BANK OF FINLAND ANNUAL REPORT 2016 BANK OF FINLAND ANNUAL REPORT 2016

The euro area economy grew, Finland left recession behind. Household debt levels allied Digitalisation is reflected in but inflationary pressures Exports, employment and to the banking sector’s Nordic changing payment practices. remained slight. Monetary public finances nevertheless connections and concentration Cash use is on the decline. policy continued to be remained weak. increased financial system accommodative. vulnerability. Bank of Finland Annual Report 2016 Front cover photo by Mari Hienonen Bank of Finland

Established 1811

Street address Snellmaninaukio, Helsinki

Postal address PO Box 160, FI-00101 Helsinki Finland

Telephone national 09 1831 international +358 9 1831

Fax +358 9 174 872

SWIFT SPFB FI HH

E-mail [email protected] [email protected]

Internet www.suomenpankki.fi/en

Bank of Finland museum www.rahamuseo.fi/en

The art site www.kansakunnanomaisuutta.fi/en

Regional offices

Vantaa Turvalaaksontie 1, Vantaa, Drafted in accordance with Section 19 of PO Box 160, the Act on the Bank of Finland. FI-00101 Helsinki, Telephone +358 9 1831 The figures in the Annual Report are based on data available in February 2017. Oulu Kajaaninkatu 8, ISSN 1239-9345 (print) BO Box 103, ISSN 1456-579X (online) FI-90101 Oulu, Grano Oy Telephone +358 9 1831 Helsinki 2017

Bank of Finland Annual Report • 2016 3 Contents

Governor's editorial ...... 6

Bank of Finland – promoter of stability...... 7

Bank of Finland activities 2016...... 8

Monetary Policy...... 8 The ECB's monetary policy and its preparation...... 8 Implementation of monetary policy in the euro area and Finland...... 14 The Bank of Finland and economic policy in Finland...... 17 Financial system...... 20 Financial stability...... 20 Financial system policy...... 22 Financial market infrastructure...... 26 Financial asset management...... 29 Bank of Finland’s financial assets and financial asset management.... 29 Investment risks and risk management...... 31 Banknotes and coins...... 33 Other operations...... 36 Research...... 36 Bank of Finland Institute for Economies in Transition...... 36 Statistics...... 38 International activities...... 40 Communications...... 42

Management and personnel...... 44

Strategy...... 44 Management system...... 48 Objectives and results framework...... 48 Action planning...... 48 Personnel and budget frameworks...... 48 Risk management...... 49 Personnel...... 49 Budget and operating expenses...... 51 Budget for the Bank of Finland...... 51 Pension fund budget...... 51 Budget for the Financial Supervisory Authority...... 52 Environment...... 53 Total risk exposure...... 55 Financial assets...... 55 Monetary policy operations...... 55 Total risk exposure on the balance sheet...... 56

Bank of Finland Annual Report • 2016 Contents 4 Financial statements...... 59

Balance sheet...... 60 Profit and loss account...... 62 The Board’s proposal on the distribution of profit...... 63 Accounting conventions...... 64 Notes on the balance sheet...... 68 Notes on the profit and loss account...... 80 Appendices to the financial statements...... 85 Notes on risk management...... 89 Auditor’s report...... 93 Statement regarding the audit as defined in Article 27 of the Statute of the European System of Central Banks and the European Central Bank...... 94

Appendices...... 96

Monetary policy measures of the Eurosystem in 2016...... 96 Key measures affecting the financial markets in 2016...... 99 Main opinions issued by the Bank of Finland in 2016...... 100 Bank of Finland publications in 2016...... 102

Supplementary tables...... 103

Organisation of the Bank of Finland...... 118

Boxes Box 1. ECB purchase programme extended to include corporate bonds...... 12 Box 2. The European Systemic Risk Board issued a warning on vulnerabilities in the residential real estate sector...... 23 Box 3. The Bank of Finland’s role in the macroprudential system...... 24 Box 4. Payment methods facing major overhaul...... 28 Box 5. Financial cycle explains long-term effects of monetary policy ...... 37 Box 6. Granular credit database supports decision-making...... 39 Box 7. Bank of Finland representatives at the ECB, EU and other international bodies in 2016...... 43 Box 8. Bank of Finland's mission, vision, strategy and values ...... 45 Box 9. Bank of Finland objectives and results framework 2016–2018...... 46

Contents Bank of Finland Annual Report • 2016 5 Governor's editorial

The eventful year of 2016 brought positive household indebtedness and the structural economic signals. Over the course of the vulnerabilities relating to the housing loan year, euro area growth was on a firmer market. The same issues were also foundation. The accommodative stance of highlighted by the European Systemic Risk Tmonetary policy played a considerable part Committee when it warned Finland of in this, as the ECB’s monetary policy fed medium-term vulnerabilities relating to through significantly into the economy. household debt. Euro area inflation remained in line with The Bank of Finland has shown the forecasts, if still slower than the ECB’s initiative within the Eurosystem and price stability objective. Therefore, invested further effort in monetary policy monetary policy will remain analysis and the development of tools for accommodative for a prolonged period. this purpose. The Bank carried out its share The international operating of the ECB’s expanded asset purchase environment saw a number of changes that programme, which has expanded its the markets considered would bring balance sheet. The risks to the Bank’s significant negative shocks to the economy. capital adequacy were anticipated, and The Brexit referendum in the United particular attention was therefore devoted Kingdom, the US presidential election and to monitoring and reporting. the rejection of constitutional reform in the Globalisation and digitalisation affect Italian referendum nevertheless produced the operating environment of the Bank of only short-term ripples on the markets. The Finland and society as a whole in a number long-term effects will, however, become of ways. Bank of Finland experts have clear only with time. Negotiations over the therefore participated in the debate insofar UK exit from the EU have not yet begun. At as it touches on economic growth. Digitali- the time of writing we have only seen sation is also changing the activities of the preliminary indications of the economic financial markets to a significant degree. policy approach of the new US administra- The Bank reinforced its work in this area by tion and are still awaiting a detailed establishing at the beginning of 2017 a programme. special cross-departmental digitalisation During the course of the year, Finland’s process. economy, too, began a gradual return to Overall, 2016 saw a number of growth. In the Bank of Finland forecast surprises in both politics and the economy published in December, it was possible to that contain downside risks to the economy. announce the end of recession. The Despite this, euro area growth has strength- economy was bolstered particularly by ened further. The outlook for Finland, too, domestic demand, especially the strengthen- is gradually improving, although there is no ing of construction activity and private shortage of challenges, particularly in consumption. Industrial output also began regard to the public finances and long-term to take a turn for the better. The broad unemployment. labour market agreement strengthened cost- competitiveness. Despite the recovery, the outlook for future growth is more moderate than we are accustomed to, on account of the decline in the working-age population and weak productivity development. Erkki Liikanen Banks operating in Finland are Governor financially sound, and this has supported 24 February 2017 the transmission of monetary policy into the domestic economy. The Bank of Finland has drawn attention to the growth in

6 Bank of Finland Annual Report • 2016 Governor's editorial Bank of Finland – promoter of stability

The Bank of Finland is the monetary auth­ care of Parliament. Supervision of the ority and national central bank of Finland. Bank’s activities is undertaken by the It is also a member of the Eurosystem, nine-member Parliamentary Supervisory which is responsible for the monetary Council, appointed by Parliament. Tpolicy and other central bank tasks of euro The Bank of Finland is a member of the area Member States. The Bank of Finland Eurosystem, which comprises the European supports and fosters economic stability. Central Bank (ECB) and the national central Price stability, secure payment systems and banks of the EU Member States that have a reliable financial system promote sustain- adopted the euro as their single currency. able economic growth, employment and Euro area monetary policy is decided by the the wellbeing of Finnish society. Governing Council of the ECB, of which the The Bank of Finland is responsible for Governor of the Bank of Finland is a member. the issuance of cash in Finland and for its Experts from the Bank of Finland support the quality and availability. The Bank has two Governor’s activity on the Governing Council regional offices for the management of and participate in preparation of the single currency supply, one in Oulu and one in monetary policy in the various committees of Vantaa. The Bank of Finland is responsible the European System of Central Banks. for safeguarding the stability of the Finnish In 2016, the Board of the Bank of financial markets in cooperation with the Finland comprised Governor Erkki Financial Supervisory Authority (FIN-FSA) Liikanen, Deputy Governor Pentti and the Ministry of Finance. The FIN-FSA, Hakkarainen and Member of the Board which is Finland’s national authority for Seppo Honkapohja. The FIN-FSA has a financial and insurance supervision, operates Board of its own, which was chaired by in connection with the Bank of Finland but is Pentti Hakkarainen, Deputy Governor of independent in its decision-making. It is part the Bank of Finland. of the European Single Supervisory Mecha- At the end of 2016, a total of 376 staff nism, which supervises euro area banks under were employed in the Bank of Finland’s the direction of the European Central Bank. head office in Helsinki and the regional The Bank of Finland’s status is defined offices in Oulu and Vantaa. The Bank of in the Finnish constitution. The Bank is an Finland and the FIN-FSA together employed independent institution governed by public 558 persons in total. The FIN-FSA produces law that operates under the guarantee and its own annual report.

Bank of Finland Deputy Governor Pentti Hakkarainen (left), Governor Erkki Liikanen and Member of the Board

Photo: Peter Mickelsson. Seppo Honkapohja.

