Household debt is at an all-time high, according to the bank.
Finland should minimize any potential risk to the stability of its financial system by taking additional steps to reduce household debt, the Bank of Finland said in a statement on Wednesday.
While new measures proposed by the government to limit the duration of home loans were necessary, the bank said, they are insufficient to properly address the problem of rising household debt. He added that the implementation of other reforms, such as a ceiling on debt relative to the income of the borrower, would also be necessary to solve the problem.
The central bank said long-term household debt issuance hit a new high. New home loan amounts are now larger than before, with mortgages often extending beyond traditional 25-year terms, increasing potential risk, the bank said.
Households taking out a loan need to be confident that their ability to repay can withstand rising interest rates, higher household spending and any uncertainty in the labor market,” said Marja NykanenDeputy Governor of the Bank of Finland.
Vulnerabilities in Finland’s banking sector are compounded by its small size and concentration, while the country’s financial stability could be threatened by external events – such as the war in Ukraine and the Covid pandemic, the bank warned.
The measures taken by the government to reduce indebtedness would increase the financial resilience of the country in general and facilitate the response to unforeseen circumstances, the bank said.
“Strengthening banks’ capital buffers should be possible in a more varied way than at present,” Nykänen said.
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