The condition of the banks and key unresolved issues in the global economy Press conference 21 March 2016

1. Bank of Finland
ECB’s monetary policy
The condition of the banks and key unresolved
issues in the global economy
Press conference 21 March 2016
121.3.2016
Erkki Liikanen

2. Suomen Pankki – Finlands Bank – Bank of Finland
Monetary policy was eased on 10 March
2016 with the adoption of a
comprehensive monetary policy
package.
21.3.2016 Erkki Liikanen 2

3. Suomen Pankki – Finlands Bank – Bank of Finland
Objectives of the March monetary policy
decisions:
 To further ease financing conditions in euro area
countries
 To foster increased lending
BACKGROUND:
 Weakened outlook for global economy
 Tightening of financing conditions in early year
 Subdued inflation outlook
21.3.2016 Erkki Liikanen 3

4. Suomen Pankki – Finlands Bank – Bank of Finland
Inflation outlook weakened and
expectations subdued
21.3.2016 Erkki Liikanen 4

5. Suomen Pankki – Finlands Bank – Bank of Finland
Still weak consumer price inflation
21.3.2016 Erkki Liikanen 5
-1
0
1
2
3
4
5
1999 2004 2009 2014
Inflation Underlying inflation*
%
* Underlying inflation = inflation excluding energy, food, alcohol and tobacco.
Sources: ECB and Bank of Finland.
Euro area consumer price inflation (HICP)

6. Suomen Pankki – Finlands Bank – Bank of Finland
Oil price strongly depressing short-term
inflation expectations
Erkki Liikanen 621.3.2016
20
40
60
80
100
120
140
-1
-0.5
0
0.5
1
1.5
2
2.5
2014 2015 2016
1-year inflation-linked swap rate
5-year inflation rate 5 years ahead
10-year inflation-linked swap rate
Oil price (Brent) (right-hand scale)
% USD/barrel
Sources: Bloomberg, Macrobond and calculations by the Bank of Finland.
22/10 3/12

7. Suomen Pankki – Finlands Bank – Bank of Finland
1
1.5
2
2.5
3
3.5
4
2009 2010 2011 2012 2013 2014 2015 2016
Market expectations, euro area Market expectations, USA
SPF survey, euro area SPF survey, USA
%
Sources: Bloomberg, ECB, Fed of Philadelphia and Marcobond.
Market expectations are based on 5-year and 10-year inflation-linked swap
rates. The SPF survey horizon extends five years ahead.
Long-term inflation expectations have
weakened again in euro area and USA
Erkki Liikanen 721.3.2016

8. Suomen Pankki – Finlands Bank – Bank of Finland
What monetary policy decisions were
taken on 10 March?
21.3.2016 Erkki Liikanen 8

9. Suomen Pankki – Finlands Bank – Bank of Finland
Governing Council decisions in March
2016
 Monetary policy rates were lowered
– Key interest rate (MRO) to 0.0% (change -5 bp)
– Deposit facility rate to -0.40% (-10 bp)
 Monthly purchase volumes in the extended asset purchase
programme (EAPP) were expanded (by €20 bn) to €80 bn as of
1 April 2016
– Investment-grade bonds issued by non-banking-sector corporations
were included on list of assets eligible for purchase
 A second series of targeted longer-term refinancing
operations (TLTRO 2) will be launched in June 2016.
– These will enhance the transmission of monetary policy measures
to the economy by encouraging banks to increase lending to the
real economy.
– Each operation will have a 4-year maturity, and the interest rate can
be as low as the rate on the deposit facility.
21.3.2016 Erkki Liikanen 9

10. Suomen Pankki – Finlands Bank – Bank of Finland
Forward guidance on monetary policy
 Purchases are intended to run until at least
the end of March 2017, or beyond, if
necessary, until inflation is on a sustained
path towards a level below, but close to,
2%.
 In view of the current outlook for price
stability, the Governing Council expects
the key ECB interest rates to remain at
present or lower levels for an extended
period of time, and well beyond the horizon
of the asset purchases.
21.3.2016 Erkki Liikanen 10

11. Suomen Pankki – Finlands Bank – Bank of Finland
Transmission of monetary policy:
The historically accommodative stance
of monetary policy supports economic
recovery and price stability through
several transmission channels.
21.3.2016 Erkki Liikanen 11

12. Suomen Pankki – Finlands Bank – Bank of Finland
0
1
2
3
4
5
6
2008 2009 2010 2011 2012 2013 2014 2015 2016
Germany Euro area average sovereign bond yield
%
10-year sovereign bond yield.
Source: Macrobond.
Euro area sovereign bond yields at low
levels
Erkki Liikanen 1221.3.2016

13. Suomen Pankki – Finlands Bank – Bank of Finland
-1
0
1
2
3
4
5
6
7
2003 2006 2009 2012 2015
3-month Euribor
Average interest rate on new corporate loans
Average interest rate on new household loans
%
Sources: ECB and Macrobond.
Bank lending rates on household and
corporate loans have decreased
Erkki Liikanen 1321.3.2016