Bank of Finland – promoter of stability Bank of Finland Annual Report • 2016 7 Bank of Finland activities 2016

Monetary Policy

The ECB's monetary policy and its preparation

The main objective of the Eurosystem’s monetary policy is to maintain price stability in the euro area. The Governing Council of the ECB has defined this objective as meaning, in practice, that the year-on-year increase in consumer prices should be below, but close to, 2% over the medium term. Monetary policy can also support other economic policy objectives of the EU as long as the objective of price stability is not jeopardised.

The members of the Executive Board of the Further monetary policy accommodation ECB and the governors of the national provided in March central banks, including the Governor of At the beginning of 2016, euro area the Bank of Finland, as members of the financing conditions were improving, partly Governing Council of the ECB, participate driven by the ECB’s monetary policy. in monetary policy decision-making. Government bond yields and average Experts from the Bank of Finland interest rates on new corporate and contributed to economic analysis and the household loans were on a downward preparation of monetary policy decisions trend. In particular, annual growth in the by, among other things, taking an active corporate loan stock was accelerating, and part in the Eurosystem’s Monetary Policy credit standards on corporate and housing and Market Operations Committees. loans had eased. Targeted longer-term In March 2016, the ECB provided refinancing operations had exerted an further monetary policy accommodation. At easing impact on credit terms and that time, it lowered its policy rates and conditions. Despite favourable develop- decided to launch a new series of targeted ments in financing conditions, financial longer-term refinancing operations market risk indicators rose, and long-term (TLTRO II) (Chart 1). In addition, the ECB inflation expectations were still fading. included bonds issued by non-bank corpo- At its monetary policy meeting of 21 rations in its expanded asset purchase January, the Governing Council considered programme (EAPP) and decided to increase that uncertainty about growth prospects in the amount of the monthly asset purchases the emerging economies, volatility on the to EUR 80 billion. financial and commodity markets and geopo- The transmission of monetary policy litical factors reinforced downside risks, and into bank lending remained effective therefore euro area inflation had remained throughout the year, and the euro area lower than forecast. The Governing Council continued to witness fairly brisk economic therefore announced its intention to review growth. Moreover, long-term inflation and possibly reconsider the monetary policy expectations began to strengthen in early stance at its meeting in early March. September. In December, the Governing According to the March 2016 ECB Council assessed euro area growth would staff macroeconomic projections, the proceed as before and inflationary pressures outlook for euro area growth had weakened would remain subdued. It therefore decided since December 2015, due to more muted to continue the asset purchase programme growth than forecast in the global economy until the end of 2017, but brought the and particularly in the emerging economies, monthly purchases back to the level of EUR the stronger exchange rate of the euro and 60 billion, starting in April 2017. the presence of higher financial market uncertainty. The inflation forecast for 2016, in particular, was significantly downgraded because of the fall in the price of crude oil.

8 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 At its monetary policy meeting of 10 Chart 1. March, the Governing Council decided to Eurosystem policy rates decrease the interest rate on the main % refinancing operations and the interest rate 6 on the marginal lending facility by 0.05 of a 5 percentage point and the interest rate on the 4 deposit facility by 0.10 of a percentage point. 3 Accordingly, since 16 March, the interest rate 2 2 on the main refinancing operations and the 1 interest rates on the marginal lending facility 1 3 and the deposit facility have been 0.00%, 0 0.25% and –0.40% respectively. In –1 connection with the decision, the Governing 2008 2009 2010 2011 2012 2013 2014 2015 2016 Council indicated that it expected the key 1. Eurosystem interest rate on the main renancing operations ECB interest rates to remain at present or 2. Eurosystem interest rate on the marginal lending facility lower levels for an extended period, and well 3. Eurosystem interest rate on the deposit facility past the horizon of the net asset purchases. Sources: European Central Bank and Macrobond. Another important decision at the meeting was to increase the monthly purchases under the EAPP to EUR 80 billion having an easing impact on credit terms and from the previous EUR 60 billion, starting in conditions. The monetary policy meeting of April. It was decided to continue these 21 April concluded that the March purchases at least until the end of March decisions had improved financing 2017, or beyond, if necessary, until there is a conditions in the euro area and that the sustained adjustment in the path of inflation pass-through of monetary policy to firms consistent with the inflation target. and households had strengthened. Global A third key decision made at the growth and geopolitical factors were, meeting was to extend the coverage of the however, seen as being surrounded by a purchase programme by accepting for high degree of uncertainty, and the risks to inclusion within it investment-grade euro- euro area economic activity were judged to denominated bonds issued by non-financial still be tilted on the downside. corporations established in the euro area. It The Bank of Finland forecast for the was also decided to launch a second series of international economy, published on 21 targeted longer-term refinancing operations March, predicted that euro area growth over (four in all) in June. The longest maturity of the forecast horizon would rest more strongly an individual operation can be four years. on domestic demand. The growth outlook for The interest rate will be fixed for each the export markets was assessed to have dete- operation at the rate on the main refinancing riorated, meaning that the contribution of net operations prevailing at the time of take-up. exports to growth would remain very small. However, if a benchmark linked to net The stabilisation of the oil price, the ongoing lending is exceeded, the interest rate can be accommodative stance of money policy and as low as the interest rate on the deposit the narrowing of the negative output gap facility prevailing at the time of the allotment were expected to support a moderate pick-up of each operation. Counterparties were in inflation. Of external risks to euro area offered an opportunity to roll over amounts growth, the Bank of Finland forecast borrowed under the previous TLTROs into highlighted the slowdown in global growth, TLTRO II operations, which have more while, of internal risks, underscoring the attractive terms and conditions and include fragility of growth following the protracted no mandatory early repayments. crisis, the refugee crisis and the UK’s Following the March monetary policy referendum on EU membership were seen as meeting, financial market risk indicators adding to political uncertainty. declined. The strengthening trend of the euro ended in the early part of May. Short-term impact from Brexit vote According to the Bank Lending Survey less than expected (BLS), the EAPP and the negative interest The June Eurosystem staff macroeconomic rate on the deposit facility were deemed as projections revised slightly upwards the

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 9 growth forecast for 2016. Inflation forecasts to emphasise downside risks to economic remained almost unchanged. At the activity, although the euro area economy monetary policy meeting of the Governing was considered to have shown resilience to Council on 2 June, the risks to euro area global political and economic uncertainty, economic activity were still viewed as tilted partly due to the favourable financing on the downside, but the balance of risks conditions provided by monetary policy. was seen as having improved to some extent The most important change in the Bank on the back of the monetary policy measures of Finland forecast for the international taken and those still in the pipeline. economy published on 29 September was the The prospective exit of the United assessment of the impact of the Brexit vote. Kingdom from the EU (Brexit), which had Slower UK growth, particularly in 2017, was been singled out as a specific risk to envisaged than previously predicted. Even so, economic activity, materialised in June, when euro area internal economic fundamentals the majority of UK citizens (51.9% of the were still seen as being supportive of growth voters) decided at the referendum that the in the context of monetary policy remaining United Kingdom must leave the European accommodative for an extended period, the Union. Government bond yields declined private sector’s debt-servicing burden markedly in response to the outcome of the diminishing, near-term fiscal policies staying vote. At the same time, financial market risk broadly neutral and the labour market indicators rose and stock prices fell, although continuing to recover. The improved they returned relatively quickly to the economic outlook and the accommodative pre-vote level. The approximately 10% stance of monetary policy were also expected depreciation of the pound sterling appeared, to gradually boost inflation. The risks were in fact, to be the only visible consequence of assessed to be predominantly on the the Brexit vote for financial markets. downside. The main risks were seen in the At its monetary policy meeting of 21 prospect of rising protectionism, China’s July, the Governing Council considered that exposure to financial market disruptions euro area financial markets had recovered because of debt-driven growth and the well from the market uncertainty triggered impact of the UK’s departure from the EU. by the outcome of the Brexit vote. According to the assessments, the ECB’s Decision to continue asset purchases at accommodative monetary policy, the a monthly pace of EUR 60 billion announced readiness of central banks to Long-term inflation expectations began to provide liquidity, if needed, and a robust rise in early September, having previously framework for bank regulation and been on a downward trend throughout the supervision contributed to favourable year. The change was due, among other financial market developments. The risks to things, to inflation entering positive territory euro area economic activity were, however, and oil price developments. Meanwhile, judged to still remain tilted on the shorter-term inflation expectations also downside. At the same time, the meeting embarked on an upward trajectory (Chart 2). laid emphasis, among other things, on the The US dollar appreciated (including need for banks to adjust their balance relative to the euro) following the US presi- sheets, and concern was voiced about the dential elections, as expectations of an interest sluggish pace of structural reforms. rate hike in the country strengthened. The The September ECB staff macroeco- price of crude oil rose at the turn of nomic projections were only a little November and December, when the OPEC different from the June projections. Weaker countries and some non-OPEC oil producers export performance was foreseen than reached agreement on restricting oil output. previously predicted, against the backdrop According to the Bank Lending Survey, of the Brexit vote. The outcome of the vote credit standards on housing loans continued was, however, viewed as having barely to ease in the third quarter of 2016, affected euro area confidence and whereas credit standards on corporate loans uncertainty indicators. Inflation forecasts remained unchanged, as opposed to the were kept almost unchanged. The monetary earlier trend. Credit demand also continued policy meetings of the Governing Council to grow, albeit slightly less than previously. on 9 September and 10 October continued The EAPP and the negative interest rate on

