The Bank of Finland has reiterated its concern about the mounting debt burden of households in Finland.
The central bank points out in its regular bulletin that household debt has risen to an all-time high fuelled not only by mortgages but also by loans taken out by housing companies to finance renovations and new-build construction.
Finnish households, it adds, also have access to a growing number of credit instruments following the easing of credit standards and proliferation of digital financial services.
The growing debt burden exposes especially highly indebted households to rising interest rates, economic hardships and falling property prices. The debt burden, however, is not an issue only for the households themselves but also for the national economy as it limits its ability to adapt to negative shocks.
The Bank of Finland also highlights that households tend to respond to economic difficulties by cutting back on consumption and building up their savings, thus limiting total demand and undermining the profitability of businesses.
“High levels of household indebtedness can quickly lead the economy into a vicious circle when cyclical conditions deteriorate: reduced consumption erodes the corporate operating environment and increases bankruptcies, leaving banks in possession of defaulted corporate loans,” elaborates Merja Nykänen, a board member at the Bank of Finland.
“These loans, in turn, weaken banks’ capital adequacy as well as their lending capacity. Reduced lending impacts […] aggregate demand, restricting economic activity and deepening the recession further still,” she adds.
The Bank of Finland consequently demands that the efforts to mitigate the risks arising from household indebtedness be stepped up by providing financial authorities with new macroeconomic tools to, for example, introduce income-based caps on mortgages.
It also expressed its support for a proposal to establish a positive credit register.
“All loans, ranging from housing loans to short payday loans, contribute to the overall debt servicing burden of households. A positive credit register would help issuers as well as recipients of credit to identify and manage the risks associated with indebtedness,” explains Nykänen.
Finland is nevertheless well-prepared for the risks and should see its financial stability strengthen further given its positive economic outlook, according to the Bank of Finland.
Nykänen also calls attention to the importance of Nordea’s decision to relocate its headquarters from Sweden to Finland, interpreting it as a show of confidence in the banking union of the European Union.
“[The relocation] will augment the pool of financial expertise in Finland; however, this comes at the expense of increased structural vulnerabilities as the banking sector becomes larger, more consolidated and with increased Nordic interconnectedness,” she reminds.
Aleksi Teivainen – HT
Photo: Antti Aimo-Koivisto – Lehtikuva