Marja Nykänen: Opening remarks - Bank of Finland Financial Literacy
Conference
Opening remarks by Ms Marja Nykänen, Deputy Governor of the Bank of Finland, at the
Bank of Finland Financial Literacy Conference, Helsinki, 12 June 2023.
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Ladies and Gentlemen, Dear Conference Participants,
Good morning and a very warm welcome to the Bank of Finland's Money Museum!
Please let me thank each of you for taking part in our conference. I also want to thank
all of our presenters, panelists and the keynote speaker Professor Annamaria Lusardi.
The quality of presentations is outstanding, and I hope you are all looking forward to the
discussions as much as I am.
We come together today to discuss the vitally important topic of financial literacy. It is a
skill which every citizen needs, but which far too many lack. Sound financial literacy is
at the heart of people's well-being, and therefore, improving it must be a top priority of
the authorities. In the past, it was sufficient to be aware of your income and expenses,
in a practical sense. "Spend less than you earn" is an old and simple wisdom. And "It is
not about the high income, but the low expenses" as my grandmother used to say.
Today, credit is readily available and complex investment products are accessible at
our fingertips. The gap between the financially resilient and the financially fragile is
widening. The current cost of living increase has made financial skills imperative for
households. It is now recognised that poor financial abilities have left many households
unprepared to face this cost of living increase, rising interest rates and their
consequences.
In this opening address I will first discuss the specific challenges that the cost of living
increase imposes on households and to financial stability. I will then explain why a lack
of financial literacy is not just an individual problem but has a wider effect on the entire
financial system. I will argue that financial literacy must go hand in hand with a
wellregulated financial market and macroprudential policies. I will emphasise that
interconnectedness between financial literacy and financial stability, in particular,
explains why central banks are fostering financial education. I will finish by introducing
initiatives by the Bank of Finland which aim to improve the financial skills of all our
citizens.
Dear Friends,
in today's economic climate it is more important than ever to be financially literate.
During a recent press conference at which I introduced our Financial Stability Review, I
quoted Warren Buffett's poignant phrase: "only when the tide goes out do you discover
who's been swimming naked". He referred to the risks investors take that only get
tested and become visible during tough times.
This wisdom applies to households too. For two decades, inflation and interest rates
were low and stable. Households were optimistic about their job and income prospects.
During these good times, access to credit was easy, which encouraged people to
borrow and spend more. But, to continue Warren Buffet's analogy, we have
experienced an unprecedented series of tidal currents. The Covid-19 pandemic,
Russian's brutal and unprovoked invasion of Ukraine, and as a consequence rapid
inflation and raising interest rates, have led to many households searching for their
swimming suits or even lifebuoys. A loan taken when interest rates were low could turn
out to be too large for some borrowers, even where the household's financial standing
ought to be sufficient to manage repayments.
Higher interest rates and tighter financial conditions can, indeed, expose households'
vulnerabilities that were built up during the period of low interest rates. The reason why
central banks in all the world's main economic regions started to raise their key interest
rates almost in unison was not, however, motivated by aim of "finding out" households,
or somehow punishing economic players. The central banks' goal is to curb the soaring
inflation that in all major economies turned out to be faster and broader than expected.
A year ago, central banks thought they could tighten monetary policy gradually as
inflation seemed to be a temporary phenomenon, but this outlook changed rapidly.
Although central banks have increased interest rates exceptionally quickly, the current
level of rates is not, however, especially high by historical standards. Yet, even a
moderate rise in interest rates matter as, in many countries, household debit
accumulation grew considerably during the times of low interest rates.
I will next talk about the implications of the cost of living increase to households in more
detail. The cost of living increase reduces household's real disposable income, which,
in turn, constrains households' budgets and their ability to consume. My focus is on
Finnish households. Although there are some country specific factors at play, we can
identify many similarities between households in Finland and other European countries.
Firstly, the ongoing cost of living increase is driven by inflation. Inflation this year
reached a level not seen in many countries since the 1980s. A combination of
postpandemic consumer demand, supply chain disruptions, accommodative economic
policies and Russia's invasion of Ukraine that shocked Europe's energy markets all
explain why inflation shot upwards. While there are signs that inflation is starting to
ease, it is still expected to remain above the ECB's target of 2 percent in the medium
term.