10 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 the deposit facility had an easing impact on credit terms and conditions. Euro area Chart 2. long-term government bond yields began to Harmonised Index of Consumer Prices for the euro area rise in September in the wake of develop- % change from previous year 5 ments in the United States. The Eurosystem projections for both 4 growth and inflation changed very little in 3 December 2016, compared with the previous, September projections. Inflation was forecast 2 to accelerate in 2017, above all on account of 1

the oil price performance. At its monetary 0 policy meeting of 8 December, the Governing Council noted that the policy rates were –1 2008 2009 2010 2011 2012 2013 2014 2015 2016 expected to remain at present or lower levels for an extended period of time, and well past Sources: Eurostat and Macrobond. the horizon of the net asset purchases. The main outcome of the December meeting was the decision to prolong the duration of the EAPP until the end of Chart 3. December 2017, with the amount of the Eurosystem balance sheet % of GDP purchases lowered to EUR 60 billion per 35 month, starting in April 2017. The purchases may be continued beyond this 30 deadline, if necessary, until there is a sustained adjustment in the path of inflation 25

consistent with the inflation target. This 20 was based on the assessment that euro area growth was firming up but inflationary 15 pressures remained subdued. The Governing 10 Council also considered that the risks to 2008 2009 2010 2011 2012 2013 2014 2015 2016 growth remained tilted on the downside. Sources: European Central Bank, Eurostat, Macrobond and However, if the economic outlook becomes calculations by the Bank of Finland. less favourable, or if financial market conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the monthly purchases Overall, the ECB’s accommodative can be increased during the course of 2017. monetary policy passed through to bank To ensure the continued smooth imple- lending effectively in 2016. This was mentation of the purchases, it was also reflected in falling average interest rates on decided to decrease the minimum remaining new corporate and household loans and maturity for eligible securities from two their higher annual growth rates. In years to one year and to permit future particular, annual growth in the corporate purchases of securities under the programme loan stock picked up significantly, exceeding with a yield to maturity below the interest annual growth in the household loan stock rate on the ECB’s deposit facility (Chart 3). during the latter part of the year. Following the December meeting, euro Monetary policy alone does not, area long-term government bond yields began however, suffice to generate sustainable to decline and stock indices to rise. Financial growth. In order to reap the full benefits market risk indicators also fell and the euro from monetary policy, the Governing depreciated. In mid-December, the dollar Council called for reforms in the euro area strengthened further relative to the euro amid economies to reduce structural unemploy- increasing divergence of monetary policy ment and boost potential output growth. stances, as the US Federal Reserve raised Going forward, fiscal policies should also interest rates and expectations of further rate do more to support economic growth, while hikes strengthened among members of the remaining in compliance with the Stability Federal Open Market Committee. and Growth Pact.

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 11 Box 1. ECB purchase programme extended to include corporate bonds

The Eurosystem began to purchase Meanwhile, the Belgian central bank corporate sector bonds in June 2016 as part operates under the programme on the of the expanded asset purchase programme Portuguese, Luxembourgian, Slovakian, (EAPP). Purchases of corporate bonds, and Slovenian, Cypriot, Maltese and Dutch the purchase programme as a whole, will markets. Given that many international continue at least until the end of 2017. As corporations active in different European well as the Bank of Finland, five other countries issue their bonds in the national central banks carry out purchases Netherlands, the country’s corporate bonds of corporate bonds on behalf of the are divided among the large central banks Eurosystem. involved in implementing the purchase To enhance the operational efficiency programme, mainly according to the of the Eurosystem, the Governing Council country in which these corporations of the ECB decided that only some national actually operate. central banks would carry out purchases of Only some corporate bonds are eligible corporate bonds. Although corporate bonds for purchase under the programme. The do not differ in terms of their modalities criteria are based on the Eurosystem’s from government bonds yielding coupon collateral framework for monetary policy interest, operating on the corporate bond operations. In particular, the requirement for market requires special skills. The Bank of a public credit rating excludes even large Finland has already accumulated such corporations from the programme: for a competence over a couple of decades of corporate bond to be purchased, at least one investing its own financial assets in eligible public credit rating agency must rank corporate bonds. the bond as belonging to the investment Besides the Bank of Finland, the central grade, which is equivalent to a rating of banks of Germany, France, Spain, Belgium BBB–. Moreover, corporate bonds must be and Italy purchase bonds issued by non- denominated in euro, and they must have a financial corporations in their respective minimum remaining maturity of six months countries. The Bank of Finland also and a maximum remaining maturity of 30 purchases bonds issued by Irish, Austrian years at the time of purchase. and Baltic non-financial corporations. As there are many large international corporations operating in the euro area, the parent undertaking of such a corporation may be located outside the euro area. By contrast, banks and other credit institutions Chart. or those corporations whose parent Euro area corporate bond spreads declined undertaking is a credit institution are % points 1.8 excluded from the programme. Bonds ECB Governing Council 1.6 announces inclusion of corporate issued by public sector undertakings are 1.4 bonds in the programme eligible, but the limits for their purchase are 1.2 1 mainly similar to those applied in the public 1.0 sector purchase programme. For example, 0.8 0.6 bonds issued by public sector undertakings 2 0.4 are not purchased directly from the issue. 0.2 The Eurosystem purchases corporate 0 bonds on both primary and secondary –0.2 2015 2016 markets. Typically, a small number of banks are responsible for debt issues on behalf of 1. 3 years, BBB-rated non-financial corporations. The Bank of 2. 3 years, AA-rated Finland competes on this market as one Source: Macrobond. investor among others. The Bank of Finland purchases securities from its own counter- parties, i.e. Finnish and international banks.

12 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 By the end of 2016, the Eurosystem programme will further strengthen the had purchased corporate bonds to the value broadly based transmission of monetary of EUR 1.5 billion. To maintain market policy and ease the corporate sector’s liquidity, Eurosystem central banks also financing conditions, thereby accelerating lend corporate bonds they have purchased. euro area inflation rates to levels consistent Published securities lending lists show that with the objective of price stability. Eurosystem purchases are broadly aligned The announcement of the launch of across different sectors and different corporate bond purchases brought down Member States. Bonds of energy and infra- corporate bond spreads by 0.20 of a structure corporations have been the most percentage point (Chart). When corporate purchased, due to the fact that, in represent- bond yields fall, the corporate sector’s ing capital-intensive sectors, they finance financing costs and requirements for return their investments on the markets. on investment decline. The purchase The corporate sector purchase programme encourages corporations to seek programme supplements the EAPP, which is market funding, which stimulates euro area allocated across public sector securities, capital markets and offers an alternative covered bank bonds and asset-backed funding channel to traditional bank finance. securities (ABSs). The corporate sector

The future of the euro area was discussed at the Bank of Finland Museum in October after an introductory talk by Professor Markus Brunnermeier. Photo: Peter Mickelsson.

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 13 Implementation of monetary policy in the euro area and Finland

In the Eurosystem, the national central banks implement the monetary policy decisions of the ECB Governing Council in a decentralised manner. The traditional system for implementa- tion of monetary policy includes market operations, standing facilities and a minimum reserve system. Counterparties place collateral with the central bank for the market operations, which are executed in the form of refinancing operations. In 2016, the Euro­ system’s expanded asset purchase programme (EAPP) was extended and corporate bonds were also included in the programme. The Bank of Finland is responsible for national implementation of the Eurosystem’s single monetary policy. Credit institutions located in Finland hold current accounts with the Bank of Finland and participate in monetary policy operations through the Bank. In addition, the Bank of Finland carries out its own share of the Eurosystem’s outright transactions.­

Monetary policy further relaxed In January–March, the asset purchases In 2016, the Eurosystem continued to relax increased the amount of liquidity by about its monetary policy. EUR 180 billion, and from April onwards by In addition to an accommodative EUR 80 billion a month (Chart 4). interest rate policy, the Eurosystem expanded Alongside its non-standard measures, its non-standard monetary policy measures. the Eurosystem continued to conduct its The ECB Governing Council decided to main refinancing operations and regular include purchases of corporate bonds in the three-month longer-term refinancing expanded asset purchase programme from operations as fixed-rate tenders with full the beginning of June 2016. The Bank of allotment. In accordance with the decision Finland is one of six national central banks of the Governing Council in December responsible for implementation of the 2015, fixed interest rate and full allotment programme (Box 1). will be applied in these standard refinancing The expanded asset purchase operations at least to the end of the last programme increased the amount of securities reserve maintenance period of 2017. held by the Eurosystem. At the same time, the The amount of financing allocated in excess liquidity in the euro area banking the weekly main refinancing operations system rose to more than EUR 1,200 billion. decreased as the year advanced and then settled around EUR 35 billion. The amount of outstanding credit in the monthly refinancing operations with a maturity of 3 months decreased from EUR 50 billion at Chart 4. the beginning of the year to EUR 13 billion. Excess liquidity in the euro area banking system The Governing Council decided to continue EUR billion 1,400 one-week dollar-denominated refinancing 1,200 operations with allotments varying between zero and EUR 6.3 billion. 1,000 800 New series of targeted longer-term 1 600 refinancing operations 400 2 In March, the Governing Council decided to 200 conduct a series of new targeted longer-term 0 refinancing operations (TLTRO II), in which 2012 2013 2014 2015 2016 banks are offered longer-term financing on 1. Excess liquidity* favourable terms (Chart 5). In these operations, 2. 30-day moving average banks in 2016 applied for an aggregate * Reserve deposits – minimum reserve requirements + overnight financing amount of EUR 506.5 billion. deposits – overnight credit via the marginal lending facility. The total number of operations will be Source: Bank of Finland. four, and they will be conducted on a quarterly basis starting from June 2016. The maturity of all the new operations will

