Bloomberg News

Finland Must Cap Mortgages to Boost Stability, Central Bank Says

May 23, 2013

Finland’s financial regulator needs the power to impose a binding cap on mortgages to prevent household debt growth from threatening financial stability, the central bank said.

“There are good reasons to ensure the readiness to make use of macro-prudential tools in time, such as loan-to-value regulation and a systemic risk buffer,” Deputy Governor Pentti Hakkarainen, who’s in charge of financial stability at the Bank of Finland, said in an e-mailed report today. “Ongoing debt accumulation erodes the ability of households and the economy to adapt to negative economic surprises.”

Finland’s financial watchdog recommended in March 2010 that banks cap mortgages at 90 percent of the property value. More than half of first-time home buyers exceed the threshold, which isn’t legally binding, according to the FSA sample studies in 2010 and 2012.

Household debt reached 119 percent of disposable incomes last year, the highest level since at least 1986, the central bank said. The increase is fueled by record-low interest rates. The European Central Bank this month cut its benchmark rate to a 0.5 percent to boost the 17-member euro-area economy that’s shrinking for the second year.

Finland should consider extra regulation on systemically important financial institutions in harmony with the global and Nordic banking market, the central bank said.

Banks in Finland have sufficient own funds that are “mainly of high quality,” the central bank said. Still, the profitability of lenders is deteriorating as the low level of rates reduces net interest income, according to the bank.

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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