Macroprudential decision: Recommendation on mortgage borrowers’ maximum debt-servicing burden – credit institutions’ capital requirements also reviewed

The Board of the Financial Supervisory Authority (FIN-FSA) recommends that housing loans in future be granted, as a rule, to loan applicants whose total loan-servicing costs are assessed to remain below 60% of their net income under stress conditions. The loan cap for borrowers other than first-time home buyers will be kept at 85%. The capital requirements of significant credit institutions were also reviewed. Due to the impacts of, inter alia, Russia’s war in Ukraine, credit institutions will not be subject to a systemic risk buffer requirement, but the need to raise the buffer rate will be reviewed as soon as conditions permit.

At its meeting on 27 June 2022, the Board of the FIN-FSA decided to issue a recommendation that mortgage borrowers’ total loan-servicing costs should, as a rule, be no more than 60% of their net income. This constitutes a ‘stressed’ debt-service-to-income (DSTI) ratio, which is calculated taking into account the servicing costs of all a borrower’s loans. In addition, in this calculation, the maturity of the loans should be no more than 25 years and the interest rate no less than 6%, except for loans with long-term interest rate hedges and fixed-rate loans. The recommendation will enter into force on 1 January 2023.

“The recommendation of a stressed debt-service-to-income limit sharpens our previous recommendations to exercise restraint in granting long and large loans. The excessive and increasing level of household indebtedness poses a structural risk which is all the more important considering the general rise in interest rates looming on the horizon. By specifying our recommendation we also respond to the recommendations of the European Systemic Risk Board,” says Marja Nykänen, Chair of the FIN-FSA Board.

The FIN-FSA Board has repeatedly urged in the past that lenders exercise restraint in granting loans that are very large with regard to the loan applicant’s income and have a longer maximum repayment period than usual. These recommendations have aimed to prevent excessive growth in household debt relative to income and to comply with Recommendation (2019/8) of the European Systemic Risk Board (ESRB), as part of which Finnish authorities were urged to introduce non-binding borrower-based measures to curb indebtedness.

A follow-up assessment published by the ESRB considers that Finland is only partially compliant with the ESRB Recommendation. In addition, the level of household debt has continued to grow irrespective of previous recommendations.

The FIN-FSA Board decided to extend the period of validity of the stricter loan cap, i.e. the maximum loan-to-collateral (LTC) ratio, which entered into force on 1 October 2021. As a result, the loan cap for residential mortgage loans other than first-home loans will remain at 85%.

Elaboration of capital requirements for Nordea and OP Group Financial

As required by law, the FIN-FSA Board has identified credit institutions significant for the Finnish financial system (other systemically important institutions, O-SIIs) and has set additional capital requirements (O-SII buffers) for them. Nordea’s O-SII buffer rate will rise to 2.5% (from 2.0%), and OP Financial Group’s to 1.5% (from 1.0%). The buffer requirement for Municipality Finance Plc will remain unchanged at 0.5%. The decision will enter into force on 1 January 2023. The identification of O-SIIs and the calibration of O-SII buffers is based on the systemic importance of credit institutions, which is assessed primarily on the basis of the scores specified in the Guidelines of the European Banking Authority (EBA).

The systemic risks and vulnerabilities surrounding the Finnish banking sector are significant and provide a justification for the systemic risk buffer (SyRB) requirement, which was withdrawn in spring 2020 due to the COVID-19 pandemic, to be reset at a level above 0.0%. Factors such as Russia’s war in Ukraine has further weakened the economic outlook for Finland and Europe, increased uncertainty about the operation of the banking system and intensified the risk of credit losses to the extent that the FIN-FSA Board decided not to apply the SyRB to Finnish credit institutions for the time being. However, the decision is subject to a reassessment, and the intention is to set the SyRB rate to a level required by risks and vulnerabilities soon as the conditions permit.

The private sector credit-to-GDP gap, which is used as the primary risk indicator for setting the countercyclical capital buffer (CCyB) requirement, has continued to post very low figures. Based on the primary and supplementary risk indicators and other available data, there are no such signs of changes in the credit markets as would require an increase in the CCyB rate.

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, which promote stability. The Board decides on a quarterly basis the level of the countercyclical capital buffer (CCyB) requirement and the level of 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 (SyRB) 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

The 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 (in Finnish, pdf)
- Bank of Finland
- Ministry of Finance
- Ministry of Social Affairs and Health
Principles for determining national systemically important credit institutions (O-SIIs) and setting additional capital requirements (pdf)
Macroprudential strategy of the Board of the FIN-FSA (pdf)
Macroprudential report 1/2022 (in Finnish)

About Finanssivalvonta

Finanssivalvonta, or the Financial Supervisory Authority (FIN-FSA), is the authority for supervision of Finland’s financial and insurance sectors. The entities supervised by the authority include banks, insurance and pension companies as well as other companies operating in the insurance sector, investment firms, fund management companies and the Helsinki Stock Exchange. We foster financial stability and confidence in the financial markets and enhance protection for customers, investors and the insured.