Macroprudential instruments

​Macroprudential instruments (or tools) refer to macroprudential measures within FIN-FSA’s powers, aimed at preventing systemic risk realisation in the financial system and mitigating the effects. Macroprudential instruments are supported by recommendations and other communications relating to macroprudential supervision and oversight.

To strengthen credit institutions’ risk resilience, use is also made of a capital conservation buffer, which is 2.5% of the credit institution’s total exposure amount. In Finland, the Credit Institutions Act provides directly for the capital conservation buffer requirement.

The macroprudential toolkit consists of various alternatives for action, since systemic risks can be cyclical or structural in nature [linkki], and the underlying factors can be complex. Some macroprudential instruments focus on credit institution’s capital adequacy levels, while others impose restrictions on business lines (particularly the loan-to-value limit on housing loans). A mix of different instruments ensures that, according to the particular circumstances, the most appropriate macroprudential tool can be used to prevent systemic risk and strengthen credit institutions’ risk resilience.

Use of macroprudential instruments is specified in either the national Credit Institutions Act1  or EU regulation (EU Capital Requirements Regulation and Capital Requirements Directive)2. The use of macroprudential instruments is further guided by the above intermediate objectives of macroprudential policy recommended by the European Systemic Risk Board, risk indicators that signal the build-up of systemic risk and macroprudential analyses of the Finnish financial system done in cooperation between authorities on the basis of these indicators.

Additional discretionary requirements relating to the prudential supervision of credit institutions’ (Pillar 2 requirements) supplement the macroprudential toolkit available to FIN-FSA. In supervising credit institutions’ capital adequacy and liquidity and considering the related Pillar 2 requirements, FIN-FSA must take into account the potential risks of credit institutions’ operations to the financial stability as a whole. Imposition of Pillar 2 requirements is primarily considered on an institution-by-institution basis. Such consideration is made in connection with the regular assessment of credit institutions’ capital adequacy and liquidity (Supervisory Review and Evaluation Process, SREP). However, FIN-FSA may also impose Pillar 2 requirements simultaneously, without a separate assessment, on several credit institutions if their business and risks are similar. Regulation concerning the imposition of Pillar 2 requirements was renewed on 15 August 2014 and is based on the Credit Institutions Act (chapter 11 sections 6–11).

Macroprudential instruments
Macroprudential instrumentLegal backgroundImplementationFrequency of Board’s decision makingAuthorities consulted prior to taking a decision

​Countercyclical capital buffer (CCB)

Credit Institutions Act, chapter 10 sections 4-6 (CRD4)

In force

Quarterly

Ministry of Finance, Ministry of Social Affairs and Health, Bank of Finland and ECB

Maximum loan to value (LTV) ratio for housing loans (loan cap)

​Credit Institutions Act, chapter 15 section 11

​Entered into force on 1 July 2016

​Quarterly

​Ministry of Finance, Ministry of Social Affairs and Health, Bank of Finland

​Articles 124 and 164 of Capital Requirements Regulation: risk weights for loans secured by mortgages on immovable property CRR Articles 124 and 164 (or Article 458​

​In force

​Annually

​ECB

​Article 458 of the Capital Requirements Regulation: stricter national measures to address macroprudential or systemic risk

CRR Article 458​

​In force

​In specific situations

​ECB

​Buffer requirement for global systemically important institutions (G-SII buffer)

​Credit Institutions Act, chapter 10 section 7 (CRD4)

​In force, but no G-SIIs in Finland

​Preconditions assessed annually

​ECB

Buffer requirement for other systemically important institutions (O-SII buffer)

​Credit Institutions Act, chapter 10 section 8 (CRD4)

Entered into force on 7 January 2016

Preconditions assessed annually

ECB​

​Systemic risk buffer requirement imposed on the basis of the structural characteristics of the financial system​Credit Institutions Act, chapter 10 sections 4 and 6a (CRD4)

Entered into forced on 1 January 2018

 

 

​Preconditions assessed annually

 

ECB

ECB’s opinion is required in all decisions on use of macroprudential instruments except those relating to LTV ratio
(grounds: Council Regulation of 15 October 2013 Article 5 and ECB Regulation of 16 April 2014 Articles 101–105).
 

