Position of banking and employee pension insurance sectors as at 31 December 2015: Domestic banking sector improved its profitability and strengthened its capital adequacy

Banks’ net interest income continued to decline, and their income generation was increasingly dependent on investment market activity. The sector’s improved results were also boosted by the removal of the bank tax.

‘Banks need to prepare for the impact of Finland’s weak economic growth and an exceptionally challenging market environment on their earnings capacity. In addition, the low level of interest rates and uncertainties in the investment market mean that participants in the employee pension insurance sector need to conduct ongoing assessments of acceptable risk levels relative to solvency and return targets,’ notes Anneli Tuominen, Director General of the Financial Supervisory Authority (FIN-FSA).

Return on investment in the employee pension insurance sector remained at 5 % last year, so return requirement was barely reached.

Negative reference rate poses a challenge for the banking sector

The exceptionally low interest rate level has made banks to mitigate the risk of low reference rates through a new clause in new loan agreements whereby the negative reference rate is not deducted. In connection with the reform of residential mortgage credit regulation, the FIN-FSA has proposed that a contractual clause safeguarding at least a margin for banks should be enabled via legislation. Should a contractual clause safeguarding the margin be prohibited, it could lead to a rise in the margin level or it could restrict interest rate options available to customers. The prohibition would be problematic because, if interest rates fall, banks’ income from lending would decline by more than funding costs.

Banks are entitled and obliged to request customer due diligence data

Banks and other financial market participants have a statutory obligation to know their customers. Enquiries addressed by banks to their customers are one way of fulfilling this due diligence obligation. According to law, the extent of due diligence data is founded on banks’ own risk-based assessments.  In the FIN-FSA’s view, the Payment Services Act does not enable the blocking of payment instruments in order to improve the collection of customer due diligence data. ‘The situation is challenging for banks if customers refuse to supply the required due diligence data during the customer relationship,’ states Jyri Helenius, Head of Department. ‘In such situations, banks must perform risk-based assessments of appropriate measures. The relevant legislation also needs to be amended.’

Due to changes in the reporting schedule, life and non-life insurance sectors Solvency II data will exceptionally not be released until the autumn.

For further information, please contact:

• Anneli Tuominen, Director General, tel. +358 10 831 5300
• Marja Nykänen, Deputy Director General, tel. +358 10 831 5247
• Jyri Helenius, Head of Department, tel. +358 10 831 5312 (customer due diligence)

Appendix

Position of banking and employee pension insurance sectors as at 31 December 2015: Articles (in Finnish)