pentti hakkarainen : capital - based macro - prudential instruments what type of policy tools are needed to address macro - prudential risks in the banking sector? notes by mr pentti hakkarainen, deputy governor of the bank of finland, for the panel discussion on " capital - based macro - prudential instruments - what type of policy tools are needed to address macro - prudential risks in the banking sector? ", eu commission's public hearing on the review of the eu macro - prudential framework. brussels, 7 november 2016. * * * thank you for your invitation to speak here today in front of this distinguished audience. this review of the eu macroprudential framework is very essential work for the european union. in my opening remark, i would like to share with you two points on capital - based macroprudential instruments, based on our own policy making experiences : first, effects of the said instruments are uncertain and second, processes for their usage are unnecessary complicated. these points are intertwined. let me start by saying that macroprudential policy is needed addition to other economic policies. it is very important that authorities have also macroprudential instruments available. we experienced in finland in the early 1990 ’ s a severe boom and bust cycle, at a time when we did not have any such tools. now, after the great financial crisis, we have instruments and framework in place. my comments today should be perceived as suggestions for improvements only and not criticism of the framework and instruments. we have several capital - based instruments available via crr / crdiv, but in practice we have found it difficult to find an “ appropriate ” instrument to mitigate systemic risks related to residential real estate and household indebtedness. some countries are already trying to curb acceleration of growth in prices and indebtedness, while we in finland have been more troubled with existing levels of indebtedness and muted macroeconomic outlook. when banks are well - capitalized and hold voluntary buffers well above regulatory capital requirements, broad based additional capital requirements, as macroprudential tools, are less effective and more targeted measures would be more appropriate, in my view. banks with high capital buffers have no need to respond to these macroprudential policy actions, and therefore the impact may either be marginal or different than what was aimed at. i am not sure whether the differences in banking structures and their solvency metrics were

forecast for this year to 0. 6 %. slide 6. wage growth is moderating in the euro area the euro area unemployment rate has remained at a record low and employment has increased, even though growth has been at a standstill since the end of 2022. this said, there are indications that labour demand is now adjusting downwards. recent euro area wage growth has been developing broadly in line with our expectations, slowing from 5 % to 4 %. importantly, a key driver of wage growth has been past inflation surprises rather than higher inflation expectations. 2 / 4 bis - central bankers'speeches slide 7. inflation expectations remain well anchored to the target inflation expectations have in fact been well anchored at around our 2 % target, as can be seen from this slide. referring to the ongoing weak demand conditions in the euro area, and in the spirit of the multilateral imf and world bank spring meetings this week, i would like to draw your attention to the developments in the euro area current account. in the march projections, the forecast for the current account surplus was revised significantly upwards, from 1 % to 3. 2 % of gdp for the current year and similarly for the two following years. as we know, the current account can be defined as the difference between investment and savings. this definition provides a useful viewpoint when assessing the effects of recent monetary policy tightening and its strong transmission. an increase in the current account surplus may reflect a lower level of investment or higher level of savings – or both, which seems to be the case in the euro area currently. an important factor contributing to a higher euro area current account is the low level of business and housing investment, which are expected to be very weak this year. this is reflected in the weak credit demand due to higher interest rates and also somewhat tighter credit supply. as bank profitability is not expected to remain as strong as before and credit risks are increasing somewhat, the supply factors may start to play a bigger role in credit extension, while credit demand is expected to start recovering. if weaker investments are contributing to a stronger current account, so too are higher savings. the savings rate increased to 14. 6 %, which is clearly above the pre - pandemic 13 %. of course, tighter monetary policy and higher interest rates play a major role in explaining the higher savings rate. however, uncertainty and low confidence also incentivise higher savings. the continuation of the russian war has probably had more complex and wide - ranging effects on confidence and