14 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 be 4 years, and premature repayment of the allotted financing may be started after two Chart 5. years at the earliest. Three of the operations Eurosystem monetary policy operations were conducted in 2016. EUR billion The fixed interest rate of the targeted 1,500 1,250 longer-term refinancing operations is the 6 1,000 interest rate of the main refinancing 750 2 1 7 operations on the allotment day of the 500 targeted operation in question. However, the 250 0 interest rate may fall all the way to the level of 3 –250 the ECB deposit facility if the bank that has 5 –500 4 applied for financing fulfils the conditions for –750 increased lending to the private sector. –1,000 As many as 514 banks or bank groups 2010 2011 2012 2013 2014 2015 2016 participated in the targeted longer-term 1. Longer-term renancing operations (3 months) refinancing operation conducted in June 2. Supplementary longer-term renancing operations (1–12 months) 2016. Participants in the September 3. Main renancing operations (1 week) operation numbered 249, while in 4. Net recourse to standing facilities (overnight) December the figure was 200. Of the 5. Fine-tuning operations (1–7 days) 6. Supplementary longer-term renancing operations (36 months) aggregated allotment in TLTRO I and 7. Targeted longer-term renancing operations TLTRO II, credits amounting to EUR 545 Source: Bank of Finland. billion were outstanding at the end of 2016. Of the outstanding credits, TLTRO I operations represented EUR 39 billion and TLTRO II operations EUR 507 billion. Chart 6. Amount of collateral placed with Collateral provided to the Eurosystem Eurosystem no longer decreasing EUR bn Credit from the central banks in the 3,000 8 10 Eurosystem requires that banks provide 2,500 sufficient collateral assets that fulfil the eligibility criteria of the Eurosystem. The 2,000 decrease in the amount of collateral that 1,500 9 7 had started in 2013 came to a halt in the 6 1,000 5 second half of 2016, settling at the same 4 500 3 level as at the end of the previous year, EUR 2 1,658 billion (Chart 6). This trend is due to 0 1 I II V I I II V I I II V a stabilisation of banks’ borrowing from 005 007 009 011 20042 20062 20082 20102 2012013/I 2 2014/I 2015/ 2016/ the Eurosystem. 2013/II2013/III2013/IV 2014/I2014/I2014/I 2015/I2015/I2015/I 2016/I2016/I2016/I In 2016, collateral at an average 1. Securities issued by central government amount of EUR 1,665 billion was provided 2. Securities issued by regional government to the central banks in the Eurosystem, as 3. Uncovered bank bonds 4. Covered bank bonds compared to an average of EUR 1,750 5. Corporate bonds billion in 2015. Since the amount of credits 6. Asset-backed securities was only slightly higher in 2015 and the 7. Other marketable assets amount of collateral remained unchanged, 8. Non-marketable assets* most of the collateral still constituted a 9. Credit claims* 10. Fixed-term deposits* surplus. Banks do not have much need for * Breakdown only available from 2013 onwards. the refinancing operations due to the excess Source: European Central Bank. liquidity brought about by the purchase programmes. In 2016, debt instruments issued by the public sector, i.e. central and regional government (23%), were still the joint most common type of collateral provided by banks. Bank loans (also 23%) were the

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 15 other leading category. Banks’ covered Chart 7. bonds and asset-backed securities came Liquidity deposits with the Bank of Finland next, both with a share of 19%. EUR bn % 100 10 90 9 Bank of Finland’s counterparties 80 8 4 increasingly active in monetary policy 70 7 operations 60 6 During the year, no changes occurred in the 50 3 5 40 4 group of counterparties engaged by the 1 30 3 Bank of Finland for monetary policy 2 20 2 refinancing and deposit operations. The 10 1 counterparties number 16 and include 0 0 2012 2013 2014 2015 2016 Finnish credit institutions and Finnish branches of Nordic credit institutions. 1. Use of deposit facility The growing liquidity surplus was also 2. Fixed-term deposits 3. Current account balances exceeding reserve requirements reflected in the deposits by the Bank’s coun- 4. Share in Eurosystem deposits (right-hand scale)* terparties, which increased considerably * Includes use of deposit facility, ƒxed-term deposits and current from the previous year. Counterparties can account balances exceeding reserve requirements (average over transfer their reserve holdings in excess of reserve maintenance period). the minimum reserve requirement into the Sources: European Central Bank and Bank of Finland. deposit facility or leave them in their current accounts with the central bank. The interest rate paid on all funds exceeding the minimum reserve requirement is the ECB deposit facility rate. In 2016, this interest rate was negative. Chart 8. In 2016, Bank of Finland counterpar- Collateral provided to the Bank of Finland ties’ total reserve holdings in excess of the (averages for 2016) minimum reserve requirement averaged EUR 67 billion, compared with EUR 27 billion in 2015 (Chart 7). Finland’s share of 6 1 the reserve holdings in excess of the 20% 22% minimum reserve requirement in the entire Eurosystem also increased rapidly early in the year and then settled towards year-end. On average, the share was 7%, which is a 5 12% significant share in relation to the size of 1% the Finnish economy. 4 Regardless of the liquidity surplus, the 10% 35% 2 counterparties of the Bank of Finland 3 participated in the refinancing operations more actively than in 2015, in particular in the targeted longer-term TLTRO II operations. The amount of outstanding 1. Central and regional government securities monetary policy credits in Finland averaged 2. Covered bank bonds EUR 2.6 billion, compared with EUR 670 3. Uncovered bank bonds 4. Corporate bonds million in the previous year. Most of the 5. Other marketable assets outstanding credits had been allocated in 6. Non-marketable credit claims the TLTRO II operations that commenced Source: Bank of Finland. in June. Eight counterparties participated in the operations. The amount of collateral provided by the counterparties of the Bank of Finland still clearly exceeded the allotment in the refinancing operations, although the total amount of collateral also declined in 2016,

16 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 by around EUR 3.7 billion to around EUR measures lowered financing costs in 17.9 billion. The more active participation Finland, thereby strengthening the precon- by counterparties in the monetary policy ditions for growth in domestic demand. operations affected the distribution of Labour productivity growth remained collateral according to credit needs. An subdued overall in the advanced economies, average of 15% of the total amount of with the long-term growth outlook clouded collateral was used as collateral for by uncertainties. Over the next 15 years, monetary policy credits, which is well above Finland, too, will experience slow economic the 3% share in 2015. On the other hand, growth compared with past decades. This the limit for intraday credit maintained by presents a threat to the funding of the the counterparties for handling payment welfare state and highlights the importance transactions tied up 61% of the collateral, of measures designed to strengthen fiscal whereas 70% of the total amount of sustainability. collateral was needed for this in 2015. The The long-term sustainability of collateral surplus averaged 25%. Finland’s public finances not being secured The most common type of collateral threatens a difficult future for the current provided was covered bonds (35%), generation of young people, who will have although their share decreased from the to bear not only the costs of caring for the 43% share in 2015 (Chart 8). The second older generation and most of their pensions, most common collateral was debt but also the costs stemming from the instruments issued by central and regional rapidly growing public debt. government (22%), while third came non- In addition to public debt, household marketable credit claims (20%), whose debt also continued to expand in 2016. The share increased significantly from the rising household debt ratio is a well-justi- previous year (13%). fied concern against the backdrop of the subdued longer-term growth outlook The Bank of Finland and economic compared with previous decades. As regards policy in Finland the management of the risks involved in household indebtedness, the Bank of In 2016, the Bank of Finland analysed Finland emphasised the importance of developments in both the domestic and the macroprudential policy and housing policy. global economy and participated in As before, the Bank underlined the economic discourse in Finland in a variety importance of structural reforms that of ways. The members of the Bank of improve growth prospects and the fiscal Finland Board and experts from the Bank balance, and of measures that restore cost- were consulted on several occasions by competitiveness. Major steps forward have Parliament and also presented their been taken with the pension reform and the assessments in other domestic fora. Competitiveness Pact, but more still needs When decisions on economic policy to be done. One important sector of were taken in 2016, economic conditions in structural policy relates to fostering Finland were better than the year before, but competition. The role of economic policy is still weak. GDP was still 4% lower than in to create a level playing-field for different 2008. In 2016, economic growth hinged sorts of companies and a positive exclusively on domestic demand, amid environment for the birth of new enterprises subdued export performance. While unem- and the growth of all sorts of companies. ployment lessened, the employment situation The uncertainties of the global and the fiscal situation remained constrained. economy relate largely to political decisions. The Bank of Finland pointed out that In many countries, the supporters of free the monetary policy pursued by the ECB trade and other international cooperation had improved the preconditions for have been forced onto the back foot. At the economic growth in Finland, too. Monetary same time there is a great need for interna- policy supported the euro area economy tional cooperation if we are to manage the and, by extension, Finnish exports to other problems with climate change, the refugee euro area countries. The euro area’s share of situation and the economy. Finland’s total exports continued to grow. Behind the political uncertainties could At the same time, the monetary policy in part lie the deteriorating income

