Banks Anneli Tuominen, who leaves Finland’s banking supervisor, fears that the economic turmoil will cause painful problems

Although the corona epidemic collapsed in the spring of 2020 global supply chains, shut down societies and extreme economic uncertainty, financial market uncertainty eased rapidly.

Banks continued to lend and the economic downturn remained short. In Finland, the cottage and detached house business flourished and the companies soon made great results again.

Russia’s attack on Ukraine has not triggered widespread concern about the state of the banks either. The banking world seems to have survived the recent crises surprisingly little, at least for now.

Thereto there is a clear reason. Investor confidence in banks and in mutual trust between banks has been maintained due to the rapid functioning of the European Central Bank (ECB) and its banking supervision.

The coronavirus was barely able to land in Europe when the ECB guaranteed banks favorable financing. Banking supervisors, for their part, allow banks, among other things, temporary relief from credit default ratings and capital buffers.

They allowed banks to grant customers long installment breaks, which supported the economy and prevented bankruptcies.

At the same time, banks were temporarily prohibited from paying dividends.

“It was it is amazing how easily the measures could be decided. Together, they noted the seriousness of the situation and considered what could be done to keep the wheels of the economy running, ”says the director of the Financial Supervisory Authority (Fiva). Anneli Tuominen.

Tuominen has led Fiva and its predecessor, the Financial Supervision Authority, for 15 years. Pest began just before the 2008 financial crisis, after which the regulation and supervision of EU banks was completely overhauled.

“The financial crisis was a big lesson in how the global financial system can crash when things are done completely wrong. This whole sector has changed completely since then. ”

Banks capital adequacy requirements have been sharply tightened and risk-taking has been stifled. In 2014, the largest banks came under the direct control of the ECB. Since then, Fiva has worked closely with the central bank.

For example, the ECB shepherded banks’ practices for recording credit losses and non-performing loans in the same format. The complex accounting of banks has been studied in more detail and in depth than at least ever before in Finland.

According to Tuominen, a lot of work has been done in going through the so-called internal models. In the models, banks determine the risk weights of loans, which in turn directly affect how much equity banks have to set aside to cover risks.

In Finland, too, banks have had to refute their models and strengthen their capital.

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“Every crisis is completely different. That is why we need to be prepared for all possible developments. ”

Sounds like complex and long-lasting? That is what it is, but also extremely important. When banking supervision fails, the foundations of societies are shaken.

The failure of banking regulation and the ensuing banking crisis drove Finland into a deep crisis in the early 1990s. The same happened in the United States and several European countries after 2008.

Although the industry is being overwhelmed by overly strict and detailed regulation, investors will also benefit. It is becoming self-evident that the risks of banks are known and that the ability of supervisors to monitor risks can also be relied on quite well. This has not always been the case.

Bringing smoothly lists the names of the supervisory bodies and the abbreviations of the measures.

Europe-wide supervision is inevitably quite bureaucratic, but on the other hand, according to Tuominen, it has greatly increased expertise and professionalism in Finland as well.

“The industry has also become attractive due to ECB co-operation and Nordea’s move to Finland. That is reflected in our recruitments. ”

As a result of the co-operation, financial supervisors have transferred from Fiva to the ECB or to companies under their supervision. That’s not what Tuomi thinks is bad.

“It also increases expertise on that side. It’s just a good thing that people are moving. ”

Although the financial sector survived the pandemic, there is no room for over-satisfaction. New threats are already here.

“The past 15 years have shown that every crisis is completely different. That is why we need to be prepared for all possible developments. The pandemic was a complete surprise. And then came this terrible brutal war, which no one in the worst imagination could even imagine, ”says Tuominen.

The best guarantee for banks in all situations is a strong solvency and a healthy credit portfolio. In this respect, Tuominen is a little skeptical.

“Are credit portfolios in as good shape as they are now after the pandemic? Have the banks gone through them with sufficient care and preparedness? ”

The concern is particularly acute for banks that have had problems for a long time. Their credit portfolios have been cleaned up well before the interest rate crisis, but the crisis drove many customer companies into trouble.

“Now the war is causing new problems for companies again, and for some banks, withdrawing from Russia will cost billions of euros.”

Read more: FT: Withdrawal from Russia will result in losses of at least EUR 10 billion for Western banks

In Finland, banks are relatively strong financially. They have no business in Russia.

The financial crisis after that, supervisors became increasingly interested in the impact of financial sector risks on the economy as a whole.

The industry slang talks about macro-stability. In Finland, Fiva and the Bank of Finland began to worry about household indebtedness.

Mortgages did not directly cause credit losses to banks, even during the recession of the 1990s.

However, households’ payment difficulties could have a devastating effect on the economy at worst if unemployment or rising interest rates lead to mass sales of housing. Prices are collapsing, economic demand is weakening, unemployment is rising and the same is happening again.

Over the years after the twist, Fiva was allowed to run through the so-called loan ceiling in 2016, which regulates how much a loan can be granted in relation to the value of the collateral.

In recent years, Fiva has hit its head against the wall trying to get through the law on how much a loan can be granted in relation to household income. Fiva would like the loan to be mainly up to five times the annual income.

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“These are very unpopular decisions. Political decision-makers hate them elsewhere than in Finland. ”

The project is not progressing during this term. Tuominen is upset about that. In his opinion, the borrowers suffer the most from loans that are too big.

“Usually it is not the bank that is suffering, but the borrowers are paying off their loans but are having to cut their own consumption.”

The size of loans and loan periods have been growing steadily. The household debt ratio, ie the amount of debt in relation to annual disposable income, has risen steadily and was already 135 per cent last autumn.

Risks are growing right now. Prices are rising faster than in decades. Mortgage rates are also rising. At the same time, economic growth is slowing down and housing sales, for example, have slowed markedly.

“Households can have problems. It is for such situations that one should be prepared that the loans are not too large. That is why we have preached this. But these are very unpopular decisions. Political decision-makers hate them elsewhere than in Finland, ”says Tuominen.

Pushing the project forward is now the responsibility of his successor. Last Christmas, Tuominen said that he would join the ECB as a member of the Banking Supervision Council in the summer.

Next November, in addition to his 68th birthday, he would have expected a mandatory pension in Finland, but Tuominen did not want to stay there yet.

“Oh why did I want to continue? What would that answer now. I just like doing the job so much. ”