The warning letter sent to Finland cautioned the country about the risks to the domestic financial sector caused by high and increasing levels of indebtedness.
According to the European Systemic Risk Board, household debt-to-income levels have reached a historic high and are well above the average for the European Union.
The Board, which reports to the European Central Bank, attributed the situation to restrained household income growth accompanied by growing household debt. It also noted that the debt is concentrated in a relatively small number of households.
Data from the Bank of Finland indicated that by the end of April, households in Finland had a total of 92.5 billion euros in mortgages. The number of loans had increased by roughly 2.7 percent between 2015 and 2016.
The Board said that the risks to banks – which have high large mortgage portfolios – and the financial sector could have a domino effect on the wider economy if rising unemployment were to lead to increased mortgage defaults, especially if it were combined with falling residential real estate prices.
Fin Min: Finland taking steps to dampen risk
According to a release issued by the Finance Ministry Monday, Finance Minister Petteri Orpo has already responded to the warning letter. He said that Finland is aware of the risks and that the government has already taken measures to dampen them.
He noted that the financial sector had adopted a ceiling for new mortgages and implemented changes to risk assessments. He added that that government had already decided to phase out the tax deduction on mortgage interest payments in a bid to reduce demand for new mortgages.
The Bank of Finland also responded, outlining measures taken to try and reverse household indebtedness and to correct the structural weaknesses that the Board had highlighted in its warning.
The Board noted however that while the measures adopted by Finland trended in the right direction, they would not necessarily be sufficient.
The ESRB issued warnings about overvaluation or excessive household debt to seven other EU countries apart from Finland: Austria, Belgium, Denmark, Luxembourg, the Netherlands, Sweden and the UK.