14. Suomen Pankki – Finlands Bank – Bank of Finland
-4
-3
-2
-1
0
1
2
3
2010 2011 2012 2013 2014 2015 2016
Corporate loan stock Household loan stock
% change from previous year
Loan stocks adjusted for balance sheet transfers and securitisation.
Sources: ECB and Macrobond.
Annual growth in loan stocks
Growth in bank loans has accelerated
Erkki Liikanen 1421.3.2016

15. Bank of Finland
Condition of the banks
15
Erkki Liikanen
21.3.2016

16. Suomen Pankki – Finlands Bank – Bank of Finland
Evolution of large banks’ share prices at
the beginning of the year
21.3.2016 16Erkki Liikanen
60
70
80
90
100
110
1.1.2016 1.2.2016 1.3.2016
Japan United States Europe Nordic countries
Index, 2016 = 100
Source: Bloomberg.

17. Suomen Pankki – Finlands Bank – Bank of Finland
Euro area banks increased their capital
Erkki Liikanen 1721.3.2016
13.5 13.1
14.3
15.5 15.6
16.2
13.7
13.1
6
8
10
12
14
16
18
2010 2011 2012 2013 2014 2015Q3
%
Source: European Central Bank.
Total capital adequacy ratio Tier 1 ratio
Common Equity Tier 1 ratio

18. Suomen Pankki – Finlands Bank – Bank of Finland
Banks’ financial results improved since the
crisis
(Return on equity, ROE)
Erkki Liikanen 18
4.3
7.1
-30
-25
-20
-15
-10
-5
0
5
10
15
20
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
%
*Reunamaat = CY, ES, GR, IE, IT ja SI.
**Ydinmaat = AT, BE, DE, FI, FR ja NL.
2015 käsittää ne pankit, jotka ovat raportoineet vuoden 2015 lopun tulinpäätöksen 16.3.2016 mennessä.
Lähde: Snl.
Reunamaat* - mediaani Reunamaat - painottamaton keskiarvo
Ydinmaat -mediaani** Ydinmaat - painottamaton keskiarvo
21.3.2016
*Non-core countries = CY, ES, GR, IE, IT and SI.
**Core-countries = AT, BE, DE, FI, FR and NL.
*** 2015 covers all banks that have reported year-end financial statement by 16 March 2016
Source: Snl.
***
Non-core countries, median *
Non-core countries, unweighted average *
Core-countries, median**
Core-countries, unweighted average **

19. Suomen Pankki – Finlands Bank – Bank of Finland
The differential between bank lending
and deposit rates has decreased
Erkki Liikanen 1921.3.2016

20. Suomen Pankki – Finlands Bank – Bank of Finland
Non-performing loans weigh on banks
 The problem of non-performing loans particularly
affects mid-sized banks in countries hit by the
crisis.
 The amount of non-performing loans has
decreased in some countries, but progress is
uneven and takes time.
 A swift reduction in non-performing loans is
essential for banks’ ability to grant new loans.
Erkki Liikanen 2021.3.2016

21. Suomen Pankki – Finlands Bank – Bank of Finland
Tax-payers’ or creditors’ responsibility?
 The crisis resolution framework that entered into
force at the beginning of the year emphasises
creditor involvement in situations where a bank
runs into trouble.
 Functions critical to society can be preserved
and problems dealt with in an orderly manner.
 The transition to the new resolution framework
will not be easy, but it is important to complete it.
Erkki Liikanen 2121.3.2016

22. Bank of Finland
Structural change in China’s
economy
22
Erkki Liikanen
21.3.2016

23. Suomen Pankki – Finlands Bank – Bank of Finland
Will China’s economic growth slow
down?
 Growth has been slowing and the transition
towards a different growth model been ongoing
for years already.
 Policy has facilitated this change in China’s
growth model in a number of ways, including
easing of the monetary policy stance.
 Capital movements have also been liberalized,
including direct foreign investment by Chinese
investors.
21.3.2016 Erkki Liikanen 23

24. Suomen Pankki – Finlands Bank – Bank of Finland
Growth slowdown and transition towards a
different growth model have been ongoing for
several years already
21.3.2016 Erkki Liikanen 24
0
2
4
6
8
10
12
14
16
18
20
2008 2009 2010 2011 2012 2013 2014 2015
GDP Industrial output Retail sales
Real annual change, %
Source: Macrobond.