  • The countercyclical capital buffer (CCB) requirement stipulates credit institutions to increase their risk resilience during the upswing of the credit cycle. Correspondingly, a release of the CCB during the downswing of the credit cycle restrains credit institutions from excessive contraction of credit. The FIN-FSA may set the CCB for credit exposures allocated to Finland at 0–2.5% of the total risk exposure amount, under conditions specified in the Ministry of Finance Decree (1029/2014, only in Finnish and Swedish). The CCB requirement must be met with Common Equity Tier 1 capital. The institution-specific CCB is determined on the basis of the geographical distribution of the exposures of each credit institution. The CCB must be met within 12 months of the decision, unless FIN-FSA decides on a stricter schedule on specific grounds. The CCB, the application of which has been possible since 1 January 2015, is based on the Credit Institutions Act (chapter 10, sections 4–6).
  • The binding maximum loan-to-value (LTV) ratio for housing loans constrains overheating in the housing markets, growth in household indebtedness and credit institutions’ risks relating to household credit during the upswing of the credit cycle. The maximum LTV ratio is 90% (95% for first-home purchases) of the fair value of collateral at the time the loan is granted. In order to restrict exceptional growth in financial stability risks, FIN-FSA may lower the LTV ratio by 10 percentage points and limit consideration of collateral other than real security in the calculation of the LTV ratio. Credit institutions must fulfil the more stringent LTV requirement within three months of the decision, at the earliest. Prior to the FIN-FSA Board decision, credit institutions are entitled to deliver their own opinion on the maximum LTV ratio and the need for changing it. The legal provisions concerning the binding maximum LTV ratio and FIN-FSA’s powers for its tightening entered into force on 1 July 2016 and are based on the Credit Institutions Act (chapter 15 section 11).
  • Increasing the risk weights on loans secured by mortgages on immovable property mitigates the risk of overheating in the immovable property markets in an indirect manner, by increasing credit institutions’ capital requirements for mortgage-backed lending. Stricter risk weights than those required by regulation may be set on the basis of financial stability considerations in credit institutions applying the standardised approach for credit risks and institutions using advanced internal ratings based approaches. Conditions that are to be taken into account when setting higher risk weights are specified in a separate European Commission Implementing Regulation. The possibility of increasing risk weights entered into force on 1 January 2014 and is based on the Capital Requirements Regulation (Articles 124 and 164). The relevant decisions will be taken by the FIN-FSA Board.
  • The powers conferred on macroprudential supervisory authorities (powers under Article 458 of the CRR) allow imposition of stricter national measures than those set out in the common EU regulatory framework in order to address systemic risk. By virtue of Article 458 of the Capital Requirements Regulation (CRR), FIN-FSA may temporarily impose stricter requirements on credit institutions’ own funds, capital conservation buffers, liquidity, risk weights for loans secured by mortgages on immovable property, risk weights for intra-financial sector exposures, large exposures and public disclosure. The imposition of stricter national measures is subject to detailed explanation of the grounds for the draft measures and a rationale for why other macroprudential instruments could not adequately address the systemic risk identified. Furthermore, it is also required that the European Commission or the Council not oppose the draft national measures due to e.g. their negative impact on the EU internal market. The possibility to use the instruments provided for in Article 458 of the CRR entered into force on 1 January 2014.
  • Global systemically important institutions/banks (G-SII/Bs) are credit institutions that pose a systemic risk so great that, if realised, it would endanger the stability of the global financial system. Efforts are made to mitigate the risks of G-SII/Bs for the financial sector and the economy by strengthening the institutions’ loss absorbency, thereby reducing the probability of their failure. The objective of additional capital requirements imposed for G-SII/Bs (G-SII/B buffers) is to prevent macroprudential risks arising from structural factors in the financial markets. The Financial Stability Board (FSB) recommends annually which credit institutions the national authorities should define as G-SII/Bs and what additional capital requirements should be applied to them. The recommendation is based on the guidelines and preparation of the Basel Committee on Banking Supervision (BCBS). In Finland, FIN-FSA determines the G-SII/Bs and the additional capital requirements to be set for them, pursuant to the Credit Institutions Act (Chapter 10 Section 7) and the Commission Delegated Regulation (EU) No 1222/2014.
  • The additional capital buffer requirement for banks whose failure or other malfunction is expected to jeopardise the stability of the national financial system, so-called other systemically important institutions (O-SIIs), increases the risk resilience of O-SIIs which, because of their systemic importance, enjoy implicit government guarantees. The O-SII buffer for credit institutions operating in Finland may be set at 0–2% of the total risk exposure amount and must be met with Common Equity Tier 1 capital. The identification of O-SIIs is based on the criteria set out in the Credit Institutions Act (chapter 10 section 8) and guidelines of the European Banking Authority (EBA) (EBA/GL/2014/10). The O-SII buffer for institutions identified as systemically important in Finland is specified by the FIN-FSA. The O-SII buffer requirement must be met within 6 months of the decision. The buffer can be required as from 1 January 2016. FIN-FSA revises and discloses annually the O-SII scores for Finnish credit institutions and the impact of different factors on the scores.
  • The FIN-FSA may set a systemic risk buffer requirement imposed on the basis of the structural characteristics of the financial system, if long-term non-cyclical risks to the financial system and the macroeconomy require a higher capital requirement; systemic risk threatens or might threaten on the national level the smooth functioning and stability of the financial system; and other instruments intended for macroprudential supervision, excluding the instruments referred to Articles 458 and 459 of the EU Capital Requirements Regulation, have not been adequate or otherwise suitable to cover the capital requirement. The systemic risk buffer requirement must be at least 1% and at most 5% of the credit institution's total exposure amount or the total exposure amount of on- and off-balance sheet items. The systemic risk buffer requirement enters into force 12 months after the decision has been made, unless the FIN-FSA for a special reason decides on an earlier date of entry into force and, however, at most 1% from 1 January 2019 and higher than that from 1 July 2019. It has been possible to set a systemic risk buffer requirement imposed on the basis of the structural characteristics of the financial system since 1 January 2018, and it is based on the Credit Institutions Act (chapter 10, sections 4 and 6a) and the Ministry of Finance Decree (65/2018).

1 Credit Institutions Act 610/2014 (only in Finnish and Swedish).
2 Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, and Directive 2013/36/EU of the European Parliament and of the Council on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.

 

 

 

27 August 2018

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