Statement 22 December 2015 – 1/2015

Statement by the Board of the Financial Supervisory Authority regarding the low level of housing loan risk weights applied by banks and the need to raise them

FIVA 14/01.00/2015

Statement by the Financial Supervisory Authority

​Household debt relative to disposable income has continued to grow as a structural phenomenon, irrespective of the cyclical situation, and in consequence the significance of loans related to housing has increased. Household indebtedness in Finland is unevenly distributed.

In the view of the Board of the Financial Supervisory Authority (FIN-FSA), in this situation the housing loan risk weights applied by banks and derived from internal ratings-based approaches are low from the macroprudential perspective, taking into account assessments of their adequacy for covering losses on housing loans in serious stress situations and the need to prepare for systemic risks relating to household indebtedness.

The increased accumulation of debt adds to the vulnerability of the household sector, thereby reinforcing the seriousness of any disruptions (e.g. an increase in unemployment or a rise in interest rates) affecting household sector solvency. In a potential stress situation, the problems of an indebted household sector would not only lead to direct loan losses for banks but also to indirect effects via consumer behaviour. Links between the financial sector and the real economy could amplify the effects, causing them to become systemic.

Household indebtedness is of particular concern given the structural weakness of macroeconomic growth prospects. Low housing loan risk weights increase the channelling of bank finance to the housing loan market, thus adding to household indebtedness and possibly strengthening cyclical fluctuations in the housing loan market and in house prices.

From a macroprudential perspective, housing loan risk weights in Finland are also low compared with many other EU and Nordic countries. In many countries where risk weights have been at the same level as in Finland, the authorities have increased risk weight requirements.

The appendix to the macroprudential report prepared jointly by the Bank of Finland and FIN-FSA provides a more detailed description and analysis of the market trends motivating this statement, including the volumes of loan losses emerging from bank stress tests and risk weights applied by other countries.

FIN-FSA will commence preparations for increasing the risk weights. Such an increase could be implemented by, for example, setting a binding lower limit for housing loan risk weights.