May 29 2009
Since late 2008 the financial crisis has rapidly weakened the global economy and has demonstrated that Finland is not isolated from disturbances in the global financial markets. Although at first the problem was considered to be one of solidity, affecting only a few companies, it has turned out to be a more widespread problem requiring state involvement. According to a recent analysis published by the Financial Supervisory Authority in April 2009, the profitability of the banking sector has materially weakened, but loss-bearing capacity remains fairly solid.
During 2008 the global financial crisis and economic downturn increased uncertainty and negatively affected the Finnish economy. Finland is a small, export-driven country and the sharp decrease in export volumes during the latter half of 2008 and the first quarters of 2009 has already had a major impact on industry. National efforts to maintain domestic demand alone will not bring Finland out of the woods. This is also evident from the European Commission's May 4 2009 financial forecast which, despite noting signs of stabilization in the economy, indicates that the indirect impact of the financial crisis may cause significant risks to the economy and inflation.
The greatest risks posed to banks by the slowdown of economic growth take the form of credit risks. So far, the number of loans in default is still relatively small, but it is increasing and is expected to grow two or threefold. The first signs of this can already be seen in the number of bankruptcies declared, which is rapidly increasing.
The capital adequacy of Finnish banks has also weakened during the past year, but it is still satisfactory compared to the situation in many other EU countries. Fortunately, Finnish banks are facing the current turbulence in a relatively healthy condition - the solvency of all Finnish banks exceeds the statutory requirement of 8%. Regulation and management of the Finnish banking sector is much more sophisticated than during the previous financial crisis in the 1990s. The banking sector is marked by a renewed sense of caution. Internal risk procedures - for example, the criteria for corporate and private lending - have been tightened and enterprises are closely monitored by banks. Although many European countries have already been forced to provide state aid to banks, Finnish banks have not yet needed such support.
So far in 2009, Finnish banks have reduced their dividends and announced plans to issue new shares. The liquidity of the Finnish banks and their ability to pay have remained at good levels. However, profitability is undermined by the continuing reduced income. Furthermore, banks' funding costs have risen as a result of the crisis. Credit risk premiums are particularly high for long-term funding and the price for long-term financing has risen as it is in short supply and is already exceeding demand. As a result, companies are facing liquidity problems.
The takeover of the three largest Icelandic banks by the Icelandic government was also reflected in the Finnish branches of these banks. Kaupthing Bank suspended operations of its Finnish branch in October 2008 in order to protect depositors' assets. The situation was resolved by a private sector arrangement with the three major Finnish banks (Nordea Bank Finland plc, OP-Pohjola Group and Sampo Bank plc), which provided for full repayment of all deposits with the Kaupthing. The Finnish government provided a state guarantee against the legal risks incurred by the parties taking part in the arrangement. This approach differs from the solution adopted in other EU countries, as it provides for a more rapid and convenient recovery for depositors.
The current crisis has clearly demonstrated the importance of risk management. In this respect, Finland has been vocal in advocating stress tests for the banking sector at a European level during the first quarter of 2009 in meetings of European financial ministers. Restoring mutual trust between banks by developing common criteria for stress tests is seen as the only route to economic recovery.
Despite measures to manage risk in the banking sector and the fairly optimistic forecast of the European Commission predicting stabilization in the financial markets, there has been criticism of the authorities' capability in managing the crisis. Critics have observed that the authorities have again failed to stop an economic bubble bursting, just as happened with the IT bubble at the beginning of the 21st century. In addition, this time US consumers are not helping Finland by increasing growth and the employment situation is unlikely to improve in the short term. The question is whether, in time, the financial crisis will affect the banking sector more fundamentally.
In fact, the financial crisis has already had a direct impact on the Nordic banking sector. For example, Finnish bank Nordea has expanded its business into the Baltic region. The Estonian economic forecast is rapidly deteriorating and the Nordea banks in Estonia are a part of the Finnish group. Any further credit losses by banks in this area will naturally have a knock-on effect for their Finnish parent companies.
However, even though Finnish banks in the Baltic region will have to endure some hardship, it seems unlikely that their solvency will be threatened as, in principle, they operate under the same lending criteria as in Finland.
The global financial crisis has affected the Finnish banking sector in another respect by leading to structural changes regarding monetary financial institutions. When Icelandic market participants withdrew from the Finnish market, new entrants appeared. There was a temporary suspension of asset transfers of Icelandic banks and a termination of operations of some other banks (eg, the Finnish branches of Icelandic bank Landsbanki Islands hf and the British-owned FCE Bank plc). In addition, the Celeres Korko investment fund of Celeres Fund Management was closed down in February 2008. However, important new entries by monetary financial institutions included the Finnish branch of Swedish firm TeliaSonera Finans AB, which commenced operations in January 2008, and the Helsinki branch of JP Morgan Europe Limited, which opened for business in July 2008. In 2008 there were also mergers in the monetary financial institutions sector.
The number of monetary financial institutions has remained stable despite the crisis. At the end of 2008, there were 390 monetary financial institutions in Finland, of which 357 were credit institutions. In relation to population, there were 15,000 inhabitants for each credit institution.
Despite the ongoing economic crisis, the Finnish banking sector seems stable. Even though risk management strategies have been unable to guard against all risks, there appears to be no immediate danger to Finnish banks. The solid profitability and capital adequacy buffers have enabled banking and lending operations to continue as usual.
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