 (LSTI, Loan Service to Income). In establishing any restrictive instruments, the definition of debt, loans and income in more detail is naturally important. Unlike prudential requirements for financial institutions, borrower-based measures have not been defined or harmonised in European Union legislation.
Household debt and the definition of when it becomes excessive from the perspective of an individual person or the economy as a whole is a complex issue. Problems stemming from excessive indebtedness are best prevented by curbing borrowing, and this is the very purpose of macroprudential measures aimed at borrowers.
It is important that authorities at their disposal have an adequately versatile macroprudential toolkit. The existence of regulatory tools does not automatically mean these tools will be used. The implementation of new tools is always preceded by exact specification and thorough preparation. Consumer protection considerations pertaining to indebtedness must also be taken into account. High indebtedness hinders the resolution of potential crises or major problems affecting the economy or the banking sector. The conclusion of many studies is that the most longstanding impacts of financial crises are concerned with household debt, where housing loans play the single most important factor. Finland also has a need for new macroprudential tools to curb household indebtedness.
1 The FIN-FSA regulations and guidelines 4/2018 “Management of credit risk and assessment of creditworthiness by supervised entities in the financial sector” provide that, in the calculation of available funds, the interest rate should be set at least at six per cent and the maturity of the loan at no more than 25 years. The calculation of available funds should also reflect a potential increase in the financial charge for the housing company loan in the event of a rise in interest rates and the termination of any grace period for principal repayment. The regulations and guidelines apply to the management of supervised entities’ credit risk, but the relevant restrictions are also closely linked to the objectives of macroprudential policy.