Significant Risks of Oral Why This Drug Class Should Not Be Included in a Preventive Care Mandate Rebecca Peck, M.D., C.C.D., and Charles W. Norris, M.D.* Dr. Rebecca Peck is a board-certified family physician, certified clinical densitometer, and Marquette Method NFP teacher. Dr. Peck may be
Financial market reportFinancial Market Report
Exceptionally large amount of bond financing by Finnish companies Stock of housing corporation loans more than tripled Strong growth in nonperforming loans at euro area Many euro area countries place restrictions on large Financial Stability and Statistics Contents
1 Financial intermediation Banks' role in financing Finnish companies has diminished Housing corporation loans from MFIs increasing strongly 2 Banks and insurance companies Banks' non-performing loans increase in the euro area, decrease in the United States Bank's position relative to other banks explains contagion in the European money markets 3 Securities markets SEU's CSD Regulation strengthens the single market and improves the rules for securities settlement Stock of bonds issued by Finnish enterprises growing at a rapid Project team
Bond and money market funds maintain their position in the investment fund markets 4 Infrastructure Several euro area countries already limit large cash payments Contactless payment is changing the way we make card payments 22 Pertti Pylkkönen 5 Key regulatory and supervisory initiatives Single Resolution Mechanism will protect taxpayers from costs of Many European countries impose restrictions on banks' housing The legislative basis for the use of macroprudential tools 25 New tools for the regulation of capital adequacy Use of instruments that influence housing lending Liquidity requirements Kimmo Virolainen List of charts
Päivi Heikkinen Chart 1. Finnish corporate sector's self-financing ratio (gross savings/investment) Chart 2. Finnish non-financial corporations' interest-bearing debt Chart 3. Imputed interest margins on new corporate loans, by loan size Chart 4. Outcome of the application for bank loans by SMEs Chart 5. MFI lending to housing corporations in Finland Chart 6. Housing starts in Finland, by type of financing, and housing corporations' renovation costs Chart 7. Imputed average margins on new drawdowns of MFI loans in Finland Chart 8. Lending to housing corporations by general government and from abroad Chart 9. Average return on equity (ROE) for large euro area banks and US banks Chart 10. Developments in non-performing loans in the euro area and United States Chart 11. Bonds issued by Finnish residents, outstanding amounts end-month Chart 12. Bond issuance by Finnish non-financial corporations, gross (all currencies) 15 Chart 13. Fund capital by fund type and total net subscriptions Chart 14. Finnish households' net investment in investment funds registered in List of tables
Table 1. Maximum sizes of cash payments in selected EU countries, EUR 1 Financial intermediation
Banks' role in financing
the corporate sector reflects a relatively strong level of internal financing in the sector as a whole. Finnish companies has
Chart 1. Finnish corporate sector's self-financing diminished
ratio (gross savings/investment) Finnish corporate sector's self-financing ratio (gross savings/investment)
Corporate finance in Finland and
elsewhere in the euro area is highly bank-
centred. In Finland, particularly large
non-financial corporations have recently
acquired financing via bond issues, and
Source: Statistics Finland.
growth in the stock of bank loans to non-
Corporate finance is bank-centred in Finland
financial corporations has come to a halt.
Financing conditions of small and
The Finnish corporate sector's interest-bearing debt medium-sized enterprises have weakened
relative to the size of the economy has grown steadily. to some extent, but are better than in the
At the end of March 2013, the debt amounted to 66% euro area on average.
of GDP and totalled EUR 127 billion .2 The largest providers of finance to non-financial Viewed at the level of the national economy as a corporations include domestic monetary financial whole, there is no major need for external finance in institutions (MFIs), in practice mainly deposit banks. the Finnish corporate sector,1 as non-financial Another important source of loan-based debt financing corporations' internal financing has exceeded is the rest of the world, chiefly foreign banks and other investment for nearly 20 years. In national accounts financial institutions. terms, there is no need for external finance from financial institutions and securities markets, as the corporate sector's gross savings exceed gross fixed capital formation. The corporate sector's self-financing ratio has long been over 100. Admittedly, in recent years, the ratio has been lower than in the pre-crisis years. Although the situation of individual non-financial corporations may even differ widely from the average, the fairly high self-financing ratio of Here direct investment loans in the balance of payments statistics 1 This article excludes housing corporations from the corporate and domestic inter-company loans are not counted among the corporate sector's interest-bearing debt. Financial Stability and Statistics – Suomen Pankki Finlands Bank increased . In particular, the smallest Chart 2. Finnish non-financial corporations' interest-bearing debt corporate loans have been affected by widening Structure of Finnish non-financial corporations' interest-bearing debt Loans from MFIsLoans from abroad (excl. direct investments) margins. Nevertheless, loan rates for Finnish non- Loans from other financial institutionsLoans from employment pension institutionsLoans from other general government entities financial corporations are lower than in the euro area Short-term debt securitiesLong-term debt securities Loan margins for large non-financial corporations have also widened, but relatively less than for smaller enterprises. This is due, in part, to large companies' access to a wider spectrum of funding sources, such as bonds. Thus, larger companies have stronger Sources: Statistics Finland and Bank of Finland.
negotiating power than smaller enterprises. Moreover, Lending by employment pension institutions to non- in making loan decisions, banks pay increasing financial corporations began to grow rapidly in the attention to the imputed capital requirements of loans, latter half of 2008, in response to increased risks which typically are lower in relative terms for large relating to the availability of corporate finance. companies than for small and medium-sized Employment pension institutions' loan stock peaked enterprises (SMEs). above EUR 10 billion, compared to a pre-crisis level of approximately EUR 4 billion. Although the loan Chart 3. Imputed interest margins on new corporate loans, by loan size stock of employment pension institutions has Up to EUR 250,000 Over EUR 250,000 and up to EUR 1 million Over EUR 1 million subsequently declined, it is still markedly larger than before the crisis. The total stock of lending to non- financial corporations by other general government entities (central and local governments) is somewhat larger than that by employment pension institutions. The biggest recent change in the structure of corporate finance is the increasing importance of market-based funding. Large non-financial Source: Bank of Finland.
corporations, in particular, have issued more bonds Financing situation of SMEs has deteriorated
than previously. By contrast, growth in bank loans has but is still better than in the euro area on
slowed: in August 2013, the three-month moving average of the annual growth rate of the corporate loan stock (excl. housing corporations) was only 0.3%. The financing situation of Finnish SMEs has weakened to some extent. According to a survey Interest margins on corporate loans have
conducted by the European Central Bank (ECB),3 the increased
proportion of rejected loan applications has increased MFIs have re-priced the risks inherent in corporate since autumn 2011 . In the period October loans. Imputed interest margins on new loan 2012 to March 2013, 11% of SMEs' bank loan agreements to non-financial corporations have 3 Survey on the access to finance of SMEs in the euro area (SAFE). Suomen Pankki Finlands Bank – Financial Stability and Statistics applications were rejected. On the other hand, during MFI statistics do not separately indicate the amount of the same period, 79% of SMEs' loan applications were loans taken out by SMEs. However, based on the approved in full. This was the euro area's second ECB's survey, it seems that developments in the SME highest figure after Germany's and clearly higher than loan stock have been subdued. the euro area average. More than half of Finnish SMEs have enough own funds and internal sources of financing to render it Chart 4. Outcome of the application for bank loans by SMEs unnecessary to seek external financing. In addition, SMEs' external financing needs have changed slightly. Not acquired due to high interest Demand for bank loans has already been on a downward path for several years, while demand for overdrafts and trade credits has increased.
