Household indebtedness has more than doubled over the last 20 years and is now at a record high. Housing corporation loans have become a significant factor contributing to indebtedness, and problems caused by payday loans, in particular, have increased. The Financial Supervisory Authority (FIN-FSA) is concerned about growing indebtedness from both the macroprudential perspective and the perspective of consumer protection. Better tools are needed for managing the related risks.
The annual FIN-FSA conference held at the Finlandia Hall today, 28 November, focuses on more effective methods for containing household indebtedness. Erik Thedéen, Director General of the Swedish Financial Supervisory Authority, Finansinspektionen, will discuss the macroprudential tools available in Sweden. Niamh Hallissey, Senior Economist and Macroprudential Policy Manager at the Central Bank of Ireland, will discuss the measures with which Ireland tackled the Irish property bubble. Claudio Raddatz Kiefer, Chief of the Global Financial Stability Analysis Division at the IMF, will provide an international perspective on macroprudential policies and financial stability.
Housing corporation loans have altered the nature of housing debt
In most countries, the most significant household debts are related to housing. This is understandable, as housing is the most expensive purchase an average household makes. The aggregate amount of mortgages and housing corporation loans has more than doubled since the turn of the millennium.
Not so long ago, new apartments were sold with zero housing corporation loan included in the price. At present, however, as much as 80% of the price of a new apartment may be covered by a housing corporation loan. Households’ hidden indebtedness via participations in housing corporation loans may not only obscure the perception about household exposures but also create a new form of joint liability in housing companies.
The macroprudential tools currently available in Finland, i.e. the various capital buffers and the loan cap (loan-to-collateral ratio, LTC), are not targeted in the best possible way at addressing the risks related to household indebtedness. Their operability is also complex. The objective of macroprudential supervision is to safeguard overall macroeconomic stability. The systemically important institutions, in particular, must have enough capital against risks and weaker cyclical situations. Household indebtedness – especially households’ ability to service their debts – is part of the macroprudential framework. However, the macroprudential tools available for addressing borrowers are not effective in Finland. The macroprudential policy framework encompasses financial stability, consumer protection and economic growth.
“It is important to try to prevent housing bubbles. The FIN-FSA is in discussions with the sector on the need for and scope of different tools. Macroprudential supervision is a relatively new and fast-evolving policy area. It is essential that supervision is carried out with effective and appropriate tools,” says Anneli Tuominen, Director General of the FIN-FSA.
We need a positive credit registry
The estimated total amount of consumer loans in Finland is around EUR 20 billion, which is approximately 13% of the total stock of household debt. At the same time, more than 380,000 people out of the 5.5 million inhabitants in Finland have a bad credit record.
The provision of so-called payday loans has increased rapidly and the marketing of these loans has become aggressive. So far, the means employed to manage the problems related to payday loans have been inadequate in Finland.
Legislators have set an interest rate cap on loans below EUR 2,000, which has resulted in an increase in the share of loans over EUR 2,000. Currently, preparations are underway for extending the interest rate cap to cover all consumer loans of all sizes, except for housing loans.
“This is not necessarily sufficient to contain household indebtedness, however. In the case of consumer credit, too, more attention should be paid to the assessment of the debtor’s repayment capacity. The borrower’s debt-servicing capacity, for example, could be used as the relevant measure. The application of these measures by lenders should also be subject to supervision, and the supervisor should have the possibility to regulate and sanction the lenders,” says Director General Tuominen.
The practical implementation of this, however, is not simple. One of the key challenges is that there are not sufficiently comprehensive data available on household debts at present. This is why we need a positive credit registry. Lenders should be obliged to use the data from the registry in assessing the borrowers’ debt-servicing capacity and document their loan granting procedures.
The full seminar and the presentations can be viewed at seminaari.fiva.fi.
For further information, please contact
Samu Kurri, Head of Department
Requests for interviews are coordinated by FIN-FSA Communications, tel. +358 9 183 5030, weekdays 9.00–16.00.