Finnish financial sector supports the banking union – but rushing risk sharing could slow down economic recovery

The Finnish financial sector has appealed to the Finnish Government that Finland should call a halt to added risk sharing and tighter capital requirements for banks in EU policy-making. On 30 November, the Eurogroup Ministers agreed to expand risk sharing by advancing the mutualisation of extraordinary ex-post contributions. The European deposit insurance scheme is also being pushed forward. Completion of Basel III would substantially raise banks’ capital requirements and could result in stricter loan conditions for households and businesses. The mortgage legislation proposals currently being prepared in Finland may also hinder labour mobility and first-time home purchases.

“Now is the time to protect Finnish banks’ lending capacity. If risk sharing and regulatory burden are further increased, it will slow down economic recovery in Finland. Policymakers therefore need to take a time-out to review the contents of both national and EU-level regulatory projects affecting the financial sector. Regulation that weakens banks’ lending capacity and the mobility of workforce must not be implemented. Because of the coronavirus-induced economic crisis, bringing forward the additional risk sharing could create an additional burden on the healthy and solvent Finnish banks”, says Finance Finland’s (FFI) Managing Director Piia-Noora Kauppi.

According to a recent statement by the European Banking Authority, the prolonged pandemic increases the probability of some bank customers failing to repay their loans. Banks’ risks are indeed already clearly rising, and there is uncertainty about the health of European banks’ balance sheets. One gauge of difficulties is the level of non-performing loan exposures. Totalling about €500 billion in the EU before the pandemic hit, they are now expected to rise, with differences between countries also likely growing. In Finland, non-performing loan exposures amount to only 1.5% of all bank exposures.

Banking union requires strict market discipline – investors are liable for their own bank

According to Kauppi, the financial crisis harshly confirmed the need to harmonise banking regulation and supervision in the EU. “The banking union has undoubtedly made the financial system stronger over the first five years of its operation. However, risk sharing must have clearly defined boundaries, or else we risk spreading moral hazard”, she notes.

“Banks must remain strong and able to overcome possible future crises. There is still much work to be done in finalising a solid foundation for the banking union. Every member state’s own banking system as well as every individual bank must reach a healthy financial situation before risk sharing can be increased with mechanisms such as the deposit insurance scheme. It is each country’s own responsibility to take care of this”, Kauppi continues.

Kauppi points out Finland is bound by the principle set out in EU Treaties that each country is responsible for its own economy. Each bank is responsible for its own financial challenges, and in turn, each bank’s owners are responsible for their banks. This is the starting point from which the crisis resolution regulation has been prepared.

“Finland must act consistently in the banking union negotiations, demanding risk reduction before additional risk sharing. Further development of the Economic and Monetary Union must employ market discipline and focus on each member state’s own responsibility. Only a healthy banking sector can finance the investments required by technological development and the fight against climate change”, Kauppi concludes.

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Financial and Prudential Regulation

Veli-Matti Mattila

Director, Chief Economist