Source: European Central Bank, Survey on the access to finance of SMEs in the euro area Financial Stability and Statistics – Suomen Pankki Finlands Bank Housing corporation loans About two fifths of MFI lending to housing
corporations is provided by Municipality Finance Plc4 from MFIs increasing
and the remaining three fifths mainly by deposit banks. strongly
The share of deposit banks has declined markedly since 2008, even as the stock of these loans has Hanna Putkuri ja Kimmo Koskinen
Municipality Finance grants loans to housing The stock of loans granted by Finnish
corporations controlled by local authorities and to MFIs to housing corporations has grown
housing corporations designated as non-profits by the significantly in the past ten years. MFIs
Housing Finance and Development Centre of Finland grant housing corporations both non-
(ARA), a government agency operating under the subsidised and state-guaranteed or
supervision of the Ministry of the Environment.6 Such subsidised loans. By contrast, the stock of
loans may be interest-subsidy or privately financed loans granted by the general government
loans, and may be used for construction, renovation or directly to housing corporations is
acquisition of housing property. contracting gradually, as new state-
According to the State Treasury, the volume of subsidised housing loans (ARAVA loans)
state guarantees and the stock of loans with interest are no longer provided.
subsidy were both upwards of EUR 8 billion in June The stock of loans granted by Finnish MFIs to housing 2013.7 Municipality Finance is the most important corporations has more than tripled in the past ten intermediary for state-subsidised housing finance. The years. In August 2013, these loans amounted to above-mentioned housing corporations designated as approximately EUR 17.3 billion, and the year-on-year non-profits legally qualify for state subsidies and loan stock growth was well over 15 guarantees. However, in the current environment of low interest rates, interest subsidies are of no Chart 5. MFI lending to housing corporations in Finland MFI lending to housing corporations in Finland Loan stock (left-hand scale) Municipality Finance also provides financing for Annual change in loan stock (right-hand scale) debt restructuring. According to Municipality Finance, demand for its loans has recently been driven by 4 At the end of 2012, the stock of loans granted by Municipality Finance to housing corporations amounted to about EUR 6.4 billion (Municipality Finance's Annual Report 2012). Annual change is calculated from monthly changes in the stock, adjusted for revaluations The data is based on the Statistics Finland outstanding credit Source: Bank of Finland.
statistics discontinued at the end of 2012. 6 Significant housing corporations with non-profit status include eg certain limited liability companies belonging to Avara, Sato, TA and 7 Includes subsidies and guarantees for rental and right-of- occupancy housing. Suomen Pankki Finlands Bank – Financial Stability and Statistics customers' willingness to replace old ARAVA loans Chart 7. Imputed average margins on new by new market-based loans. drawdowns of MFI loans in Finland Imputed average margins on new drawdowns of MFI loans in Finland Housing production and housing corporations' Loans to non-financial corporationsHousing loans to householdsLoans to housing corporations renovation costs have evolved fairly steadily in Finland in recent years. Following the dip in 2008– 2009, housing starts have regained their average level of the first post-millennium decade. The relative importance of state-subsidised ARA production increased strongly in 2009–2010, as privately financed housing construction collapsed. The trend has Source: Bank of Finland.
MFIs have increased their margins on new loans in subsequently normalised order to improve profitability and to better take Chart 6. Housing starts in Finland, by type of financing, and housing corporations' renovation account of credit risks in pricing. In recent years, the long-sustained period of historically low Euribor rates Housing starts in Finland, by type of financing, and housing corporations' renovation costs Privately financed housing starts (left-hand scale) and Euribor-tied lending rates has been the most ARA housing starts (left-hand scale)Total housing starts (left-hand scale)Renovation by housing corporations, new statistics ( right-hand scale) important factor eroding profitability in basic banking. Renovation by housing corporations, old statistics (right-hand scale) Banks have also cited more expensive funding and anticipated costs for regulatory tightening as justifications for the widening of loan margins. Direct lending by the State contracts at an
Sources: Statistics Finland, ARA and Bank of Finland calculations.
The stock of loans granted by the general government Margins on the increase, continued low level
directly to housing corporations is mainly composed of of interest rates
ARAVA finance, ie loans granted for rental and right- The average interest rate on the stock of loans granted of-occupancy housing. No new ARAVA loans have by MFIs to housing corporations remained at a been provided since 2007; rather, state subsidies for historically low level (1.65%) at the end of August housing purposes are entirely channelled via interest 2013. The average interest rate on new drawdowns in subsidies and guarantees on loans granted by MFIs. August was 1.89%. The imputed interest margin8 on The stock of loans granted by the general new loans averaged 1.47 percentage points in August, goverment directly to housing corporations peaked in ie slightly less than for new housing loans to 2009, and has since been declining at an even pace households and appreciably less than for new . The stock of ARAVA loans managed by the corporate loans . The average loan repayment State Treasury amounted to about EUR 7.1 billion at period is more than 20 years. the end of June 2013. 8 Imputed loan margins are based on Bank of Finland calculations and data on interest rates and volumes of new loan drawdowns at different initial rate fixations. Financial Stability and Statistics – Suomen Pankki Finlands Bank Part of housing corporation loans are in practice Chart 8. Lending to housing corporations by general government and from abroad the responsibility of households. According to Lending to housing corporations by general government and from abroad Central government Statistics Finland's estimate, the loan stock of housing Employment pension institutions Insurance corporations Rest of the world companies owned by households amounted to approximately EUR 9.2 billion at the end of June 2013. In financial accounts within the national accounts framework, these loans taken out for eg financing renovations and repaid in the form of maintenance charges are classified as household Source: Statistics Finland.
debt.10 This calculation method, inter alia, improves What are housing corporations?
the international comparability of the household debt- to-income ratio.
In Statistics Finland's economic classification, housing corporations are housing companies, housing co- operatives, residential real estate companies, right-of- occupancy associations and other housing corporations. According to the Financial Supervisory Authority (FIN-FSA), corporations engaged in renting and management of own or leased real property account for most of the loans granted by deposit banks for real estate industry (a total of EUR 17.8 billion at the end of June 2013). Such corporations typically include housing companies and housing cooperatives as well as housing corporations designated as non- Most sectoral statistics on economic and financial transactions include all housing corporations in the corporate sector. For example, ECB statistics include MFI loans to housing corporations in loans to the corporate sector. In Finland, the relative impact of housing corporations on growth in this sector's aggregate loan stock has been of particular relevance during the past 12 months, as the stock of loans to non-financial corporations has barely grown.9 In other euro area countries, housing corporations generally play a minor role in this area. 9 The financing situation of non-financial corporations is discussed 10 Correspondingly, national accounts add imputed income from in more detail in section 1.1. housing property to households' disposable income. Suomen Pankki Finlands Bank – Financial Stability and Statistics 2 Banks and insurance companies
Chart 9. Average return on equity (ROE) for large euro area banks and US banks loans increase in the euro
area, decrease in the United
Kimmo Koskinen, Mervi Toivanen
Banks' financial results have recently been
pronouncedly better in the United States
The sample of banks includes all FDIC-supervised institutions in the United States and about 60 large listed banks in the euro area.