The rapid and steep rise in inflation has been a cause of anxiety for many households.
Distributional effects of inflation have been serious because households in the lower
parts of the income distribution are disproportionately affected by the increases in the
costs of essential goods. Especially low-income households, in Finland and elsewhere,
spend a large share of their income on basic consumption such as food, electricity and
heating, which makes them particularly vulnerable to increases in the living costs.
Lowincome households, furthermore, are able to save less and are more
liquidityconstrained than high-income households. They have less room to buffer sharp
increases in their cost of living through savings or affordable loans.
Secondly, it's worth highlighting that Finnish households have more debt than ever
before, in the face of fast-rising interest rates. For decades Finnish households have
constantly accumulated debt in relation to their income. The more debt
households have, the more significant the negative impact a rise in interest rates has on
other spending opportunities. Finnish households are particularly vulnerable to the
interest rate increases, because the rates on housing loans are usually variable.
According to a survey by the Bank of Finland, about a quarter of the total housing loan
stock in Finland is hedged against interest rate rises. However, the most indebted
households are less likely to have hedged their housing loans, and this is a cause of
concern.
Finally, the rise in interest rates and the tighter financing conditions have weakened the
financial cycle. The housing markets have dampened significantly, and the rate of credit
growth has slowed. In addition to high interest rates, the housing market has also been
hit by low consumer confidence. The third way in which the cost of living increase
squeezes household consumption opportunities is the so-called "wealth effect".
Housing wealth forms a significant share of Finnish households' assets, and thus
declining home prices have a negative impact on household wealth. In turn, lower
household wealth makes households reduce their spending.
Most of the household debt in Finland is housing related. I occasionally get challenged
by the somewhat misleading argument that housing loans in Finland are not a problem
to financial stability, because households generally avoid defaulting on them at any
cost. Yet, the significance of indebted households is highlighted in the event of a shock
to the economy. In an economic downturn, indebted households cut their consumption
to service their debt.
I will use an illustrative example from our recent history. Finland experienced a severe
recession in the 1990s. During this difficult period households sought first and foremost
to service their housing loans. Considering the depth of the economic downfall and level
of mass unemployment, the total value of unserviced or failed housing loans remained
surprisingly low. However, to serve their loans, households reduced consumption which
caused losses for domestic market companies. Companies, in turn, adjusted their
operations via layoffs or redundancies. Bankruptcies by banks' customers resulted in an
increase in loan losses, particularly in the corporate sector, and weakened banks'
capital positions, meaning that banks had to cut down on lending even more. This
caused a self-fulfilling spiral between households, companies and banks that deepened
the recession and strengthened the instability of the financial market.
To sum up, the cost of living increase has meant that households' incomes could not
keep up with increasing costs. Low-income households and households with large
variable rate loans have been particularly affected. The foundations of financial stability
can still be shaken even if there are no mass defaults, because households'
consumption may decline sharply in response to lower real income and the "wealth
effect". This could reduce output and increase the probability of recession, and
potentially result in higher risks to banks' asset quality through corporate defaults.
Is there anything that could be done to prevent a vicious circle from forming between
households and financial markets, two distinctive sectors of the economy? The answer
is macroprudential policy, a concept that emerged in response to the financial crisis.
Macroprudential policy seeks to address risks arising from interactions between the real
economy and the financial system.
Macroprudential instruments are used for preventing financial crises by strengthening
the resilience of the financial systems, including housing markets. In Finland, decisions
on the use of macroprudential instruments are taken by the Board of the Financial
Supervisory Authority, the FIN-FSA, which I am chairing. Macroprudential policies may
take different forms. For example, in Finland we expect new legislation to become
effective next month, which aims to curb excessive household indebtedness. The new
legislation will introduce a maximum maturity of 30 years on housing loans and include
certain amortisation requirements. Furthermore, non-bank lenders such as payday loan
providers will be moved under the supervision of the FIN-FSA. I'm convinced these new
laws will contain risks related to housing loans and curb excessive household
indebtedness.