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 17 development of many households and unemployment rate dropped sharply in growing inequality in the advanced 2016, but improvement in employment has economies. Factors underlying the structural been more difficult. changes experienced in the advanced Finland’s fiscal situation remains economies in recent decades include techno- challenging despite the major consolidation logical change and globalisation. While measures adopted in recent years. The having generated a great deal of economic general government deficit is large, and well-being, they have also created a greater public debt has grown at a rapid pace. need to manage the economic impact of Attainment of more balanced public these trends within the advanced economies. finances is hampered not only by high The Bank of Finland emphasised that policy unemployment-related and other social choices should be devoted to supporting the security expenditure but also by rapid successful adaptation of economies to new growth in age-related spending and low circumstances, while at the same time economic growth. There is a significant and caring for those whose economic position long-term structural problem with Finland’s has been weakened. The educational system public finances that cannot be explained by has a key role to play in combating cyclical factors alone. inequality, particularly over the longer term. The sluggishness of the economy in recent years, together with sharp declines in Domestic forecasting in 2016 energy and commodities prices, have kept After several weak years, the Finnish inflation low. Inflation according to the economy returned to growth in 2016, with harmonised index of consumer prices domestic demand as the engine of growth. (HICP) was just 0.4% in 2016. During 2016, growth strengthened particu- According to the Bank of Finland larly on the back of private consumption forecast in December 2016, GDP will and investment recovery. By contrast, continue to grow in 2017–2019, driven exports continued to perform sluggishly mainly by domestic demand, but will and export demand remained weak. remain subdued, at a good 1% per annum, Private consumption has been the main relative to previous cyclical upswings. driver of growth ever since 2014. Private The Competitiveness Pact concluded in consumption has been buoyed by low 2016 will curb increases in average earnings inflation and an accommodative monetary and unit labour costs in 2017. More policy. Purchasing power has also been subdued developments in costs will boost sustained by a sharp increase in public growth in investment, exports and GDP. transfers. Improved cost-competitiveness and the Investment growth clearly began to recovery of export markets will see Finnish take off already in 2015. In addition to a exports return to growth. These favourable pick-up in residential construction developments are, however, clouded by investment, productive investment also growing uncertainties in the international grew. Still, the GDP share of productive economy. investment has remained modest. Investment growth will be strongest in In recent years, total Finnish exports 2016–2017, fuelled particularly by have not grown as expected, lagging behind construction. Low interest rates and the the trend in the export markets. Reduced availability of funding will strengthen the industrial capacity and problems caused by investment environment. In the second half deteriorated cost-competitiveness have kept of the forecast period, the growth rate will export growth extremely modest. At the level out, in response to a moderation in same time, low global investment and construction activity. Productive investment uncertainties in the international economy will also trend up, but its share of GDP will have eroded export prospects. be lower than usual. The labour market situation in Finland The continued accommodative stance improved in 2016, reflected in a rapid of monetary policy and strong consumer reduction in unemployment. However, the confidence will boost private consumption, labour market recovery was slowed by particularly early in the forecast period. structural problems, with long-term unem- Indeed, in the immediate years ahead ployment in particular remaining high. The private consumption will remain the major

18 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 factor contributing to economic growth in The Bank of Finland forecasts were Finland. The increase in households’ real revised up over the course of 2016. In the income will be driven by gradual improve- light of preliminary National Accounts ments in employment and persistently low data, economic growth turned out to be inflation. The number of people employed faster than projected in late 2015. However, will increase, with the employment rate growth has increasingly hinged on domestic rising as unemployment falls. demand. Private consumption in particular The outlook for the public finances in has been robust, while investment growth the immediate years ahead is particularly has been brisk in response to a revival in affected by government decisions on construction activity. By contrast, export expenditure adjustments and the Competi- growth remained somewhat weaker than tiveness Pact. Fiscal policy will ease in 2017 projected. In response to the Competitive- with the entry into force of the cuts in taxes ness Pact and more subdued developments and social security contributions decided in in costs, forecasts for 2017 have also been connection with the Competitiveness Pact. revised slightly up. The risks to the forecast, The general government deficit will, however, remain tilted on the downside. however, remain large, and public debt will continue to grow at a rapid pace in 2016–2019. Photo: Peter Mickelsson.

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 19 Financial system

One of the tasks of the Bank of Finland is to analyse vulnerabilities that warn of financial crises and examine the effects of macroprudential tools. The Bank also participates in the preparation of measures for preventing financial crises. In its stability reports, the Bank of Finland has assessed the short-term stability risks to the financial system as small, but it has drawn attention to the increase in household debt accumulation and the vulnerabilities of the Finnish banking system. The Bank has also emphasised the need to complement the macroprudential tools currently available. The Governor of the Bank of Finland is a decision-maker on the General Board of the European Systemic Risk Board (ESRB), an EU body within the European System of Financial Supervisors (ESFS). The ESRB analyses risks to the financial system in the EU and issues warnings and recommendations to national authorities for measures to enhance stability. In 2016, the ESRB issued a warning to eight EU countries. For example, it issued a warning to Finland on medium-term vulnerabilities in the residential real estate sector. The Governing Council of the ECB also deals with questions relating to financial stability. Bank of Finland experts participate in the work performed within committees and working groups of the ESRB and the ECB.

Financial stability real estate sector (see Box 2). To forestall these risks, it is essential to ensure that The average profitability of the euro area authorities have access to a broader set of banking sector remained under pressure in macroprudential tools to influence 2016. In addition to challenges related to an household debt accumulation and the operating environment with low interest related systemic risks. rates, banks’ profitability has also been The structural vulnerabilities of the eroded by the protracted structural Finnish banking system have remained problems in the banking sector. In several significant. Finland’s banking system is euro area countries, the banking sector is among the most concentrated in the EU: the quite large relative to the size of the two largest banks account for nearly economy, and is inefficient. Moreover, some two-thirds of both deposits and lending. countries banks are burdened by the consid- Banks are dependent on market-based erable amount of bad loans on their balance funding and bond funding acquired mainly sheets. from the international financial markets. Despite the problems facing the euro Housing loans account for a considerable area banking sector, banks’ lending capacity share of banking sector lending, and the improved in 2016, the ECB’s accommoda- risk weights for housing loans are low, tive monetary policy fed through to bank which benefits the banks in their capital lending and the rate of growth in household adequacy calculations. The vulnerability to and corporate lending picked up in the area the housing market of banks operating in during the course of the year. Finland is further increased by their inter- In its stability assessments, the Bank of connectedness with the Nordic banking Finland has in recent years drawn attention systems. to the increase in household debt and the uneven distribution of this debt, as well as Banks operating in Finland: strong capital to structural vulnerabilities in lending for adequacy and small impairment losses house purchase. In the assessment of the Despite the difficulties in the operating Bank, notwithstanding the vulnerabilities, environment, the situation of the Finnish there are no signs of short-term threats to banking sector has remained stable. Banks’ the stability of the Finnish financial system. capital adequacy is solid on average, and The European Systemic Risk Board despite a moderate weakening, their profita- issued a warning to Finland on bility has remained relatively good. medium-term vulnerabilities related to Banks’ net interest income declined in household indebtedness and the residential January–September 2016 by approximately

20 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 7%. They have been able to compensate part of this decline by, for example, Table 1. increasing their net fee income somewhat. Banking sector capital adequacy Despite the slight weakening in profita- September bility, banking sector capital adequacy 2012 2013 2014 2015 2016 remained strong in 2016. The Finnish Average Core Tier 1 15.5 14.8 15.8 21.0 21.1 banking sector’s capital position has long capital ratio, % been characterised by a high CET1-to-own Total capital ratio, % 17.0 16.0 17.3 23.1 23.1 funds ratio. Source: Financial Supervisory Authority. The quality of lending in the Finnish banking sector has remained good. At the end of September 2016, non-performing assets accounted for 1.5% of total assets (12/2015: 1.5%). The non-performing also diminish in future. The value chain of assets of banks operating in Finland are financial intermediation nowadays includes among the lowest in the EU, as the average alternative providers of funding, such as ratio for the EU over the corresponding brokers of crowdfunding or peer-to-peer period was over 5%. Banks’ impairment loans. losses remained small in 2016 (less than The Bank of Finland, in cooperation 0.1% of the credit portfolio). The leverage with commercial banks and other financial ratio of Finnish banks was 5.5% at the end sector entities, is innovating and developing of September 2016 (12/2015: 5.7%), which efficient methods of payment, for example is already now significantly higher than the in the Payments Council and its working minimum requirement (3%) proposed by groups (see ‘Financial market infrastruc- the Basel Committee on Banking ture’, p 26). Supervision. New FinTech companies which utilise Growth in private sector bank credit digital innovations and new, constantly unchanged from previous year developing information technology The pace of growth in household debt solutions are challenging the banking sector remained unchanged in 2016 compared with their new operating practices, particu- with the previous year. In December, the larly with payment and investment services. stock of household loans and the stock of These new entities create new challenges to housing loans grew by 2.4% year-on-year banks’ traditional business models, and the (in 2015: 2.5%). In recent years, a slight entry of competitors to the market puts change has taken place in the nature of pressure on banks’ profitability. households’ housing finance. The rate of Technological advances enable the growth of bank loans to housing corpora- introduction of new operating practices in tions is higher than that of housing loans to the financial sector. Financial sector households. The annual growth rate of structures have traditionally been fairly loans by housing corporations was in rigid, and changes have taken a long time. September 2016 slightly over 10% (9/2015: Moreover, financial market infrastructures 18.6%). have been in the hands of large operators, The indicator of household debt – i.e. and new players have faced difficulties in debt relative to disposable income – has entering the market. Digitalisation does, continued to rise. In September 2016, the however, offer a considerable potential for debt ratio was 126.9%, compared with change, which may reshape current 123.8% a year earlier. Reflecting the low financial market infrastructures. level of interest rates, the debt-servicing Thus far digitalisation has primarily capacity of households has remained affected the operating processes of banks relatively good, despite the higher debt and other financial sector entities, and ratio. structural changes have been minor. The Finnish non-financial corporations’ effects of digitalisation are reflected in, for access to bank funding is still among the example, shifts in consumers’ payment best in the euro area: surveys on the access habits and a decrease in the use of cash. to finance show that of the companies that Banks’ role in financial intermediation may applied for a bank loan, approximately