Sources: FDIC and Reuters Datastream.
than in the euro area. The difference is
US banks' earnings were mainly driven by lower largely explained by weaker economic
impairment losses and higher non-interest income. The activity and strong increases in
growth in non-interest income was due, in particular, impairment losses in the euro area. Losses
to increased profits from securities trading. By of banks in Southern European countries,
contrast, net interest income contracted, as the low in particular, have expanded significantly.
level of interest rates reduced banks' interest income. US banks reported improved earnings for the
Banks' loan losses and impairments on loans have second quarter of 2013. According to data from the declined amid the recovering US economy. Banks Federal Deposit Insurance Corporation (FDIC), a recognised about USD 9 billion in impairment losses supervisor of US banks, the aggregate earnings of US for the second quarter of 2013, compared to a banks grew by about 23% on the second quarter of maximum of about USD 63 billion for a single quarter, 2012, to USD 42.2 billion.11 This was the fourth reached in the last quarter of 2009. However, even consecutive year in which earnings have improved. though non-performing loans relative to the loan stock In June 2013, nearly 54% of the banks reported an have simultaneously been on a clear downward improvement in year-on-year earnings, while only trajectory, the volumes have remained higher than 8.2% cited a weakening. The banks' average return on prior to the financial crisis that came to a head in 2008 equity (ROE) was 9.9%, compared to 8.7% a year earlier Measured by return on assets12, Some banks have already reported their earnings for however, the banks' average earnings (1.17%) the third quarter of 2013. Wells Fargo's earnings grew remained below the average for 2000–2006 (1.27%). on the previous quarter (April–June 2013), whereas J.P. Morgan posted a loss owing to a substantial legal charge relating to sub-prime mortgages. Loan losses and impairments on loans reported by large banks 11 FDIC data cover 6,940 commercial and savings banks. continued to decline quarter on quarter, and cost Financial Stability and Statistics – Suomen Pankki Finlands Bank cutting helped to reduce expenses. The low level of slowly. At the same time, banks' own market funding, interest rates and weak mortgage credit performance notably in Southern European countries, has remained still kept banks' interest income at low levels and discernibly more expensive than in the period eroded securities trading income. preceding the financial crisis, causing banks' interest The Tier 1 capital adequacy ratio of banks supervised expenses to rise and contributing to declines in net by the FDIC, which was 13.0% in the second quarter interest income. of 2013, has remained broadly unchanged since 2011. Developments in non-interest income continue to In 2009 and 2010, however, banks' capital levels were diverge. On the one hand, subdued economic activity bolstered significantly; at the end of 2008 the Tier 1 reduces banks' fee income. On the other hand, capital ratio was 9.9%. The Tier 1 capital ratio of US narrower interest rate differentials and favourable price commercial banks, staying at 12.6% in the second movements in the stock market have boosted bank quarter of 2013, is slightly lower than that of the profits from securities trading. banking sector as a whole. Impairments recognised on loans and securities constitute the most important cause of euro area banks' Chart 10. Developments in non-performing loans in the euro area and United States poor profit performance. For example, at the end of 2012, banks in Spain recognised impairments of almost EUR 50 billion on e.g. real estate sector loans. Despite banks' increased impairment recognition, growth in non-performing loans has not come to a halt, but has instead clearly outpaced impairment recognition. The growth in non-performing loans has increased doubts about the banks' ability to cope with Source: IMF.
future loan losses and about the adequacy of capital The profitability of large euro area banks13 remained
levels. To restore confidence, assessments of euro area weak in the second quarter of 2013, although many banks will be undertaken, in an effort to ensure the banks managed to move into profit territory after the consistency of valuation practices for bank balance end of 2012. The weakness of the economy, increasing sheet components and to review the capital adequacy. impairment losses and the low level of interest rates The most important of these initiatives is the Balance continue to weigh on bank results. The weighted Sheet Assessment to be conducted under the guidance average of euro area banks' return on equity (ROE) of the ECB within the framework of the Single was 3.3% at the end of June 2013, after 4.5% a year Supervisory Mechanism. Tightening capital requirements, market pressures and Banks' net interest income is burdened, in particular, growing loan losses have forced banks to bolster their by low interest rates and subdued credit demand. capital positions. The average Tier 1 capital adequacy Although euro area banks have widened margins on ratio of large euro area banks was 12.1% in the second new loans, margins on the aggregate loan stock expand quarter of 2013, compared to 9.8% as late as at the end 13 Euro area banks include about 60 large listed banking groups operating in euro area countries. Suomen Pankki Finlands Bank – Financial Stability and Statistics Bank's position relative to
model15 used in epidemiology. In the model, banks are other banks explains
broken down in three categories: susceptible, infected contagion in the European
or recovered. Contagion spreads across the network of money markets
banks' financial linkages. If the capital buffers of a susceptible bank are too small relative to its Mervi Toivanen
receivables from the infected counterparty, negative domino effects spill over from the infected bank to the A research paper on contagion in the
susceptible bank. Contagion probability depends on interbank money market shows that in
interbank exposures between the two banks, mistrust 2010 contagion negatively affected 40% of
European banks on average. A bank's
towards the infected bank and the size of the overall central position in the interbank network
interbank market. The model is simulated with actual is particularly important in explaining the
data on European banks. level of contagion, while a bank's size is a
The results show that contagion affected on considerably less significant explanatory
average 40% and 70% of European banks in 2010 and 2007, respectively. Country-level results in turn Banks manage and level out their daily liquidity needs suggest that banks from France, the United Kingdom, in the interbank money market. Interbank exposures Germany and Spain are the most contagious ones, nevertheless create contagion channels through which whereas Irish, Greek and Portuguese banks induce the problems of one bank may spill over to other only limited negative effects. banks. Insolvency of an individual bank causes losses Given the results, it is of interest to disentangle the to the creditor bank, which, in turn, may lead to the leading indicators determining the level of contagion. creditor bank's inability to meet its own obligations. This is analysed by cross-sectional panel estimations Such spreading of problems is known as contagion. where the level of contagion is explained by bank- The most recent example of the spreading of specific characteristics such as size, capital buffers and uncertainty and counterparty risk aversion in the indicators that depict the bank's position in the financial markets is the financial crisis that started in banking network. The results show that a bank's the United States in 2008 and spread like a disease position in the network is more important in through the interbank network. explaining contagion than its size or leverage. Bank A very recent research paper14 assesses the clustering, large interbank loans and a bank's spreading of contagion and its possible negative prominence in the interbank loan network are the key effects in the European banking sector. The research explanatory factors. The results support the view that, proposes a novel approach for modelling contagion in besides bank size, bank regulation should address the interbank network by implementing the SIR banks' position and significance in the money markets. 14 Mervi Toivanen (2013) Contagion in the interbank network: an epidemiological approach. Bank of Finland's Discussion Paper series The name of the model comes from the words susceptible - (19/2013). See the Bank of Finland's website infected - resistant (SIR). Financial Stability and Statistics – Suomen Pankki Finlands Bank 3 Securities markets
SEU's CSD Regulation
securities transactions. In Finland, such services are provided by the Finnish central securities depository, strengthens the single
Euroclear Finland. market and improves the
The proposed Regulation includes many important rules for securities
reforms. The Regulation, which will be directly binding on member states, will eg require market settlement
participants to commit to settling securities transactions two days after the trading day (T+2). At Jenni Koskinen
