Macroprudential decision: Loan cap remains at 85%; lenders are recommended to exercise restraint in granting loans that are large relative to income and have a long repayment period

The Board of the Financial Supervisory Authority (FIN-FSA) recommends that lenders carefully assess borrowers’ ability to pay, taking into account potential future changes in debt-servicing costs, and exercise restraint in granting loans that are large relative to income and have a longer than usual repayment period. The recommendation will be specified during the first half of 2022. The FIN-FSA Board has decided to extend the period of validity of the decision on a tighter loan cap, and hence the loan cap on residential mortgage loans other than first-home loans will remain at 85%. The countercyclical capital buffer requirement for banks will also be kept unchanged at its standard level.

The FIN-FSA Board has already in its previous decisions repeatedly recommended that lenders exercise restraint in granting loans that are large with regard to the borrowers’ income and have a longer maximum repayment period than usual. In its current recommendation, the Board also emphasises the need to assess households’ ability to pay, taking into account potential future changes in debt-servicing costs.

The recommendation will be specified in the first half of 2022 in respect of the types of loans lenders should exercise restraint in granting. At the same time, the FIN-FSA Board will assess the need to set an additional capital requirement for housing loans where the borrower’s debts or debt-service expenditures are particularly high relative to income.

‘The current recommendation, which will be specified next year, aims at even more strongly preventing excessive growth in household indebtedness relative to income. When granting loans, it is also important that lenders take into account potential future changes in total debt-servicing costs so that any increases in interest rates or disruptions in borrowers’ debt repayment would not threaten their ability to service their debts or maintain consumption,’ says Marja Nykänen, Chair of the FIN-FSA Board.

The need to update the recommendation of the FIN-FSA Board has arisen in the course of 2021. According to current plans, a debt-to-income (DTI) ratio as suggested by the Ministry of Finance working group to prevent excessive household indebtedness is not being proposed to be included in Finnish legislation. In addition, the European Systemic Risk Board (ESRB) has published an assessment of compliance with its Recommendation, as part of which it urges Finnish authorities to take more specific non-legally binding borrower-based measures than the ones implemented to limit indebtedness.

Maximum loan-to-collateral ratio and banks’ additional capital requirements

The FIN-FSA Board has decided to extend the period of validity of the tighter loan cap, i.e. the maximum loan-to-collateral (LTC) ratio for housing loans, which became effective on 1 October 2021. The Board also decided to maintain the countercyclical capital buffer (CCyB) rate at 0.0%. The primary risk indicator for setting the CCyB requirement - the private sector credit-to-GDP gap - has remained at a low level. In addition, based on supplementary risk indicators and measures, there are no clear signs of such a build-up of cyclical risks as would require an increase in the CCyB rate.

The Board will update the FIN-FSA’s macroprudential strategy and decide on the application of structural macroprudential buffer requirements for banks in the second quarter of 2022.

The Board of the Financial Supervisory Authority assesses on a quarterly basis the short- and long-term risks to the stability of Finland’s financial system. If necessary, the Board may tighten or relax the macroprudential instruments that promote stability. The Board decides on a quarterly basis the levels of the countercyclical capital buffer (CCyB) requirement and the maximum loan-to-collateral (LTC) ratio for housing loans. The levels of the additional capital requirements for nationally systemically important institutions (O-SII buffers) are reviewed at least annually and the level of the systemic risk buffer at least every second year.

For further information, please contact:

Marja Nykänen, Chair of the Board of the Financial Supervisory Authority, tel. +358 9 183 2007

View this link to access the appendices listed below

Board’s decision on the application of macroprudential instruments (pdf)
Proposal of the Director General of the FIN-FSA, circulated for comment, on the application of macroprudential instruments (pdf, in Finnish)
Opinions on the Director General’s proposal on the application of macroprudential instruments (pdf, in Finnish)
- Bank of Finland
- Ministry of Finance
- Ministry of Social Affairs and Health
Macroprudential report 2/2021 (in Finnish)