Finnish financial sector's capital position provides buffer against weaker economic outlook - important to prepare for higher risk levels
Russia’s invasion of Ukraine has also increased the risks for the Finnish financial sector in a manner that is difficult to anticipate. The sector’s strong capital position provides a buffer against the deterioration of the operating environment. Supervised entities must, however, prepare for higher risk levels, stemming from the weakening economic outlook and the increasing threat of cyber attacks.The Finnish financial sector's capital position is strong and it therefore faces the weakening economic situation with good buffers and a solid foundation.
“The Financial Supervisory Authority is monitoring the operating environment on an enhanced basis and in a variety of ways in cooperation with Finnish and European authorities. Preparing for risks in this new situation is important for both the financial sector and society as a whole,” states Anneli Tuominen Director General of the Financial Supervisory Authority (FIN-FSA).
The Finnish financial sector's direct exposures to Russia are small: less than 0.1% of the total assets of the banking sector, around 0.3% of insurance entities’ investments, and around 0.4% of management companies’ investments are exposed to direct Russia risks. As business becomes more difficult both in Russia and with Russia, the financial sector, too, will be subject to indirect exposures that cannot, as yet, be assessed. Finland's location as a peripheral market next to Russia has been reflected also in share prices, interest rates and the price of hedging against credit risk.
The European Union has imposed on Russia multiple sanctions that are directly binding on all supervised entities of the FIN-FSA. The FIN-FSA is monitoring compliance with the sanctions as part of the monitoring of operational risk management and compliance. The focus of monitoring is on the banking sector and means to circumvent the banking system with the help of, for example, cryptocurrencies.
The war has also increased the risk of cyber attacks against financial sector entities and service providers. The FIN-FSA requires supervised entities to comply with the regulations and guidelines on payment and information systems, information security and continuity planning, and to ensure that their protective measures against various cyber threats are up to date.
In the period 28 February 2022 - 2 March 2022, some Finnish banks were subject to denial-of-service attacks that caused disruptions in and slowed the operation of online and mobile banking services. There is no information as to the actors behind the attacks, as is usual in cases like this. Actual payment systems have, however, continued to operate reliably recently, and there have been no significant disruptions.
Financial sector's capital position remained strong at the end of 2021
The Finnish banking sector's capital ratios remained solid and stronger than the European average in 2021.
The banking sector's Common Equity Tier 1 (CET1) capital ratio weakened slightly at the end of 2021, reflecting for example, changes in the internal ratings-based models used for calculating capital adequacy, as well as profit distribution. Nevertheless, the banking sector's continued strong performance boosted the level of retained earnings and supported capital adequacy. Retained earnings and additional capital buffers improve Finnish banks’ resilience to risks. The banking sector's CET1 capital ratio at the end of 2021 was 17.8% (12/2020: 18.1%) and the total capital ratio was 21.4% (12/2020: 21.2%).
The employee pension sector’s solvency has risen steadily on the back of positive developments in the financial markets, and at the end of 2021 it was 136.3% (12/2020: 129.1%).
Investment assets grew to EUR 159 billion (12/2020: EUR 138.1 billion), mainly due to returns on equities, and growth was also supported by other investment classes. Reflecting the increase in solvency capital, the employee pension sector's resilience was good at the turn of the year against negative value changes in investment assets.
The life insurance sector's solvency ratio strengthened in 2021 and at the end of the year it was 193.4% (12/2020: 187.0%). The solid performance throughout the year was due, in particular, to the rise in interest rates in the first half of the year, which was reflected as a decrease in technical provisions relative to investment assets.
Life insurance companies’ return on investment was 4.2% in 2021. Return on investment was dampened by the slightly negative return on fixed-income investment, but equities generated a solid return. The return on real estate investments, too, was higher than in previous years.
Premiums written developed strongly, driven in particular by unit-linked policies. Following a weak reference year, demand recovered in the entire life insurance market. Premiums written clearly exceeded the amount of claims paid. Life insurers’ profitability was good.
The non-life insurance sector's own funds continued to increase and was, at the end of 2021, at its highest level since the introduction of Solvency II regulation. The amount of own funds was bolstered by return on investment and income from insurance business. The year-end solvency ratio of 242.1% (12/2020: 232.1%) was good.
Return on investment at the end of 2021 was 5.4%, which was accrued mainly from equity investments. The return on fixed-income investments was negative.
Insurance business profitability was very good. The improvement in profitability reflected the increase in premiums written, while at the same time, claims incurred remained at the lower level witnessed in 2020 as a result of the pandemic.