the same time, the text emphasises the need to improve settlement discipline in Europe and therefore direct The EU's future CSD Regulation allows
measures to address settlement fails will be put in authorised CSDs to provide services
throughout the EU. A new settlement
On the markets where the Euroclear group is period (T+2) will soon be introduced on
involved in CSD activities, the aim is to introduce T+2 the equities market. Those settling later
settlement already earlier than required by the will be subject to an effective sanctioning
Regulation. A shorter settlement cycle increases operational efficiency and reduces counterparty risk. The purpose of the EU regulation on central securities Nearly all the European equities markets have thus far depositories (CSD Regulation) currently being applied the T+3 model. T+2 settlement is however prepared is to harmonise EU-level requirements for already common practice in foreign exchange CSDs and for settlement of securities transactions and thus enhance the safety of the completion of securities One of the main objectives of the regulatory reform transactions. The Regulation reduces the complexity of is to give authorised CSDs the freedom to provide post-trading caused by differences in national rules services throughout the EU. Share issuers would also and regulations. The aim is also to open CSD be able to choose the place of issuance. As the borders functions to competition and to lower the costs of are opened, it is however necessary to carefully define cross-border securities transactions. The proposed the powers, responsibilities and cooperation of the Regulation therefore also supports the introduction and various authorities. The principle is that the competent efficient use of the ECB's T2S platform16. authority of the CSD's home country will grant The proposal for a Regulation focuses essentially authorisation to the CSD and will be responsible for its on CSD functions relating to the settlement of ongoing supervision and regular reviews, in accordance with Level 2 regulations, which will 16 TARGET2-Securities (T2S) is a securities settlement platform supplement the Regulation. The competent authorities provided by euro area central banks, see are required to cooperate with the relevant authorities, Suomen Pankki Finlands Bank – Financial Stability and Statistics eg central banks. Harmonised reporting is also Regulation however recognises the model of direct currently being developed in cooperation with the ownership and the special role of the account European Securities and Markets Authority (ESMA) operators. The proposal has sparked debate also in and national securities markets supervisors and central Finland, particularly on the publicity of securities ownership (see eg Kauppalehti, 2 Oct 2013, in Finnish Finnish investors are currently required to keep their holdings in book-entry registers maintained by The details of the Regulation, which has undergone Euroclear Finland. Securities are recorded in a book- extensive preparations, are expected to be further entry register on behalf of the shareholders, by a honed in the EU's legislative process. The aim is to account operators approved by the CSD. This clear have the Regulation adopted during the current term of and secure model of direct ownership is exceptional in the European Parliament, ie in early 2014 at the latest. Europe. In most EU countries the keeping of ownership records is the responsibility of a bank acting as counterparty to the CSD and as nominee register to individual investors. The proposal for a Financial Stability and Statistics – Suomen Pankki Finlands Bank Stock of bonds issued by
Chart 11. Bonds issued by Finnish residents, outstan tanding amounts at Finnish enterprises
Central government Financial corporations growing at a rapid pace
The stock of bonds issued by Finnish
enterprises is growing at a rate of 30%,
and the group of issuers has become more
Sources: Financial Supervisory Authority and State Treasury.
diversified. After Spain, the growth rate
The stock of loans granted by banks to non-financial for Finland is the second highest in
corporations has grown very slowly, and the share of bank loans in the corporate sector's debt financing is decreasing. Larger companies have diversified the The total stock of bonds issued by Finnish residents is acquisition of debt funding by increasing bond currently growing at a faster rate than that for the issuance. As a result of rapid growth of issuance, aggregate of euro area residents. In August 2013, the bonds already account for almost one fourth of non- annual growth rate of the stock of bonds issued by financial corporations' interest-bearing debt17. Finnish financial corporations, enterprises and the In August 2013, the volume of bonds issued by central government in the Finnish and international Finnish enterprises in the Finnish and international markets was about 6%, while the corresponding markets was 30% higher than in the previous year growth rate for the euro area was just over 1%. The stock of bonds issued by Finnish residents totalled EUR 183 bn in August. The general ) (all currencies) government and financial corporations each accounted for over 40% of the stock, while the share of non- financial corporations has already grown to 15% Source: European Central Bank.
The range of issuers has become more diversified, but only a few issuers have credit ratings. This has been reflected eg in issued bonds' coupon interest rates. The lowest coupon rates (investment grade corporate 17 See section 1.1. Banks' role in corporate finance has diminished. Suomen Pankki Finlands Bank – Financial Stability and Statistics bonds) have stood at 2.75% and the highest (non- which approximately 85% was covered by the end of investment grade corporate bonds) at over 12%. September. The debt has been almost fully covered by The stock of bonds issued by non-financial long-term bonds, and at end-September short-term corporations is also growing faster than the total bond treasury bills accounted for less than 4% of the debt. stock in other European countries. In August, the euro The central government has sought to diversify its area corporate bond market grew at an annual rate of borrowing in the course of the year and has also issued 10%. The stock of corporate bonds has grown bonds denominated in non-euro currencies under the considerably faster in Finland than in the euro area on Euro Medium Term Note (EMTN) programme. average. At the end of August, Finnish corporate According to the budget proposal, the central bonds already accounted for almost 3% of total government will acquire new debt financing of some corporate bond issuance in the euro area, which is EUR 7 bn in 2014. By the end of 2014, central notably higher than eg Finland's share in the euro area government debt will rise to almost EUR 100 bn19. Finnish bonds mostly sold to international
The annual growth rate of the stock of bonds investors
issued by Finnish financial corporations18 was 6% in Finnish bond issuance has primarily been directed at August. A considerable portion of bond funding is either domestic or foreign institutional investors; sales acquired in the wholesale market. Instruments sold to to private investors have been fairly modest. Bonds private customers consist mainly of various structured held by Finnish households only account for a few bonds. Smaller local banks have recently started to percent of the total bond stock. However, the share is strengthen their capital positions by issuing slightly larger in practice since households invest in debentures. However, the individual issue volumes are bonds mainly via investment funds and voluntary unit- fairly modest; only a few million euros. Bonds directed at larger banks' wholesale markets have linked insurance products. The key domestic investors are insurance mostly been covered (mortgage-backed bonds). At the corporations and employee pension institutions, which end of August, the stock of bonds issued by Finnish hold almost a tenth of bonds issued by Finnish financial corporations totalled EUR 75 bn, of which residents. The insurance sector's domestic bond covered bonds accounted for EUR 28 bn. investment has recently been heavily concentrated on In the euro area as a whole, the stock of bonds the corporate bond market. issued by financial corporations contracted in August Foreign investors currently hold over 80% of the 2013 by about 8% from the year-earlier period. stock of bonds issued by Finnish residents and about Contraction of bank balance sheets and problems in 90% of the stock of bonds issued by the Finnish real-estate markets in several countries are reflected in central and local governments. reduced funding from the markets. Finland's central government (budgetary) debt amounted to EUR 86.2 bn at end-September 2013. The net borrowing requirement for 2013 is EUR 9.3 bn, of 18 Deposit banks, mortgage banks and Municipality Finance. 19 See www.statetreasury.fi Financial Stability and Statistics – Suomen Pankki Finlands Bank Bond and money market
Chart 13. Fund capital by fund type and total net subscriptions funds maintain their
Net assets of funds by fund type and total net subscriptions Real estate funds Money market funds position in the investment
Net subscriptions (RHS) fund markets
The level of capital in investment funds
registered in Finland has continued to
Source: Bank of Finland.