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 21 80% were granted the loan in full or for cyclical capital buffer requirement on credit most of the amount applied for. Surveys on institutions. In its opinions, the Bank of companies’ access to finance (SME Finland did, however, underscore the need barometer) indicate a tightening of terms to monitor the pace of growth in the credit and conditions of access to finance by SMEs stock and particularly developments on the that are involved in global trading and housing loan market, and to prepare to growth-oriented. Collateral requirements raise the additional capital requirement, if have tightened and the use of loan necessary. covenants has increased. In addition, the Bank proposed that The average interest rate on the stock changes be considered in the method of of loans by Finnish non-financial corpora- calculating the maximum loan-to-value tions (incl. housing corporations) declined ratio that entered into force in July 2016. In in 2016. In December 2016, the average Finland, the maximum loan-to-value ratio interest rate on the loan stock was 1.47% limits the amount of housing loan relative (12/2015: 1.63%). The imputed margins of to collateral, not relative to the value of the new corporate loans are, however, on a housing, as in many other countries. slight upward trend. The annual growth The Bank of Finland also highlighted rate of drawdowns by non-financial corpo- the need to introduce in Finland macropru- rations (incl. housing corporations) slowed dential tools for ensuring the ability of in 2016: in December, the annual growth households to service their debt. The lack of rate of corporate loans was 4.6%, this type of tool was also identified by the compared with over 5% a year earlier. European Systemic Risk Board in the warning it issued to Finland (see Box 2) and Financial system policy by the International Monetary Fund in its financial system stability assessment. The Bank of Finland supports financial The macroprudential toolset also stability by, for example, participating in currently lacks a systemic risk buffer the preparation of macroprudential policy requirement for the prevention of risks and decision-making in Finland, and in a caused by the structure of the banking broader context, in the euro area and the system; the Bank of Finland has supported European Union (see Box 3). In addition, the incorporation of this requirement into the Bank develops the necessary crisis legislation. The Ministry of Finance started management capabilities in cooperation preparing the required amendment to with domestic and international authorities legislation in 2016. and supports the development of financial For the development of crisis regulation and supervision. management capabilities, international The purpose of macroprudential policy cooperation is important, as the Finnish is to prevent financial crises that threaten banking sector is closely interconnected the stability of the entire financial system. with the Nordic and Baltic banking systems. In Finland, decisions on the use of macro- 2016 saw renewal of the Memorandum of prudential tools are taken by the FIN-FSA Understanding between the central banks of Board. As part of the preparation of macro- these countries. The MoU enhances central prudential decisions, the Bank of Finland banks’ capabilities for cooperation in the delivered in 2016 four opinions on supervision of financial stability and crisis proposals by the Director General of the management. The macroprudential forum FIN-FSA for the deployment of macropru- of the national central banks and financial dential tools. supervisory authorities of these countries is In June 2016, the FIN-FSA Board also working actively. The need for decided to take measures to introduce a cooperation is underlined by the conversion minimum level for the average risk weight in 2017 of Nordea Bank Finland from a on housing loans. In its opinions, the Bank subsidiary into a branch of the Swedish of Finland supported these measures and parent bank. emphasised the need to implement them in EU-level cooperation for fostering full, in accordance with the decision. financial stability is described in more detail Due to the weak economic cycle, it was in Box 3. not necessary in 2016 to impose a counter-

22 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 Box 2.

The European Systemic Risk Board issued a warning on vulnerabilities in the residential real estate sector

The European Systemic Risk Board (ESRB) grow in line with demand, at least not in the issued in autumn 2016 a warning to several short term. As a result, the rise in prices turns EU countries on vulnerabilities related to the into a self-reinforcing spiral. It is often residential real estate sector and household difficult to distinguish a bubble from a rise in debt. Housing market bubbles and excessive housing prices that is emanating from household indebtedness are among the most permanent constraints on housing supply or a important factors underlying financial crises, strengthening of demand due to factors other and therefore further measures for improving than expectations of higher housing prices. the capacity to forestall these risks must be Price bubbles contribute to unsustaina- considered in Finland, too. ble debt accumulation. In an environment The ESRB issued in November 2016 to of high prices, banks can increase their Finland and seven other EU countries a lending activities in a seemingly safe manner warning on medium-term vulnerabilities in if real estate collateral is valued at the sales the residential real estate sector. The price at a given time. In many of the warning issued to Finland focused on the countries that were warned by the ESRB, already high and increasing level of the maximum size of the housing loan is household indebtedness. The ESRB noted tied to the price of the residential property that policy measures have already been – in the case of Finland, to the value of implemented in Finland to mitigate the collateral, in a broader sense – but not to, risks, but they may not be sufficient to fully for example, the loan applicant’s income, address them. Why is the ESRB concerned which normally would not grow due to the about household indebtedness? price bubble. As a result, the ESRB The task of the ESRB is to issue considers that the measures available for warnings and recommendations to enhance curbing household indebtedness are insuffi- financial stability. In the countries that were cient in many of the countries concerned. warned about vulnerabilities in the If there is a price bubble, collateralised residential real estate sector, household debt loans will turn out to be a threat to financial levels are historically high by both the stability and the safety provided by the countries’ own standards and European collateral merely ostensible if a large group of standards. A high level of indebtedness debtors is unable to service their loans with weakens households’ ability to adapt in an their income. Housing supply increases as event of weaker than expected economic insolvent debtors are forced to realise their developments. In a downturn, this increases residential property. There may be a consider- the risk of higher credit losses and a able number of forced sales of residential real reduction in consumption, leading to a estate, which will finally burst the bubble. further contraction in the economy. House price trends differ considerably Many researchers of banking crises between countries and regions. In some of the have come to the conclusion that price countries that were warned, residential real bubbles on the housing market are one of estate prices have risen at an alarmingly rapid the most important leading indicators of pace, particularly in the large cities. In some crises. Expectations on further increases in countries, households have also acquired large the value of residential real estate feed the volumes of new housing debt. In Finland, the price bubble. These expectations are based main problem is household indebtedness. mainly on developments in the recent past, If the risks related to the housing market and this trend is assumed to continue. were to materialise they could spread across A person may purchase housing only countries, via international trade and banks. with the purpose of selling it for a higher price The vulnerabilities of Nordic banks are at a later stage, whereas other homebuyers increased by the banking sector’s structural want to avoid paying an even higher price in specificities, for example the high degree of future. Strong demand naturally pushes up concentration, interconnectedness and prices, as the volume of housing does not dependence on market-based funding.

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 23 Box 3.

The Bank of Finland’s role in the macroprudential system

Macroprudential policy refers to not only In Finland, macroprudential decisions macroprudential supervision, but also are taken by the FIN-FSA Board. This is a particularly to actions for preventing natural place for decision-making, as all the systemic risks, with the objective of relevant Finnish authorities are represented ensuring the stability of the financial system on the Board together with independent as a whole. members. In line with established practice, Within banking union, responsibility the decisions are taken separately from for macroprudential policy is divided micro-level decisions. The ECB has separate between the ECB and national authorities. processes for monetary policy, banking The task of the ECB is to assess the supervision and macroprudential policy measures taken by the national authorities decision-making. and to tighten them, where necessary. In the Macroprudential policy decisions are case of Finland, the decision-making powers prepared in cooperation by Bank of Finland of the ECB cover all the macroprudential and FIN-FSA experts. The Bank of Finland tools, with the exception of the maximum is responsible primarily for macroprudential loan-to-value ratio (LTV) defined in analysis, whereas institution-specific micro- national legislation. On macroprudential prudential analysis is the responsibility of issues, decisions of the ECB are taken by the the FIN-FSA. Both analyses are part of the Governing Council. preparation of macroprudential policy. At The banking supervision and macro- the Bank of Finland, preparation takes prudential perspectives are brought together place in the internal financial stability in the Macroprudential Forum. This policy process. This is conducted on a comprises the members of the Governing quarterly basis, as legislation requires that Council of the ECB and the Supervisory macroprudential decisions are taken on this Board of the Single Supervisory Mechanism. frequency. The process produces a macro- The European Systemic Risk Board (ESRB) prudential report containing an analysis of is responsible for macroprudential oversight systemic risks and, based on this analysis, a of the financial system of the European recommendation by experts for action to be Union. Its task is to issue macroprudential taken. Based on this information, Bank of policy recommendations and warnings. Finland, FIN-FSA and Ministry of Finance The Financial Stability Committee experts assess the need for macroprudential (FSC) of the European System of Central policy action. Banks (ESCB) supports the Governing The FIN-FSA’s Director General Council of the ECB and the Macropruden- presents a proposal on macroprudential tial Forum. On the Committee, the ECB and policy to the FIN-FSA Board for decision. In the national authorities make joint risk addition to the Bank of Finland and the assessments and coordinate their policies. Ministry of Finance, the Ministry of Social The work of the ESRB is, in turn, supported Affairs and Health also expresses an by its Advisory Technical Committee and opinion on the proposal. Subsequently, the Advisory Scientific Committee. The system FIN-FSA consults with the ECB regarding is so extensive because macroprudential the decision. The Bank of Finland has the policy cannot be assessed separately from right to issue a proposal to the FIN-FSA banking supervision and monetary policy, Board for decision. All decisions taken and due to the close connection between these their grounds as well as comprehensive three components. background material are published on the Via the committees of the ESCB and FIN-FSA website. The extensive prepara- the ESRB, Bank of Finland experts tions ensure that the decision-making participate in the preparation and long-term bodies have all necessary information at development of macroprudential policy. their disposal. Bank of Finland experts also conduct It was a conscious decision to build targeted research and apply international such a multi-layered macroprudential research and experience in practice. system on the domestic level and within the

24 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 Banking Union. The purpose is to also facilitate difficult and unpopular decisions. The multi-layered structure requires effective preparation, in cooperation between the relevant authorities. The Bank of Finland and its experts play an active role in macroprudential policy within the Banking Union and in the domestic context. As the Bank of Finland is neither the regulator nor the supervisor of financial institutions, it can make independent technical preparations to support policy decisions. The work is based on extensive analysis by the Bank, focusing on the interaction between the financial system and the macro economy and an assessment of the impact of this interaction on financial stability.

