’s banking risk is concentrated on the country’s housing market. The country is one of eight in the EU to have received a warning from the European Systemic Risk Board over medium-term vulnerabilities on its residential real-estate market.

Finland is taking advantage of a clause under European capital rules that allows national regulators to impose stricter requirements to address macro-prudential or systemic risk. The proposed buffer has yet to make its way to Finland’s parliament. The country has already applied local requirements for too-big-to-fail lenders.

The FSA has said it plans to seek more powers, including to force the amortization of mortgages, if risks grow. It’s set to decide on Tuesday whether to apply the macro-prudential tools at its disposal, including a counter-cyclical capital buffer.

Kauppi says new macro-prudential tools would hit banks’ corporate lending and hurt investment just as Finland’s economy shows some signs of recovering.

The concern is whether “the right time is now,” she said.

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