Dear participants,
even the best combination of macroprudential policies and related legislation is not a
silver bullet when it comes to curbing household indebtedness on an individual level.
The design and implementation of various macroprudential policies aim to support the
overall resilience of the financial system. These macroprudential measures always take
an aggregate perspective. They cannot efficiently limit risks stemming from individuals
or circumstantial events. This is where financial literacy comes into play. It is an
individual skill. When taking loans or making savings and investment decisions,
households have to be able to consider the whole range of life events that may affect
their financial position. These individual decisions cannot be controlled efficiently by
macroprudential policies. The same also applies the other way round: when making
financial decisions the households consider the risks they face personally, not the
economy-wide systemic risks or externalities that macroprudential policies address.
Having said this, there are fundamental synergies between financial literacy and
financial stability. Buying a house is usually the biggest economic decision taken by an
individual. While making this decision, households need to understand what is going on
in the economy and in the financial world but also be able to manage their own
finances. Financially literate households are able to make better decisions by using
crucial tools that make them resilient to shocks. This decreases their financial fragility.
In aggregate, they contribute towards a stronger and more stable economy and
financial markets. Macroprudential policies such as loan-to-value ratio or
debt-toincome ratio are relevant both from the households' and the financial system's
perspective. These policies target households at large. Their aim is to ensure that,
when needed, households have sufficient buffers and shock absorbers. In many cases,
risks that arise from housing markets, in particular, impose bigger risks for households
than banks or other financial institutions.
Interconnetedness between financial literacy and financial stability is the primary reason
why central banks, including the Bank of Finland, want to promote financial literacy and
education. Financial literacy enhances financial stability.
Links between financial stability and financial literacy are important and they form a
worthwhile field for exploration. I am delighted that many papers today focus on
microlevel decision-making and its links to the macro-economic outcomes. The bird's eye
view enables us to discuss the broad scope of financial literacy. Many papers and
presentations also consider the societal effects of financial literacy. Collecting high-
quality data, designing studies to evaluate financial literacy policies, improving teaching
techniques and making central banking communications more understandable are all
financial literacy research areas that help us to understand household behaviour and
eventually improve financial stability.
Dear all,
Let me reiterate how delighted I am to welcome you to the Bank of Finland's first
international financial literacy conference. For the Bank of Finland, promoting financial
literacy has been a key strategic priority and this financial literacy centre in connection
with our museum is a concrete outcome of this work. When we were choosing the
vision for our centre, we abandoned the stereotypical Finnish modesty. The vision
states, "Finns will be the best at financial literacy in the world"!
This year we are also celebrating the 20th anniversary of the Bank of Finland's
museum. The museum is open to the public for free and it has become a popular place
to visit here in the heart of Helsinki.
In 2020 the Bank of Finland took an initiative which resulted the first national strategy in
financial education. We started by surveying all different financial education activities in
Finland. When it comes to implementing the strategy, we thrive to be a key player within
our national financial education network. The network includes relevant ministries,
banking, consumer and financial sector associations and NGOs. Co-operation between
different stakeholders is crucial, because in Finland many important policy areas such
as consumer protection or citizens' advice do not fall under the functions of the central
bank. Co-operation enhances the outreach of financial education to different
socioeconomic groups and gives us a feedback channel that we can utilise in developing our
activities further.
The mission of the Financial Literacy Centre is to improve citizens' understanding of the
economy and increase their interest in economic issues. Our educational games,
exhibitions and interactive displays explain common economic concepts like inflation,
interest rates, and, in general, aim to make monetary policy more accessible to the
broader public. We also offer workshops on personal finance for school children and
students.
To our visitors, we deliver neutral and research-based information about the economy,
the Bank of Finland and the Eurosystem in a comprehensible manner. I hope that
during the breaks you can find time to explore our Centre. Its manager Anu Raijas is
happy to tell you more about our activities and operations.
Dear friends, with these words, I thank you for your attention and wish you all a very
good conference!