25. Suomen Pankki – Finlands Bank – Bank of Finland
Volume of China’s commodities imports
not decreased much
21.3.2016 Erkki Liikanen 25
60
80
100
120
140
160
180
2009 2010 2011 2012 2013 2014 2015 2016
Crude oil Iron ore Copper Pulp
Index 2009 = 100, 3-month moving average
Source: Macrobond.
China's commodities import volume

26. Suomen Pankki – Finlands Bank – Bank of Finland
Bank of Finland’s economists’ forecast
on China
21.3.2016 Erkki Liikanen 26
-4
-2
0
2
4
6
8
10
12
14
2008 2010 2012 2014 2016 2018
Net exports Investment Consumption GDP
Sources: NBSC and BOFIT
% Forecast

27. Suomen Pankki – Finlands Bank – Bank of Finland
China’s exchange rate appreciated
significantly over past decade
21.3.2016 Erkki Liikanen 27
5
6
7
8
9
10
11
1280
90
100
110
120
130
140
150
2005 2007 2009 2011 2013 2015
Real trade-weighted exchange
rate
EUR/CNY (rhs)
USD/CNY (rhs)
Index 2010 = 100 EUR/CNY and USD/CNY
Sources: BIS, Bloomberg.

28. Bank of Finland
Climate change and the
financial sector
28
Erkki Liikanen
21.3.2016

29. Suomen Pankki – Finlands Bank – Bank of Finland
Paris climate agreement is crucial
“This is a historic moment, not just for us and our world
today, but for our children, our grandchildren and future
generations. The Paris Agreement is a turning point in
the world’s fight against unmanaged climate change…”
Nicholas Stern’s comments on the Paris climate
agreement (press release dated 12 December 2015).
21.3.2016 Erkki Liikanen 29

30. Suomen Pankki – Finlands Bank – Bank of Finland
What are the financial implications of
climate change?
 Climate change is a global problem with
significant costs
– Climate policy implies sharing costs temporally and
geographically
 It affects economic growth, inflation and financial
stability and adds to uncertainty
– Implications for growth and financial stability
are assessed to be mainly negative, also over
the short term
 Analysing the implications for financial stability is
crucial.
21.3.2016 Erkki Liikanen 30

31. Suomen Pankki – Finlands Bank – Bank of Finland
How does climate change affect
financial stability?
 The increasing frequency and amplitude of
extreme weather events leads to an increase in
financial losses
– The value of banks’ investment portfolios and
debtors’ debt servicing ability decrease; insurance
companies reimburse damages covered by
insurance policies.
 Restrictions of emissions create uncertainty
regarding the business continuity of companies
generating significant emissions in their
business
– The risk concerns a significant share of globally
traded securities, and banks have been lending to
these companies.
21.3.2016 Erkki Liikanen 31

32. Suomen Pankki – Finlands Bank – Bank of Finland
Why is determination and rapid
progress important in climate policy?
 Climate change is taking place now and cannot
be stopped immediately
– Decisions taken and investments made will have an
impact for decades ahead.
– Emissions remain in the atmosphere for decades.
 Determined and consistent climate policy will
minimise adverse effects – also for financial
stability.
 It is better to take the right decisions now than to
wait.
– Principle of prudence
– No unnecessary limits to alternatives
– Precarious to trust on salvation by innovation
21.3.2016 Erkki Liikanen 32

33. Bank of Finland
Bank of Finland financial
statements and result
33
Erkki Liikanen
21.3.2016

34. Suomen Pankki – Finlands Bank – Bank of Finland
Central bank result discloses prevailing
monetary policy
 The central bank's primary task is to take measures to
ensure price stability in the euro area. The profit of the
central bank is generated as a result of these operations.
 The Bank of Finland operates efficiently and aims to
ensure distribution of profit to the State.
 The Bank of Finland's income consists of interest
income on banknotes and monetary policy items as well
as investment income on foreign reserves and other
financial assets of the Bank.
 The accommodative monetary policy shows in the
Bank's balance sheet and profit and loss account.
Interest income has decreased due to the low interest
rates.
21.3.2016 34Erkki Liikanen

35. Suomen Pankki – Finlands Bank – Bank of Finland 35
Total risks (excl. gold) in relation to balance
sheet risk buffers 31 Dec 2015
21.3.2016 Erkki Liikanen

36. Suomen Pankki – Finlands Bank – Bank of Finland
Bank of Finland profit and distribution of profit
to the State 2000–2015
21.3.2016 36Erkki Liikanen
309
254
163
177
112
200
293
410 401
420
283
254
337
239
150 146
129
99
81.5 88.4
56
134
186
250 250
260
195
185
227
180
138
98
0
50
100
150
200
250
300
350
400
450
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Profit for the financial year Distribution to the State
EUR million

37. Suomen Pankki – Finlands Bank – Bank of Finland21.3.2016 37
0
100
200
300
400
500
600
700
800
900
1000
1100
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Changes in headcount, 1970-2015
Bank of Finland Financial Supervisory Authority
Erkki Liikanen

38. Suomen Pankki – Finlands Bank – Bank of Finland
Thank you!
21.3.2016 Erkki Liikanen 38