The completion of Banking Union is an important objective from the perspective of financial stability. Reaching an agreement on a common deposit insurance scheme is a key component in achieving that objective. The purpose of a deposit insurance scheme is to strengthen confidence in uninterrupted access to bank deposits. The size of the Deposit Insurance Fund must be sufficient to credibly withstand possible problem situations. Banks’ deposit insurance contributions should be calibrated based on risks. This would reign in individual banks’ incentives to benefit from a common deposit insurance scheme to which all banks have contributed. Studies show that a common deposit insurance scheme would be quite resilient.

There are no immediate threats to the stability of the Finnish financial system. The relocation of Nordea’s corporate headquarters will, however, increase the banking sector’s exposure to structural vulnerabilities. The regulatory and supervisory reforms already implemented and participation in the European Banking Union will serve to mitigate the risks associated with the expansion of the banking sector, but adoption of a common European Deposit Insurance Scheme remains an important measure yet to be implemented within the Banking Union. An income-related cap on loans is needed to rein in the increase in household indebtedness.

A macroprudential decision taken by the Financial Supervisory Authority's Board in early spring to tighten the maximum loan-to-collateral (LTC) ratio for housing loans will bolster the stability of the Finnish financial system. The policy adjustment will help curtail growing household indebtedness by restricting the provision of large housing loans relative to collateral and by increasing awareness of the risks inherent in such loans. It will not, however, remove the risks associated with outstanding household debt and its protracted growth. New macroprudential tools are still required to contain growing indebtedness.

An integrated European banking market can be seen as an ultimate objective of the Europe’s banking union project. This would help disentangle supply of credit in a certain country from the state of public finances of that country. The recent initiative to reduce home bias in banks’ sovereign debt exposures aims to support these goals. By a similar logic, should bank lending be steered towards more cross-border diversification within the banking union? This could be encouraged within the current system of banks’ capital requirements.