Finance Finland surprised at the IMF’s recommendation to strengthen banks’ liquidity buffers

Finnish banks have taken good care of their funding during the pandemic. Image: Shutterstock
  • The International Monetary Fund’s (IMF) assessment finds the Finnish banking system resilient, profitable and well-capitalised.
  • The IMF nevertheless thinks that Finnish banks should further strengthen their liquidity buffers.
  • In recent years, a substantial amount of regulation has focused on strengthening banks’ liquidity and funding.
  • The analysis of the Finnish Financial Supervisory Authority (FIN-FSA) also proves that the Finnish banking sector’s capital position is strong.

On 17 November, after concluding an official staff visit to Finland, the International Monetary Fund (IMF) issued a statement regarding the state of the Finnish economy and the stability of the Finnish financial sector. According to the statement, the Finnish banking system is generally resilient, well-capitalised and profitable.

The banking system’s resilience has been tested several times in recent years – both by uncontrollable events as well as by design. Recent proof of the Finnish banking system’s strength is that the costs of Finnish banks’ funding did not increase even as Russia’s war of aggression began to increase overall uncertainty. The IMF’s assessment finds the banking system to be resilient to adverse macroeconomic shocks.

However, according to the IMF, banks have a vulnerability in their reliance on short-term wholesale funding, and a tightening of global financial conditions may put pressure on their liquidity. The IMF notes that banks must therefore further enhance their liquidity buffers.

Examined in the context of tightening regulation and current data on banks’ liquidity, the IMF’s concern over Finnish banks’ liquidity seems strange.

The regulation and supervision of the banking sector’s liquidity and funding have increased significantly after the financial crisis. The post-crisis reform of the international Basel framework even included two regulatory requirements explicitly related to liquidity risk: the Liquidity Coverage Ratio and the Net Stable Funding Ratio.

Current regulation has reduced banks’ reliance on short-term wholesale funding and improved their ability to recover from sudden liquidity shocks.

Finnish banks’ liquidity is strong also according to an analysis published by the Finnish Financial Supervisory Authority (FIN-FSA) in September. At the end of June, the banking sector’s aggregate liquidity surpassed the capital adequacy requirements by €63 billion. This means banks have the sufficient liquidity to cover a scenario in which customers need to withdraw large amounts of cash and undisbursed loans.

Finnish banks have been active and taken good care of their funding during the pandemic. They have further reduced their reliance on short-term wholesale funding by, for example, making use of the targeted longer-term refinancing operations (TLTRO) of the European Central Bank (ECB).

At the end of 2021, the Finnish banking sector had acquired about €36 billion through the TLTRO programme.

In light of this background, the IMF’s recommendation that banks should further enhance their liquidity buffers can be considered both surprising and excessive.

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