Macroprudential Regulation in Finnish Housing Markets: Lessons from Literature

Abstract

I review the literature on the novel system-wide stability oriented approach to financial regulation called macroprudential policy that has gained wide popularity after the recent global financial crisis. The aim is to shed light on the new policy by reviewing the existing research on the matter as well as identifying the gaps in the current knowledge. In comparison with other policy fields in the broader financial regulation context, macroprudential policy is still in its infancy, and no consensus on the suitable policy regime has been reached so far. Moreover, evidence, say, on the effects of the macroprudential instruments employed remains limited at best, and policymakers have essentially formulated their toolkits by the process of trial and error.

Next, I go on to focus especially on macroprudential policy conducted in the housing market, a sector that also was in the center of events in the recent financial crisis. Several characteristic features of the housing market are such that it is prone to threatening the stability of the financial system as a whole. These properties include the importance of dwellings as a storage of wealth for households and generally high leverage in house purchases. Due to the central role of the sector, policymakers have attempted to contain housing market disturbances, among other measures, by imposing limits on maximum allowed loan-to-value ratio in mortgages.

I then progress further by drawing lessons from these literatures to the macroprudential policymakers operating in the Finnish housing market, providing development suggestions for regulatory framework in place. Despite the recent introduction of several new tools in Finland, there is still room for improvement. I propose complementing the existing toolkit with debt-service-to-income limits in mortgage lending and adopting a dynamic loan loss provisioning scheme. Both of these appear prominent solutions in the light of international experience, and the introduction of the tools is also supported by the special features of the Finnish housing market. Furthermore, a task that calls for attention in particular in Finland and other EU countries due to the single market rules is further strengthening the international coordination between authorities.