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

order to reverse the ongoing run on domestic deposits, a declaration was made that all deposits in iceland were safe. this did not include deposits in foreign branches, as iceland did not have the necessary access to fx to make such an implicit guarantee credible. all deposits in icelandic - headquartered banks were, however, given priority over other unsecured claims, including those in foreign branches. this decision was a key to the outcome that deposit claims from the foreign branches have now been paid in full from recoveries of the old banks ’ estates. bis central bankers ’ speeches in international discussion, a number of myths have developed about this process. there have been claims that iceland allowed its banking system to collapse, with what now seem reasonable results, and that others should consider doing the same. the fact is that iceland kept the domestic part of its banking system running throughout, and at significant expense ; otherwise, the consequences would have been dire. some have claimed that the banks were nationalised. they were not. the failed private banks are private companies in winding - up proceedings governed by law. the government fully recapitalised one of the new banks. the other two have been private banks owned primarily by the estates of the old banks. others have claimed that iceland defaulted and got away with it. the opposite is true. the credit of the sovereign was preserved, and all debt obligations have been paid in full and on time. on the whole, these measures were successful, which mitigated the effect of the banks ’ failure on the economy. the domestic payment system functioned more or less seamlessly throughout, and there was continuous access to deposits and basic banking services in iceland. the economic programme with the imf was initiated in november 2008. it had three key goals : stabilisation of the exchange rate, fiscal sustainability, and reconstruction of the financial sector. financing amounted to usd 4. 4 bn. with 1. 4 bn. coming from the imf and the rest from bilateral loans from the nordic countries and poland. despite some initial delays due to the bilateral dispute on deposit guarantees, which i will not discuss here, the programme was very successful, and all three goals were reached. the programme ended in august 2011. the nordic bilateral loans were prepaid in 2012 – 2015, and the imf facility and the polish loan were prepaid in autumn 2015. comprehensive capital controls were an important element in the programme, but their rationale was to help to stabilise the exchange rate after the currency had fallen