Households' direct investment in investment funds grow. Plans call for European regulation
of money market funds to be tightened in
accounted for 20% of total fund capital in August. In order to mitigate the threat of systemic
addition to direct fund investments, households also risk to the markets associated with money
indirectly place large sums in the investment fund market funds.
markets, via individual life and pension insurance products. Households are the largest holder group of Fund capital has continued to grow in Finland
fund shares in the domestic investment fund markets: At the end of August 2013, capital in investment funds their total holdings comprise over a third of the total registered in Finland totalled EUR 70.7 bn, up EUR 4 fund capital. There was a slight change in households' bn on the start of the year. A substantial portion of the financial wealth in January-August 2013, as increase – about two thirds – is from new investment households' net investment in investment funds inflows. Despite the low level of interest rates, bond totalled almost EUR 1 bn in the first half of 2013, and money market funds have maintained their key while their deposits contracted by EUR 1.3 bn position in the investment fund markets; at the end of August, half of total capital in Finnish investment Life and non-life insurers' holdings in investment funds was in bond funds. Money market funds, which funds have increased strongly, particularly as a result invest in short-term interest instruments, accounted for of robust growth in life insurers' premium income 5% of total fund capital and equity funds for 37%. from individual unit-linked life and pension insurance Mixed funds' investor-attractiveness has gradually products. A substantial part of funds invested in unit- diminished, and their share of total fund capital is just linked insurance products are redirected to investment fund markets; at the end of August, life and non-life Mixed funds have this year been the only funds in insurers' total holdings in investment funds accounted the largest-size category that have recorded negative net subscriptions, in the amount of EUR 1.4 bn. New The general government's (incl. employee pension inflows to bond and money market funds totalled EUR institutions) share in total investment fund capital has 2.8 bn in January-August, and equity funds attracted stabilised at 10%. Suomen Pankki Finlands Bank – Financial Stability and Statistics market for AIFMs and a harmonised framework for Chart 14. Finnish households' net investment in investment funds registered in Finland their activities and supervision. Finnish households' net investment in investment funds registered in Finland The AIFM Directive regulates marketing of AIFs to professional investors. The Government bill proposes the marketing of AIFs in Finland also to non- professional customers. Legislation on money market funds (MMFs) is also to be revised. In September 2013 the European Parliament and the Council issued a proposal for a Source: Bank of Finland.
regulation on MMFs with the aim to harmonise EU- The share of foreign investment in Finnish investment wide regulation in this field. The new regulation seeks funds has edged down this year, but foreign to mitigate systemic risk and the related threats arising investment still accounts for over a fifth of the total from MMFs in the financial markets. One such fun capital. A significant portion of foreign investment potential and systemically relevant risk is for a came from Sweden. massive exit from MMFs. The new regulation also Finland's investment fund markets are highly aims to reduce interlinkages between MMFs and concentrated. The market share of the two biggest management companies is about 50% and that of the The proposal will introduce strict restrictions on MMFs' investment ac five biggest management companies is 75%. At the tivities, eg restrictions on assets end of August, there were 32 management companies in which the funds can invest. MMFs will also be operating in Finland, which managed 514 UCITS prohibited from engaging in short selling of money funds and special funds. market instruments. One of the focal points of the proposed regulation Upcoming changes to regulation on
is more stringent rules on constant net asset value investment funds
(CNAV) MMFs. The most important change is that, in The Directive on alternative investment fund managers order to prevent such exits, a CNAV MMF will be (AIFMD Directive, 2011/61/EC) was adopted in June required to hold a liquidity buffer amounting to at least 2011. The deadline for the implementation of the 3% of its total assets. Directive was July 2013. In Finland, a Government At the end of August 2013, there were 13 MMFs bill concerning the legislative changes required by the registered in Finland, and capital invested in them Directive has been submitted to Parliament, and the totalled EUR 3.7 bn. There are no CNAV MMFs new provisions are scheduled to enter into force at the operating in Finland. turn of the year. The scope of the new legislation will be extended eg to equity, real-estate, hedge and commodity funds not covered by the UCITS Directive. The AIFM Directive aims to provide for an internal Financial Stability and Statistics – Suomen Pankki Finlands Bank 4 Infrastructure
Several euro area
Popularity of cash
countries already limit
In Central and particularly in Southern Europe, large cash payments
cash is still the dominate retail payment instrument. In Greece, ca 90% of the retail payments are cash payments, the figure for Austria is ca 80%. Even in Kari Takala
Germany as much as two-thirds of retail payments are In the aftermath of the financial crisis,
cash payments. The share of card payments is however several EU countries have limited the use
growing slowly but steadily in the euro area. In the of cash for large payments, in order to
Nordic countries, the Netherlands and the United curb the grey economy. Many countries
Kingdom, card payments already clearly dominate the popular with tourists have more relaxed
retail payment market. legislation on the use of cash by foreigners.
