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Despite Finland's economy facing a recession, the Finnish financial system has maintained its stability thanks to sustained improvements in financial regulation and macroprudential policy. However, geopolitical tensions including the Russian invasion of Ukraine, the conflict in Gaza, and international trade restrictions pose new threats to global and national financial systems, as noted by Marja Nykänen, Vice Chair of the Board in her recent assessment of Finland's financial stability.

The real estate and housing markets in Finland are experiencing significant pressures, with old home prices falling, a reduction in property transactions, and a near halt in new home constructions. The construction sector has seen an increase in bankruptcies, and banks are facing growing credit risks associated with loans to this sector. Despite these challenges, household debt levels have decreased, mitigating some risks.

Interest rate decreases and an economic recovery in line with expectations could bolster financial stability. However, risks for banks and real estate investors might escalate if the property market fails to recover.

With digitalization and climate change, new and unpredictable threats arise that could destabilize the financial system both short-term and long-term. The shift towards a digital financial sector offers opportunities but also increases risks related to misinformation and cyber influence. Financial risks related to climate change and biodiversity loss are still difficult to assess fully.

Nykänen emphasized that financial regulations need to evolve based on careful planning, not just as an end in itself. Regulations should anticipate changes in the operating environment to avoid merely reacting to past crises. Strengthening banks' and borrowers' resilience to economic shocks is critical. A comprehensive macroprudential policy enhances the crisis resilience of banks and borrowers, preparing for fluctuations in housing market activity and property prices.

To improve trust in the financial system's resilience and reliability, preparations against liquidity and cyber risks are ongoing. European companies need more diversified ways to finance their investments to support growth. A unified and efficient capital market within the EU would benefit European businesses, reducing their reliance on bank financing and helping Europe remain competitive amid global economic pressures. Nykänen concludes that a strong European economy is essential for protecting against disruptions in the financial system.

HT

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