STRENGTHENING THE RESILIENCE OF THE BANKING SECTOR

General

The Finnish authorities share the view of the Committee that further regulatory measures are called for to strengthen the resilience of the banking sector. We are, however, concerned about the complexity of the set of proposed measures, resulting at this stage in difficulties to make sufficiently extensive impact studies, and later when implemented, a heavy administrative burden for the industry, possibly without clear evidence for the overall positive impact of the measures adopted. For this reason, the Finnish authorities would like the Committee to consider solutions which would be, to the extent possible, simple, conceptually consistent and relying on information already gathered by the banks. Since the cumulative effect of potential changes is likely to be very substantial, we would like to emphasize that the quantitative impact study plays a critical role in the work. Additionally, as far as the timing is concerned, we believe that sufficient time should be allowed to carry out further impact studies after the basic principles have been agreed upon, where necessary. Furthermore, we would like to point out that further work should be done in working out the effects of the higher capital requirements, including capital buffers, on macro-economic developments. We should also acknowledge the possibility that some of the proposed regulatory changes eventually turn out to be unsustainable in light of the impact assessments. Of the several important changes proposed by the Committee, we would especially like to support the measures aiming at reducing the pro-cyclicality of the capital adequacy framework. This aim is very important and we find the work done so far very valuable. However, the information regarding the actual measures is not precise enough for us to be able to take a detailed stand on them at the moment. Among other things, the clarification on how the different measures interact with each other is needed. We also consider it important that banks are allowed to use the capital buffers when needed in worsened economic conditions. We are of the view that the forthcoming changes in the capital adequacy framework should not punish the business models that have been proved to be prudent and stable (e.g. credit institutions concentrating on the low-risk retail-orientated business, or credit institutions specializing in public sector lending (0 % risk-weighted). Some of the proposals made by the Committee seem to work against this objective, leverage ratio being the most significant case rom the Finnish point of view, the most crucial issues, to which we would like to draw the Committee's attention, are the following: ξ On the leverage ratio : the level on which the ratio will be set, as well as the status of the ratio (pillar I or pillar II) oWhile we see also arguments for creating a hard back stop measure to curb excessive levels of bank leverage we consider it most appropriate to integrate leverage ratio into Pillar II framework (see Section 4). ξ On the definition of own funds : the treatment of minority interest as well as the investments to financial institutions and insurance companies, and the treatment of instruments issued by NJS companies. oFor co-operative banks, there are several criteria for Core Tier 1 capital which might be problematic depending on the interpretation of the criterion for NJS companies. These criteria should be further investigated. Especially the criterion for permanence should not be interpreted so tightly that the typical capital instruments of such banks would not be eligible. oWhile we agree that the elimination of minority interest from the group capital is conceptually correct, its impact should be carefully assessed, undue effects should be avoided and an adequate transitional period provided. We also believe that it would be correct to eliminate the minority interest only to the extent it exceeds the capital requirement of the subsidiary in question. o The treatment of investments in insurance undertakings by banks belonging to financial conglomerates should not be tightened as it would have severe impact on such banks. Please find below more detailed comments on the proposals download