The large amounts of cash are not necessarily used for payment but they may be kept as liquid cash assets Many euro area countries have in recent years started or used for storing wealth even for extended periods of to limit large cash payments or have tightened the time. This is reflected in the fact that, of the banknotes restrictions on cash payments. The aim, inter alia, is to issued in the euro area, 36% are of the two highest prevent and curb the black and grey economy, money laundering and terrorism financing. The popularity of cash payments in Finland has Another aim of the restrictions is to boost tax been maintained by the easiness of cash ATM revenues, which have shrunk as a result of the withdrawals and the fact that consumers are not financial crisis, by making cash payments electronic usually charged directly for the cash withdrawals. At and thus decreasing the cash payment-related the checkout counter, cash has until recently been opportunities for unreported sales. The use of cash clearly the fastest payment method, and it still is, at may enable unreported sales, because the payment least for small payments involving coins. transaction does not necessarily create a digital trace. Temporary cash withdrawal limits have been in This usually applies to private entrepreneurs who are place recently at least at bank branches in Spain and not part of a retail chain and industries where cash Cyprus, to prevent deposit flight. In other countries, payment is frequent. In some sectors, the use of cash consumers and companies can withdraw cash from also enables the payment of salaries and wages under their current accounts and hold cash without the table, ie without paying income tax.20 20 Payment of salaries and wages under the table usually requires that the company also has a cash flow. Studies show that in the Finnish construction sector, wages have been paid under the table. account. Information on the impact of the new regulation is not yet But since July 2013, it has been compulsory to pay wages on a bank Suomen Pankki Finlands Bank – Financial Stability and Statistics In the euro area, cash can be moved across borders Cyprus and Estonia). Of the EU countries, Denmark, freely, without cash declaration obligations. A person Sweden and the United Kingdom also do not have arriving from or leaving the EU's free trade area must limits on cash payments. In these countries, accounting however declare cash in amounts of EUR 10,000 or software makes tax evasion more difficult for larger more. The anti-money laundering directive applies to companies, and cash payments are already declining. cash payments of over EUR 15,000.21 In its proposal In addition, there seems to be no empirical evidence on for a for a new anti-money laundering directive, the the impact of limits on cash payments in these European Commission proposes that the directive be applied to cash payments of EUR 7,500 or more. Some EU countries (Finland, Estonia, the Czech Cash is legal tender in the euro area, and therefore, Republic and France) also have limits concerning the as a rule, it should be impossible to refuse to accept efficiency of cash payments. For example, a cash cash. Finland, like some other euro area countries, payment involving more than 50 coins need not be emphasise the freedom of contract in legal praxis accepted. In addition, retailers must inform customers concerning payments. In Finland, customers should be clearly at the checkout that they have limits on eg the informed clearly about limits on the acceptance of cash acceptance of banknotes larger than 50 euro. The ECB payments, already before entering the store or by the has thus far not issued any general guidelines on cash checkout counter. payment limits, but it has considered them to be The current maximum for cash payments in the subject to national decision making.
euro area varies between EUR 1,000 and 15,000 . The limits usually apply only to business activities, as cash payments between private individuals cannot be controlled. Some countries also have limits on cash payments between companies. In Finland, companies do not normally pay each other in The forerunner in limiting cash payments is France, where the maximum cash payment is EUR 3,000. Foreigners are however allowed to pay in cash for purchases amounting to as much as EUR 15,000. A similar practice facilitating purchases by tourists is applied in Spain. Countries with significant tourism revenue thus already have eased the limits on maximum size of cash payments (France and Spain) or do not have limits on the size of cash payments (Malta, ages/Default.aspx Financial Stability and Statistics – Suomen Pankki Finlands Bank Table 1. Maximum sizes of cash payments in selected EU countries, EUR Maximum for Maximum for
Cash payment can be refused, if the price is low relative to the offered banknote.
Obligation to declare sums of over EUR 15,000.
Foreigners have to show identification for purchases exceeding EUR 1,000.
Will be lowered to EUR 3,000 as of start of 2014. House purchase in cash prohibited as of the start of 2014.
Limits do not apply to purchases between consumers.
Limit applies only to consumer's responsibility for VAT if the trader does not pay his share of the tax.
The sum in euro corresponds to ca DKK 10,000.
Limit is EUR15,000 if the payment is not related to the payer's business.
Limit is defined as the sum of purchases in one day, if it is equivalent to CZK 350,000.
The following countries do not have limits on cash payments: Iceland, Slovenia, Malta, United Kingdom, Austria, Cyprus, Finland and SwedenLithuania and Estonia.
Suomen Pankki Finlands Bank – Financial Stability and Statistics Contactless payment is
which he can continue making payments without a changing the way we
The new payment method has raised discussion make card payments
also in the media. Its safety has been questioned. On the other hand, many would definitely like to start Anne Nisén22
using contactless payment because of its convenience and speed. The card companies managing the card Quick and easy payment methods are
features seek to ensure safety of the cards by defining gaining popularity. Consumers are already clearly what information can be read from the card
accustomed to paying for purchases by
with the NFC function. Payment without a PIN is a card and invoices online. The latest
safer alternative, particularly if there is a high risk of payment trends seem to be to contactless
the PIN and card getting into the wrong hands. The and mobile payment.
contactless payment feature does not change the card user's responsibilities for potential misuse of the card: Banks operating in Finland are planning, and some the customer is not responsible for misuse if he or she have already added, the Near Field Communication uses the card carefully, in accordance with the card (NFC) feature to their payment cards. NFC enables the terms and conditions. payment of small purchases without a PIN, by passing Banks are planning to automatically incorporate the card close to the retailer's payment terminal. The the contactless payment feature into cards upon payment terminal must have an NFC function to renewal and into new cards in connection with card enable payment without a PIN. Finnish banks have orders. In a supervisory letter sent to banks in June decided to set the maximum for a contactless payment 2013, the Financial Supervisory Authority pointed out the safety aspects of the NFC feature. The Financial Contactless payments based on NFC utilise radio Supervisory Authority requires that private customers frequency identification (RFID) technology. A very should be able to get, without extra charge, an small transmitter placed in the card's chip enables the alternative card without the NFC feature, if they so payment terminal to read the card data required for the wish. The banks are also required to inform their payment. Mobile payment solutions are also changing customers clearly about the new ways of using and the NFC feature is expected to be added to mobile payment cards, the terms and conditions, safety payment in the coming years. Contactless payment aspects, and what to do if they do not want to start enables the payment of small purchases without a PIN. using this new type of payment card. Larger purchases will still require keying in the PIN. The bank issuing the card can impose additional restrictions on card usage, eg by setting a limit on the number of contactless payments; when the limit is exceeded, the customer must key in the PIN once, after 22 The author is employed by the Financial Supervisory Authority. Financial Stability and Statistics – Suomen Pankki Finlands Bank 5 Key regulatory and supervisory
Mechanism. The Mechanism would be based largely on the almost completed Recovery and Resolution Mechanism will protect
Directive (RRD) for credit institutions and investment taxpayers from costs of
firms, but would also include certain key new banking crises
elements. The most difficult issues that will still have to be resolved before introduction of the Mechanism relate to the legal foundation of the Mechanism, Jyrki Haajanen
decision-making procedures and funding. The Single Resolution Mechanism must have a The European Commission proposal for
solid legal foundation if significant powers (that the Single Resolution Mechanism is
normally belong to national authorities) are to be intended to come into effect at the
delegated to it. The Commission proposes as the legal beginning of 2015. The proposal does,
foundation article 114 of the Treaty on the Functioning however, contain a number of
controversial issues that will need to be
of the European Union, which deals with the resolved before final decisions are taken.