In June, the Bank of Finland organised the Economic and Financial Committee (EFC) meeting in Helsinki. Photo: Peter Mickelsson.

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 25 Financial market infrastructure (see ‘Payment system services’). European central securities depositories and central Maintaining the reliability and efficiency of banks are due to become platform users in the payment and financial system is one of several different stages. The Bank of the Bank of Finland’s statutory tasks. The Finland, in cooperation with the Financial Bank of Finland therefore takes an active Supervisory Authority, is closely monitoring part in oversight cooperation between the project of the Finnish Central Securities domestic and international market infra- Depository, Euroclear Finland, and of the structures. Finnish market for migration to T2S. The Bank of Finland participates in the Throughout the 2000s, the Bank of development of payment systems via, for Finland has maintained and upgraded its example, the work of the Payments Council. BOF-PSS2 Payment and Settlement System The Payments Council is a domestic Simulator, which is used worldwide as a cooperation body that brings together both quantitative analysis tool. As usual, in users and providers of payment services and August the Bank of Finland organized, the relevant authorities. already for the 14th time, an international In 2016, an e-book entitled ‘How do simulator seminar, attended by researchers we pay in the 2020s? Perspectives on future from several different continents. The payment solutions’ was published as a simulator is in a process of ongoing Payments Council initiative; this was a first improvement so as to better meet user for the Payments Council. The book requirements, and in 2016 work was done to brought together the views of different develop, among other things, a component stakeholders in the area of payments on simulating central counterparty activity. visions for the future payments landscape. During the year, the Payments Council also Payment system services conducted an analysis entitled ‘Käteistä The Bank of Finland provides payment kaupan kassalta’ (‘Cash from the check- system services to banks via its TARGET2 out’), exploring the possibilities of cash component, TARGET2-Suomen Pankki. distribution directly via retailer terminals Overall, the TARGET2 system, owned and (known as cashback services). operated by the Eurosystem, functioned Meanwhile, the Payments Forum reliably in 2016. presents annually the work of the Payments The aggregate value of payments Council. In 2016, the Forum was organised processed in TARGET2-Suomen Pankki for the tenth time, attracting well over 150 during the year increased, while their volume experts to reflect on the possibilities and remained at the level of the previous year. An challenges for payments. This time, the average of 1,600 payments per day were themes were digitalisation and financial processed. The aggregate value of these technology (fintech). In addition, a panel payments was approximately EUR 43 billion discussion on the future payments (Chart 9). These account for 0.4% of the environment was organised on the basis of volume and 2.3% of the value of payments the Payment Council’s e-book. processed in TARGET2 as a whole. During the year, the Bank of Finland TARGET2-Suomen Pankki had 23 collected payment statistics from payment direct participants at year-end, of which and credit institutions and payment system three were ancillary systems. At the end of operators on the basis of the ECB 2016, TARGET2 as a whole had some Regulation on payment statistics. The data 1,000 direct participants connected to the are used for payment system monitoring system through 25 central banks’ and were published on the Bank of Finland components. website and, in greater detail, on the ECB The Bank of Finland also uses its own website. collateral management system (BoF-CMS- The Bank of Finland joined as user the Cola) for providing collateral management pan-European securities settlement services to its customers. During the course platform, TARGET2-Securities (T2S) in of 2016, the system was operationally September 2016, and has since been reliable, managing EUR 18 billion worth of providing T2S liquidity management collateral assets, on average. The use of the services to domestic market participants system has furthered digitalisation by

26 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 automating functionalities, including reporting and filing. Chart 9. In September 2016, the Bank of Daily average volume and turnover of TARGET payments Finland joined the European securities processed for TARGET2-Suomen Pankki system participants settlement platform (TARGET2-Securities, Number EUR bm T2S) as a user and simultaneously 2,400 120 commenced the provision of liquidity 2,000 100 management services to those of its 1 1,600 80 customers that had been the first to register as T2S users. The number of banks using 1,200 60 2 T2S via the Bank of Finland will increase in 800 40 connection with the upcoming migration waves. In the context of its own T2S 400 20 project, the Bank of Finland pursued close 0 0 cooperation with customers and Euroclear 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Finland by carrying out tests and training 1. Volume of payments (left-hand scale) customers with a view to ensuring 2. Turnover (right-hand scale) successful T2S migration. Source: European Central Bank. During 2016, the Bank of Finland fostered dialogue with the markets, both within national user groups and at bilateral meetings, while functioning as a point of contact for the ECB and actively participat- tions, the Bank’s work focused particularly ing in work at committee and working on the development of future payment group level. In addition to T2S prepara- system services.

Professor Bengt Holmström was the first Finn to be awarded the Nobel Prize for economic sciences. Professor Holmström is an active debater and has also spoken at the Bank of Finland Museum. Photo: Peter Mickelsson.

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 27 Box 4.

Payment methods facing major overhaul

Digitalisation is creating opportunities and It has always been important for reshaping existing practices in the different payments to function as smoothly, sectors of the economy. The new operating efficiently and safely as possible. These procedures it brings are also visible in the principles have also been the point of sphere of payments. departure for the new payment solutions. In the past ten years, the ease of use, Banks’ new mobile payment devices enable speed and convenience of card payments easy execution of payments between have crowded out cash usage particularly in individuals. Increasing migration of business purchases of daily consumer goods. Only in into the online environment has created a 2009 did consumer card payments contract need for safe identification, including temporarily as a consequence of an abrupt biometric identification. In addition, decline in consumption caused by the providers of payment services have sought financial crisis (Chart). to lower unit costs for payments. The popularity of card payments Consumers and merchants have a need primarily reflects technological advances, to monitor their use of money and but the growth in card payments has also payments via electronic ledgers and to been boosted by impaired access to cash. conduct more thorough analyses thereof. The signing of card payment vouchers is Merchants also wish to enhance the already history, the rapidity of PIN authen- efficiency of service provision. Shopping tication and retailer point-of-sale terminals and payments are becoming increasingly has increased and the widespread use of personalised. A combination of services and contactless proximity payments is payments opens up new opportunities for advancing at a brisk pace. At the same time, more efficient payment execution and the number of cash dispensers has provision of new services. decreased. Mobile payment methods are New services also help reduce the need likely to become general in Finland in the for cash. Items typically settled via cash next few years as new services enter the payment will represent a declining market. proportion of households’ consumption expenditure as online shopping increases. An ever larger share of regular payments will be automated to take place in electronic Chart. systems. Besides services, a significant Euro amounts of cash and card payments in Finland* proportion of daily consumer goods trade EUR billion Figures for 2016 are advance estimates 50 could also move over to electronic order, 2 delivery and payment systems. Another aim 40 is that, in the near term, electronic

30 payments could already be transferred between banks from one account to another 20 within a few seconds. Moreover, a number 1 of operators are currently working, among 10 other things, on the application of

0 blockchain technologies in new payment 1999 2004 2009 2014 solutions. We can assume that, going 1. Estimated annual total of cash payments forward, digitalisation will make increas- 2. Value of card payments, excl. retailer cards ingly powerful inroads into the payments * The share of cash payments is based on an estimate made via sphere. distribution channels and household consumption, as comprehensive statistical data on all cash payments and cash recycling are not available. Sources: Federation of Finnish Financial Services and Bank of Finland.

