Coronavirus shut down society in spring 2020, making it vital to keep consumption going and the wheels of the economy in motion. Many steps taken by authorities to safeguard the economy have ensured banks’ capacity to grant loans and allow debt-servicing concessions to customers, which has a key impact on the ability of households and businesses to function.

The role of banks in resolving the economic crisis caused by the coronavirus was considered crucial. Therefore, it has been important to support banks’ capacity to grant credit and be flexible in the event of temporary debt-servicing difficulties among businesses and households. This has been highlighted particularly in Finland and other parts of Europe where the financial system is highly bank-centric.

Banks’ lending capacity was strengthened

The FIN-FSA Board makes macroprudential decisions on a quarterly basis about additional capital requirements for banks and about how much credit borrowers may receive for a house purchase relative to own funding or other collateral (loan cap, maximum loan-to-collateral ratio). The objective of the decisions is to contain or support lending, i.e. have an influence on the channelling of financing to the markets.

When the coronavirus pandemic began in March 2020, the Board made an extra macroprudential decision to decrease banks’ capital requirements. This decision, in combination with decisions by other countries’ macroprudential supervisors, increased Finnish banks’ lending capacity to Finnish businesses and households by an estimated EUR 30 billion.

Structural macroprudential buffers have been set for problems caused by the structures of the banking sector, such as its size or concentration. No cyclical macroprudential buffers have been set for the Finnish banking sector which could be activated and removed at different stages of the economic cycle. In the highly exceptional circumstances caused by the coronavirus pandemic, it was appropriate to reduce the structural buffers in order not to weaken the ability of credit institutions to provide loans to the corporate sector in particular.

In June 2020, the FIN-FSA Board decided to restore the maximum LTC for housing loans back to its standard level of 90% for non-first-home buyers. This decision supported the functioning of the housing markets and the channelling of finance to the real economy.

Fast decisions about further flexibility

As the supervisor of the most significant banks in the euro area, the European Central Bank (ECB) decided to provide a possibility for banks to be flexible regarding their additional capital and liquidity requirements. The decision was made rapidly when the pandemic began and economies shut down.

The purpose of the capital and liquidity buffers is to help bank withstand stress situations such as the coronavirus pandemic. The European banking sector has strengthened its capital buffers significantly since the global financial crisis. It was therefore possible for the ECB to allow banks to temporarily fall below their capital buffer and liquidity requirements. In addition, banks were allowed to cover their discretionary Pillar 2 additional capital requirement in addition to CET1 capital by other own funds.

The FIN-FSA made corresponding policy decisions for banks under its supervision within the limits allowed by Finnish legislation.

It is important that any flexibility concerning capital requirements are channelled to supporting the real economy. In order to support this objective, the ECB gave a recommendation to banks under its direct supervision to refrain from the distribution of dividends on a temporary basis. The recommendation was given in March and renewed in July. The recommendation was extended further in December by recommending that banks exercise extreme caution in profit distribution until autumn 2021.

The FIN-FSA gave a similar recommendation to banks under its supervision. In the supervisor's opinion, it is important to maintain strong capital adequacy among Finnish banks and comply with common European guidance.¹

Reporting by banks was eased

The reporting by banks was either eased or additional time was granted for the submission of reports. European authorities postponed stress tests by a year, as they would require significant resources from the banks and the authorities. In order to have an up-to-date situational view, the FIN-FSA and the ECB monitored banks’ capital adequacy, liquidity and corporate finance risks on an enhanced basis when the crisis escalated.

The European Commission brought forward by a year regulation facilitating lending to SMEs and infrastructure and also made other regulatory changes aimed at easing the impacts of the coronavirus pandemic.

In March, the European Securities and Markets Authority (ESMA) published a statement on the method of calculation of expected credit losses in the exceptional circumstances caused by the pandemic. The objective was to facilitate financial reporting by banks. The statement provided guidelines on the assessment of a significant increase in credit risk and expected credit losses in IFRS financial statement reporting. Consistent reporting improves the possibilities of investors and other stakeholders to compare banks and assess their financial condition.

Capital adequacy as a long-term target

2020 was an exceptional year that required the supervisor to have a completely new kind of approach to supervision. In normal circumstances, the supervisor's primary attention focuses on ensuring banks’ capital adequacy and liquidity as well as on compliance with related requirements. In the corona-induced situation, however, there was a need to consider opportunities to take advantage of the capital buffers accumulated, temporarily ease the supplementary capital requirements and also accept a controlled shortfall from these thresholds.

Banks operating in Finland encountered the coronavirus pandemic from a profitable and solvent position, which enabled the flexible approach. By ensuring the channelling of flexibilities to support the economy and, for example, by issuing the recommendation not to distribute dividends, the supervisor sought to ensure that banks’ capital adequacy in Finland remains at a solid level.

The capital adequacy of banks operating in Finland is high by European standards, and the level of non-performing loans is low, but Finnish households are more indebted than the European average. It is important for banks to ensure borrowers’ repayment capacity and observe caution particularly in granting long-term credit to avoid over-indebtedness of individual households.

Concessions granted by banks have temporarily improved the ability of borrowers to cope with debt servicing. The public sector has provided support funding to businesses, and legislation on bankruptcy has been adjusted on a temporary basis. Although loan moratoria, or general grace periods concerning a large number of loans, are not used in Finland in contrast with other parts of Europe, the outlook for bank customers when the support measures are phased out is not entirely clear. Grace periods granted to customers, public support and uncertain cash flow make it difficult to assess credit risk, which increases uncertainty concerning the estimation of the future impacts of the pandemic in the banking sector.

It is the supervisor’s task to ensure for its part that the Finnish banking sector remains well capitalised and maintains its significant role as the intermediary of finance and monetary transactions.

¹ In early 2021, however, two Finnish banks decided to distribute dividends in excess of the prudent profit distribution criteria described in the non-binding recommendation.