harmonising of Member States' legislation. The Prominent among these are the legal
suggestion is not entirely unproblematic, as in practice foundation of the Mechanism, decision-
the proposal would mean powers (and responsibilities) making procedures and funding.
under the RRD being transferred from national authorities to an EU authority. In reality, the work of In July 2013, the European Commission issued a the Single Resolution Mechanism would often not proposal for the Regulation on the Single Resolution involve measures to harmonise legislation, but rather Mechanism. This is part of the broader project for the application of already harmonised powers to European Banking Union, which also includes the individual cases. In evaluating the adequacy of the Single Supervisory Mechanism for banks and an legal foundation, the final structure and decision- integrated deposit guarantee scheme. In its proposal, making procedures of the Single Resolution the Commission suggests the establishment of a Single Mechanism will be important. Resolution Board for crisis resolution in respect of Under the proposal, the Commission would take failing European banks and a single Bank Resolution the key decisions on resolution based on proposals Fund to cover some of the costs of resolution. from the Single Resolution Board (such as whether Together with the Commission and the national and when to place a bank into resolution and the scope resolution authorities, the Single Resolution Board and of use of resolution tools and the Fund). In accordance Fund would constitute the EU's Single Resolution with the Commission's decision, the Single Resolution Suomen Pankki Finlands Bank – Financial Stability and Statistics Board would draw up a resolution plan, in which the Commission's proposal, new legislation governing measures to be taken in resolving the crisis at the bank bail-in would not come fully into effect until the would be set out in detail. National resolution beginning of 2018, although the Single Resolution authorities would be in charge of executing the Mechanism would already begin operation at the resolution plan, but the Board would oversee beginning of 2015. Postponement of the introduction resolution and could, where necessary, directly address of bail-in would cause a 3-year transition period during executive orders to troubled banks. The Single which the funding of resolution would have to be Resolution Board would contain representatives from resolved in some other credible manner. the Commission, the ECB and Member States. As an The Commission and Member States, and at a later alternative to the key role of the Commission, a stage also the European Parliament, are negotiating formally and politically independent resolution over the Regulation on the Single Resolution authority with extensive, precisely defined powers has Mechanism with the aim of securing its adoption also been proposed. before the spring 2014 European Parliament elections. As part of the Single Resolution Mechanism, it is The timetable is extremely tight and will require the also proposed to create a Single Bank Resolution speedy resolution of the many questions still Fund. Over the next ten years, funds would be gathered into the Fund equal to 1% of all bank deposits covered by deposit guarantee (based on the situation in 2011, the amount to be gathered in would be approximately EUR 55 billion). Essentially, the goal of the Fund would be to support the stability of the financial system, not the operations of unviable banks. The Single Bank Resolution Fund would replace the national resolution funds of countries participating in the Banking Union. The Single Resolution Mechanism will be able to function effectively only when it has sufficient funds available to complete the resolution of troubled banks. Both the RRD and the Single Resolution Mechanism rest very strongly on the principle of creditor responsibility (bail-in). This is accomplished by covering a bank's losses initially with its own equity capital (plus subordinated liabilities) and thereafter converting a sufficient amount of creditors' receivables into (new) equity so as to enable the new bank formed out of the healthy components of the troubled bank to have an adequate capital base. In the Financial Stability and Statistics – Suomen Pankki Finlands Bank Many European countries
(iii) macroprudential instruments potentially having an effect via the terms and conditions and the availability impose restrictions on
of housing loans and mortgage credit more broadly. banks' housing lending
Our examination does not consider those instruments that will be compulsorily included in Member States' Jukka Vauhkonen
macroprudential toolkit via the EU's regulation of capital adequacy, the requirement for counter-cyclical EU countries have – contrary to the
capital buffers and the capital buffer requirement for general view – a relatively large amount of
globally systemically important banks. We also leave experience in using potential
out macroprudential instruments that could possibly be macroprudential tools, even if the specific
targeted at infrastructure actors and financial purpose for their use has not been to ward
institutions other than banks. off systemic risks and strengthen the
stability of the financial system. Half of the 5.2.1
The legislative basis for the use countries in the EU have imposed a loan-
of macroprudential tools to-value cap on housing loans, if differently
defined and used for different purposes.
The purpose of most potential macroprudential tools is Some countries also have experience with
to regulate banks' capital adequacy and liquidity, the use of capital adequacy requirements
which for their part affect banks' ability to grant loans for banks in excess of the EU's minimum
and enlarge their balance sheets, the terms of lending and banks' resilience to crises and losses. The requirements on banks in the EU in regard to capital This article examines EU countries' experiences to adequacy and liquidity are set out in the Capital date with the use, for either micro- or macroprudential Requirements Directive and Regulation (CRD purposes, of regulatory instruments that are suitable IV/CRR). The Capital Requirements Directive defines for use as macroprudential tools. We also examine centrally the type of macroprudential tools national Member States' intentions in the immediate years authorities have at their disposal and how their use can ahead to adopt macroprudential tools within the scope possibly be directed or coordinated at EU level. of the EU's Capital Requirements Directive. With CRD IV, all Member States will be required for The macroprudential tools to be examined can be the first time to introduce a standardised divided into three groups: (i) banks' capital adequacy macroprudential tool, a counter-cyclical capital buffer. requirements; (ii) banks' liquidity requirements; and The imposition of a counter-cyclical capital buffer will 23 By macroprudential tools we mean regulatory gradually become possible in all euro area countries at instruments for which the primary, publically the latest by 2016–2019, in accordance with the expressed objective is to reduce risks to the stability of timetable for transition set out in CRD IV. Earlier the financial system as a whole and strengthen the financial system's risk-bearing capacity relative to 24 In 2016, Member States must be able, where such collective risks. necessary, to impose a counter-cyclical capital buffer Suomen Pankki Finlands Bank – Financial Stability and Statistics introduction is also permitted. Of countries outside the Many other potential macroprudential tools, too, EU, Switzerland has already introduced a buffer are outwith the scope of the Directive. It does not requirement. Norway, too, may activate a buffer in the cover regulatory instruments that affect the terms and conditions of lending, such as the imposition of a loan- The Directive and Regulation also make provision to-value cap on housing loans or a maximum debt-to- for other macroprudential tools that will allow income ratio for loan applicants. The use of such regulation of the size of capital buffer required of instruments will in future continue to be at the banks. Nationally systemically important credit discretion of national authorities. institutions can have an O-SII buffer of a maximum 2% imposed on the basis of their systemic importance. New tools for the regulation of In addition, or alternatively, a country can impose on capital adequacy all or some of its credit institutions a systemic risk The EU's new Capital Requirements Directive and buffer requirement of, as a rule, a maximum 5%. The requirement for a systemic risk buffer