Description of macroprudential instruments

The countercyclical capital buffer

The countercyclical capital buffer (CCyB) requirement stipulates credit institutions to increase their risk resilience during the upswing of the credit cycle. Correspondingly, a release of the CCyB during the downswing of the credit cycle restrains credit institutions from excessive contraction of credit.

The FIN-FSA may set the CCyB for credit exposures allocated to Finland at 0–2.5% of the total risk exposure amount, under conditions specified in the Ministry of Finance Decree (1029/2014, only in Finnish and Swedish). The CCyB requirement must be met with Common Equity Tier 1 capital. The institution-specific CCyB is determined on the basis of the geographical distribution of the exposures of each credit institution. The CCyB must be met within 12 months of the decision, unless FIN-FSA decides on a stricter schedule on specific grounds.

The CCyB, the application of which has been possible since 1 January 2015, is based on the Credit Institutions Act (chapter 10, sections 4, 5 and 6).

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The binding maximum loan-to-value (LTV) ratio for housing loans

The binding maximum loan-to-value (LTV) ratio for housing loans constrains overheating in the housing markets, growth in household indebtedness and credit institutions’ risks relating to household credit during the upswing of the credit cycle.

The maximum LTV ratio is 90% (95% for first-home purchases) of the fair value of collateral at the time the loan is granted. In order to restrict exceptional growth in financial stability risks, FIN-FSA may lower the LTV ratio by 10 percentage points and limit consideration of collateral other than real security in the calculation of the LTV ratio. Credit institutions must fulfil the more stringent LTV requirement within three months of the decision, at the earliest. Prior to the FIN-FSA Board decision, credit institutions are entitled to deliver their own opinion on the maximum LTV ratio and the need for changing it.

The legal provisions concerning the binding maximum LTV ratio and FIN-FSA’s powers for its tightening entered into force on 1 July 2016 and are based on the Credit Institutions Act (chapter 15 section 11).

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Increasing the risk weights on loans secured by mortgages on immovable property

Increasing the risk weights on loans secured by mortgages on immovable property mitigates the risk of overheating in the immovable property markets in an indirect manner, by increasing credit institutions capital requirements for mortgage-backed lending.

Stricter risk weights than those required by regulation may be set on the basis of financial stability considerations in credit institutions applying the standardised approach for credit risks and institutions using advanced internal ratings based approaches. Conditions that are to be taken into account when setting higher risk weights are specified in a separate European Commission Implementing Regulation.

The possibility of increasing risk weights entered into force on 1 January 2014 and is based on the Capital Requirements Regulation (Articles 124 and 164). The relevant decisions will be taken by the FIN-FSA Board.

The powers conferred on macroprudential supervisory authorities

The powers conferred on macroprudential supervisory authorities (powers under Article 458 of the CRR) allow imposition of stricter national measures than those set out in the common EU regulatory framework in order to address systemic risk.

By virtue of Article 458 of the Capital Requirements Regulation (CRR), FIN-FSA may temporarily impose stricter requirements on credit institutions’ own funds, capital conservation buffers, liquidity, risk weights for loans secured by mortgages on immovable property, risk weights for intra-financial sector exposures, large exposures and public disclosure. The imposition of stricter national measures is subject to detailed explanation of the grounds for the draft measures and a rationale for why other macroprudential instruments could not adequately address the systemic risk identified. Furthermore, it is also required that the European Commission or the Council not oppose the draft national measures due to e.g. their negative impact on the EU internal market.

The possibility to use the instruments provided for in Article 458 of the CRR entered into force on 1 January 2014.

Global systemically important institutions/banks (G-SII/Bs)

Global systemically important institutions/banks (G-SII/Bs) are credit institutions that pose a systemic risk so great that, if realised, it would endanger the stability of the global financial system.

Efforts are made to mitigate the risks of G-SII/Bs for the financial sector and the economy by strengthening the institutions’ loss absorbency, thereby reducing the probability of their failure. The objective of additional capital requirements imposed for G-SII/Bs (G-SII/B buffers) is to prevent macroprudential risks arising from structural factors in the financial markets.

The Financial Stability Board (FSB) recommends annually which credit institutions the national authorities should define as G-SII/Bs and what additional capital requirements should be applied to them. The recommendation is based on the guidelines and preparation of the Basel Committee on Banking Supervision (BCBS).

In Finland, FIN-FSA determines the G-SII/Bs and the additional capital requirements to be set for them, pursuant to the Credit Institutions Act (Chapter 10 Section 7) and the Commission Delegated Regulation (EU) No 1222/2014.

Principles for determining national systemically important credit institutions (O-SIIs) and setting additional capital requirements (O-SII buffers)

The additional capital buffer requirement for banks whose failure or other malfunction is expected to jeopardise the stability of the national financial system, so-called other systemically important institutions (O-SIIs), increases the risk resilience of O-SIIs which, because of their systemic importance, enjoy implicit government guarantees.

The O-SII buffer for credit institutions operating in Finland may be set at 0–3% of the total risk exposure amount and must be met with Common Equity Tier 1 capital. The identification of O-SIIs is based on the criteria set out in the Credit Institutions Act (chapter 10 section 8) and guidelines of the European Banking Authority (EBA) (EBA/GL/2014/10). The O-SII buffer for institutions identified as systemically important in Finland is specified by the FIN-FSA. The O-SII buffer requirement must be met within 6 months of the decision.

The buffer can be required as from 1 January 2016. FIN-FSA revises and discloses annually the O-SII scores for Finnish credit institutions and the impact of different factors on the scores.

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The FIN-FSA may set a systemic risk buffer requirement imposed on the basis of the structural characteristics of the financial system

A systemic risk buffer (SyRB) requirement is imposed if there are grounds for preventing and mitigating risks that have a negative impact on the stable operation of the financial system or on the real economy.

An SyRB requirement can be imposed if: 

  • a risk arising from long-term, non-cyclical factors threatening the financial system or the macroeconomy requires higher capital buffers;
  • the risk in question threatens or may threaten the uninterrupted operation and stability of the Finnish financial system;
  • the imposition of an SyRB requirement will only have a minimal negative impact on the operation of financial systems in other countries; and
  • the risks in question have not already been covered by other additional capital requirements.

The SyRB requirement may amount to no more than 5% of the credit institution’s total risk exposure amount, or of the total risk exposure amount of on- and off-balance sheet items.

The SyRB requirement will enter into force 12 months after the making of the decision, unless the FIN-FSA for a special reason decides on an earlier date of entry into force.

The SyRB instrument has been available for use since 1 January 2018 and is based on the Act on Credit Institutions (chapter 10, sections 4a–c) and the Ministry of Finance Decree 409/2021.