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Banking sector capital position as at 31 March 2020: banks’ capital ratios were weakened by market volatility, but the surplus of own funds increased as a result of the easing of additional capital requirements

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The banking sector’s capital ratios − i.e. the ratio of own funds to total risk exposure − weakened in early 2020, due in particular to strong volatility in market prices. However, the decisions taken in spring to lower the additional capital requirements, with the purpose of ensuring lending capacity, increased the banking sector’s surplus of own funds.

The Finnish banking sector faced the coronavirus pandemic with strong capital buffers. However, the sector’s capital ratios declined in the first quarter of 2020 compared with the situation at the end of 2019. At the end of March, the Common Equity Tier 1 (CET1) capital ratio was 16.8% (31 December 2019: 17.6%) and the total capital ratio was 20.2% (31 December 2019: 21.3%). The weakening of capital ratios reflected, in particular, strong volatility in market prices at the end of March, which increased the risk-weighted assets for market risk and decreased the amount of own funds, due to negative value changes in financial assets measured at fair value. Capital ratios were also weakened by changes to the definitions used for the purpose of calculating own funds requirements (application of the definition of default in accordance with the new EBA Guidelines)1 by some of the banks.

In March, the European Central Bank (ECB) allowed its directly supervised banks flexibility in the fulfilment of certain additional capital and liquidity requirements, due to the exceptional situation created by the coronavirus pandemic. The measures announced in the decision supported banks’ ability to provide credit to the real economy. The measures provided by the ECB are for the most part available also to banks directly supervised by the FIN-FSA, if necessary. The ECB and the FIN-FSA also issued a recommendation to banks to refrain from dividend distribution until 1 October 2020.

The FIN-FSA Board also decided to lower those additional capital requirements that are within the scope of national decision-making. These decisions removed the systemic risk buffer of Finnish credit institutions. The FIN-FSA Board also decided to lower the O-SII buffer (the additional capital requirement for other systemically important institutions) in the case of OP Financial Group.2 The Finnish banking sector’s additional capital requirements were decreased also by decisions taken by other Nordic supervisors to ease countercyclical capital buffer requirements.

As a result of the lower additional capital requirements, the banking sector’s surplus of own funds increased compared with the situation at the end of last year.3 The macroprudential decisions increased the Finnish banking sector’s imputed lending capacity to Finnish businesses and households by some EUR 30 billion.

Appendix

Capital position of banking sector and financial and insurance conglomerates as at 31 March 2020 (Excel)

1 Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013 (EBA/GL/2016/07).

2 Decision of the Board of the Financial Supervisory Authority on lowering the additional capital requirements for credit institutions.

3 The preliminary decision on lowering the additional capital requirements was taken on 17 March 2020. The final decision was taken on 6 April 2020 and entered into force immediately. In the calculation of the banking sector’s surplus of own funds as at 31 March 2020, this final decision was taken into account proactively.

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Regulator Information

Abbreviation: FIN-FSA
Jurisdiction: Finland

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