can be imposed Regulation will change the range of instruments for structural or macroprudential reasons, for example available to Member States to tighten the capital the banking sector's large size relative to the country's requirements on their countries' banks. The Capital economy as a whole. Requirements Directive currently in force is based on The Directive does not, however, oblige Member the principle of minimum harmonisation: the Directive States to include a systemic risk buffer requirement in defines EU-level minimum common requirements, the tools available to their authority with responsibility from which Member States are free to differ in a for macroprudential supervision. It is not yet apparent stricter direction. In contrast, the new CRD IV will be if this requirement will be made available to Finland's based on maximum harmonisation, from which macroprudential supervisory authority. Member states may differ only in ways defined in the The new quantitative liquidity standards included text of the Directive. in Basel III and EU rules – the Liquidity Coverage Member States will in future have three ways in Ratio (LCR) and the Net Stable Funding Ratio (NSFR) which they can impose on some or all of their credit – are essentially microprudential provisions. It is still institutions (structural) capital requirements beyond unclear to what extent they will in future be usable the mandatory EU minimum: 1) an O-SII buffer nationally as countercyclical or discretionary requirement 2) a systemic risk buffer requirement or 3) measures. Member States can, however, use other a capital buffer requirement imposed on a single credit liquidity requirements for either micro- or institution by the banking supervisor on the basis of a macroprudential purposes. Pillar 2 assessment. Of these, the first two are new instruments. Pillar 2 requirements have been in use since the implementation of the Basel II capital of at most 0.625%. This level will be raised annually framework. As well as institution-specific risk factors, by 0.625 percentage points until 2019, when they must use of a Pillar 2 requirement could in future also be be able, where necessary, to impose a counter-cyclical based on macroprudential reasons, such as the risks an capital buffer of 2.5%. Financial Stability and Statistics – Suomen Pankki Finlands Bank individual institution poses to the financial system as a has been used, in a number of very different ways. There are major differences between European Already prior to the financial crisis, some countries of countries in respect of how ‘binding' the loan-to-value Central and Eastern Europe (Croatia, Estonia) were cap has been, and hence how much its use has already using capital requirements that were stricter restricted housing lending and affected its terms and than the EU's minimum requirements. For example, in Estonia the minimum capital requirement for banks The effectiveness of a loan-to-value cap is was raised from 8% to 10% as early as 1997. influenced by, for example, its level, scope (applies to As a consequence of the financial crisis, the minimum all mortgage-backed loans, or just to some), how capital requirements for banks were also tightened in legally binding it is (recommendation or mandatory), Greece, which imposed a 9% core capital requirement the sanctions for a breach of the rules, and whether (Core Tier 1) in March 2013. In Portugal, too, the core unsecured top-up loans are allowed. capital requirement for banks was increased. Slovakia In Sweden, for example, the loan-to-value cap is has in place a non-binding core capital binding and is applied comprehensively to all recommendation of 9%. mortgage-backed loans. In some countries, however, rules like loan-to-value caps are applied more Use of instruments that influence housing lending In some countries, such as Finland, the loan-to- value cap is a non-mandatory recommendation. In a Authorities in European countries have made extensive few countries (Poland, Romania and Hungary) the use of regulatory instruments that restrict bank lending loan-to-value cap applies only to housing loans for the purchase of housing and other real estate. The denominated in foreign currency. use of these instruments has been motivated by both European countries have not used loan-to-value ‘microprudential' and ‘macroprudential' objectives. caps as a discretionary countercyclical tool; as a rule, it The former include strengthening consumer protection has been applied either as a fixed rule or at least as a and the capital adequacy of banks, while the latter rule with only rare exceptions. It is chiefly just certain would be, for example, the objective of moderating the Asian countries that have experience with using a pace of growth in housing loans or rising house prices. To date, microprudential objectives would appear to Belgium, the United Kingdom, Italy, Latvia, have been the more important motivation. Lithuania, Portugal, Poland, France, Sweden, Romania, Slovakia, Finland and Hungary. Experiences Loan-to-value caps
with using a loan-to-value cap are examined in more A loan-to-value cap has been the most commonly used detail in Vauhkonen and Putkuri (2013) ‘Lamauttaako regulatory instrument targeting lending to house vai vakauttaako lainakatto Suomen asuntomarkkinat?' purchasers.25 A loan-to-value cap can be used, and [‘Would a loan-to-value cap stabilise or paralyse the Finnish housing market?'] Kansantaloudellinen 25 Countries that have applied a loan-to-value cap in its aikakauskirja [Finnish Economic Journal], 109, various forms include at least the Netherlands, Suomen Pankki Finlands Bank – Financial Stability and Statistics loan-to-value cap as a tool of active (macroprudential) instruments has been primarily for microprudential purposes. Many countries have in use similar requirements for minimum levels of liquid assets to be Other regulatory instruments applied to
held by banks to those envisaged for the forthcoming housing lending
Liquidity Coverage Ratio.27 In a few countries, banks Loan applicants' loan-to-income (LTI) ratio or debt-to- are also required to have sufficient liquid assets income (DTI) ratios have been used in many EU denominated in foreign currency (Croatia, Sweden and countries.26 In Finland, the Financial Supervisory Hungary). Meanwhile, foreign subsidiaries of Austrian Authority (FIN-FSA) has not issued direct banks are required to have a sufficient level of funding recommendations regarding the LTI/DTI or a acquisition in their country of operation. maximum debt service burden. FIN-FSA has, In some non-euro-area countries, the requirements however, urged banks operating in Finland to carry out for banks' cash reserves can potentially be used as a financial margin assessment for every new housing macroprudential instruments (Croatia and Hungary). loan applicant. Stress test calculations of a loan Foreign-sourced or foreign-currency-denominated applicant's debt-servicing capacity should be funding has also had imposed upon it in individual conducted at least for the highest level of interest rates countries various cash reserve requirements (Croatia) seen in the euro era (12-month Euribor at 6%) and for or else is subject to more intensive supervision a maximum repayment period of 25 years. The housing loan risk weightings employed by banks in their capital adequacy calculations can also be raised for macroprudential reasons. Of the Nordic countries, Sweden and Norway have raised their housing loan risk weightings above the minimum levels defined in the Capital Requirements Regulation. Individual EU countries also have in place and available for use other regulatory instruments to influence housing lending. Examples include sectoral capital requirements (United Kingdom), limits on housing loan interest rates and on the duration of loans (France) and dynamic loan loss reservations (Spain). Liquidity requirements EU countries have had no experience of the explicitly macroprudential use of regulatory instruments that influence banking liquidity; the use of such 27 Such countries include at least Belgium, Croatia, 26 These include at least the Netherlands, Belgium, Poland, Portugal, France, Romania, Slovakia, Sweden, France, Lithuania, Portugal and Poland. Denmark and Hungary. Financial Stability and Statistics – Suomen Pankki Finlands Bank
ORIGINAL CONTRIBUTION Health Outcomes After Stopping ConjugatedEquine Estrogens Among PostmenopausalWomen With Prior HysterectomyA Randomized Controlled Trial Andrea Z. LaCroix, PhD Context The Women's Health Initiative Estrogen-Alone Trial was stopped early af- Rowan T. Chlebowski, MD, PhD ter a mean of 7.1 years of follow-up because of an increased risk of stroke and little