28 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 Financial asset Table 2. management The Bank of Finland's financial assets 31 Dec 2016 31 Dec 2015 EUR m EUR m The Bank of Finland manages financial Gold 1,731 1,534 assets totalling EUR 19,082 million. These Foreign reserves 6,554 6,193 assets comprise the Bank of Finland’s SDR 532 381 financial assets, the share of foreign reserve Foreign currency-denominated assets transferred to the European Central fixed-income investment portfolio 6,022 5,812 Bank and the Bank of Finland’s pension Euro-denominated financial assets 8,807 9,023 fund assets. At the end of 2016, the total values of these assets amounted to EUR Equity 290 132 17,382 million, EUR 1,087 million and Total 17,382 16,883 EUR 613 million, respectively. The liquidity portfolio was still presented as a separate item in 2015, but here it is combined with the foreign currency-denominated fixed-income investment portfolio. Bank of Finland’s financial assets and Source: Bank of Finland. financial asset management

The Bank of Finland’s financial assets comprise foreign reserves, euro-denomi- nated financial assets, gold and equities. The Table 3. foreign reserves consist of the foreign Distribution of the Bank of Finland's financial assets by currency currency-denominated fixed-income Currency 31 Dec 2016 31 Dec 2015 investment portfolio and items denominated EUR m EUR m in IMF Special Drawing Rights (SDRs) Euro (EUR) 9,097 9,156 (Table 2). The Board of the Bank of Finland US dollar (USD) 4,731 4,487 takes decisions on the amount of the Bank’s Pound sterling (GBP) 798 880 financial assets in accordance with the Japanese yen (JPY) 492 445 Agreement on Net Financial Assets (ANFA) Gold (XAU) 1,731 1,534 between the Eurosystem central banks. It SDR 532 381 sets rules and limits for such holdings of Total financial assets 17,382 16,883 national central banks as are related to the discharge of their national tasks. The Board Equity investments are included within the euro entry. did not change the amount of financial Source: Bank of Finland. assets in 2016. The Bank of Finland’s net financial assets at the end of 2016 amounted to EUR Table 4. 7.8 billion. These assets are calculated by Return* on the Bank of Finland's financial assets in 2016 and deducting the liabilities not directly related 2015 to monetary policy on the liabilities side of 2016 2016 2015 2015 the balance sheet from the assets not % EUR m % EUR m directly related to monetary policy on the Interest rate return 0.47 68.8 0.39 57.5 assets side of the balance sheet. Currency revaluation 0.35 55.0 3.83 551.2 Equity return 10.63 28.9 10.81 2.1 Objectives and yield from the management of financial assets Total 1.02 152.7 4.25 610.9 The Bank of Finland invests its assets on the * Excluding gold and SDR. international financial markets (distribution Source: Bank of Finland. of the financial assets by currency, see Table 3). The objective of financial asset management is to meet the liquidity, security and return requirements placed on the central bank in respect of the assets managed. In managing its financial assets, the Bank of Finland secures the value of

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 29 these assets and its ability, when necessary, The Bank’s Investment division is allowed to support the liquidity of the banking to deviate from these by making active system. The strict limits set for investment investment decisions within pre-set bounds risk ensure prudent management of the for permitted leeway and strict risk limits. Bank’s financial assets. Portfolio returns are benchmarked against In 2016, the structure of the financial public indices that are customised for assets was simplified by combining the central bank needs. In 2016, the liquidity portfolio with the fixed-income investments generated a return of 0.11%, investment portfolio. The liquidity of the i.e. EUR 14 million, above the benchmark financial assets is secured by minimum indices. The excess return according to the amounts of holdings of US and German three-year rolling average was 0.07%. government bonds, which ensure the Bank of Finland’s ability to provide liquidity for Maturity of US dollar-denominated acute policy needs under all circumstances. investments was extended Equity holdings were increased in 2016 The Bank of Finland’s fixed-income according to plan, in compliance with a investment portfolios are held in prudent approach and within the limits government and government-related permitted by the role of the central bank. securities, covered bonds, corporate bonds The total return on the Bank of and cash (Table 5). The average maturity of Finland’s financial assets in 2016 was these assets at the end of 2016 was 2½ 1.02%, i.e. around EUR 152.7 million. This years for investments in US dollars, 2 years return breaks down into interest rate and for investments in pounds sterling, 1½ years equity returns and valuation changes due to for euro-denominated investments and 1 exchange rate movements (Table 4). The year for investments in Japanese yen. low level of interest rates is reflected in the Compared with the previous year, the interest rate return, which in 2016 was maturity remained the same, except for US positive in the amount of EUR 68.8 million. dollar-denominated investments, whose Equity investments generated returns of maturity was extended by six months. EUR 28.9 million in 2016, on account of dividends and higher valuations. In 2016, ECB reserves managed together with valuation changes due to exchange rates Estonian central bank were positive, at EUR 55.0 million. The Management of the foreign reserves of the appreciation of the US dollar (+3.3%) and European Central Bank has been distributed the Japanese yen (+6.2%) covered valuation among the Eurosystem national central changes resulting from the depreciation of banks according to their respective capital the pound sterling (–14.3%). keys. The emphasis is on security and Fixed-income investment portfolios are liquidity, as the key purpose of the reserves subject to strategic allocation and duration. is to ensure the availability of sufficient resources for the Eurosystem’s potential foreign exchange interventions. The Bank of Finland manages part of the ECB’s reserves together with the Bank Table 5. of Estonia. The value of Finland and Allocation of the Bank of Finland's fixed-income investment Estonia’s pooled US dollar-denominated portfolios at the end of 2015 portfolio of the ECB’s foreign reserves was Fixed-income investment portfolios Allocation (%) at the end of 2016 about EUR 1,087 Government debt instruments 55.6 million. The ECB’s Annual Report provides Government-related debt instruments 21.3 additional information on the management Covered bonds 7.7 of its foreign reserves. Corporate bonds 8.0 Management of Bank of Finland Pension Cash holdings 7.4 Fund assets unchanged Total 100 The objective of the Bank of Finland Source: Bank of Finland. Pension Fund is to manage the assets held to cover the Bank’s pension liabilities in accordance with the generally accepted

30 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 principles for the management of pension instruments, and the related interest rate assets. These may deviate from the risk is managed by spreading the principles applied to the management of the investments among several debt instruments central bank’s financial assets. with differing maturities. In managing On 31 December 2016, the value of interest rate risks, the Bank primarily relies the pension fund’s assets was EUR 613 on ‘modified duration’ (see Definitions and million, with the Bank’s pension liabilities concepts, p. 92). amounting to EUR 564 million. The total The target durations of the Bank’s return on assets in 2016 amounted to 3.3%. fixed-income investment portfolios are More information on the pension fund’s normally decided for each currency once a asset management is available from the year, and in 2016 a decision was made to fund’s own annual report. raise moderately the target duration of US dollar-denominated fixed-income Investment risks and risk investments. The modified duration of all management the Bank’s fixed-income investments at the end of the year was approximately 1.8, In investing its own financial assets, the Bank compared with around 1.7 at the end of of Finland is exposed to market risks, credit 2015. risks, liquidity risks and operational risks. The daily level of interest rate risk is Market risks include exchange rate risk, also measured by the Value-at-Risk (VaR, interest rate risk and risks arising from fluc- see Definitions and concepts, p. 92) method. tuations in the price of gold and stock prices. Moreover, the VaR figure is used to limit More precise definitions of the risks, with the fixed-income investment portfolio additional information on risk management, interest rate risk relative to the benchmark can be found in the ‘Notes on risk index. management’ (p. 89–92). Information on the total risk exposure on the Bank of Finland’s Total market risk in the Bank’s own balance sheet is provided on pages 55–57. financial assets declined slightly VaR figures are calculated daily for total Foreign reserve portfolio market risk, exchange rate risk and equity exposes to exchange rate risk risk as well as interest rate risk. The Exchange rate risk remained the most year-end amount of total market risk was at significant risk in the Bank of Finland’s a slightly lower level than at the end of financial asset management in 2016, as in 2015 (Chart 10). Equity investments previous years. This is due to the Bank holding a foreign reserve portfolio for the purpose of discharging its central bank Chart 10. functions. The foreign reserves consist of VaR gures for market risk in the Bank of Finland’s claims on the IMF (Special Drawing Rights, nancial assets in 2016* SDRs) and investments denominated in US EUR m dollars, pounds sterling and Japanese yen. 165 150 The Bank does not generally hedge 135 foreign currency-denominated investments 120 1 and claims against exchange rate risk. In 105 90 2 previous years, hedging against SDR 75 exchange rate risk was used, but this 60 3 practice was abandoned in late 2016. The 45 30 targeted size and currency composition of 4 15 5 the foreign reserve portfolio is assessed by 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec the Bank at three-year intervals. This assessment was undertaken in early 2016. 1. Total market risk 2. Total market risk (excl. gold) 3. Exchange rate risk 4. Interest rate risk Higher target duration for US dollar- 5. Equity risk denominated fixed-income investments * One-day horizon, 99% con‚dence level. The Bank of Finland’s own financial assets Source: Bank of Finland. are mainly invested in fixed-income

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 31 increased on the previous year. They are Liquidity risk is managed by restricting made as indirect investments via equity the size of holdings of individual issues or funds and are distributed across several of total issuer debt. There are also restric- markets and several companies, which tions in place for the length of maturities of reduces the risks related to equity holdings. some instruments and for securities lending and short selling. No significant changes in credit, Although the separate concept of liquidity and operational risks and liquidity portfolio in the management of the related risk management Bank’s own financial assets was abandoned The total credit risk arising from investments in 2016, attention is still paid to the charac- is gauged and monitored in terms of a teristics of investment instruments. A separate credit risk VaR method. Addition- significant proportion of the assets is still ally, credit risk is managed by diversifying held in investment instruments that are investments, within established limits, across saleable within a short period of time and several issuers and counterparties. at low cost. Issuers of securities serving as Monitoring of operational risks covers, investments and Bank of Finland counter- among other things, risks related to staff parties are subject to criteria designed to and information systems. These are ensure sufficient counterparty and issuer managed by, for example, regularly tested creditworthiness. The factors used in and adequate backup arrangements and assessing creditworthiness include public reliable and well-documented workflows credit ratings provided by rating agencies and instructions. and market-based indicators. Photo: Peter Mickelsson.

32 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 Banknotes and coins

The Bank of Finland is responsible for ensuring the availability of euro cash in Finland. In practice, the Bank does this by using the distribution systems of stakeholders in professional cash supply, such as ATM companies, banks, shops and cash-in-transit companies. As in many other euro area countries, the vast majority of euro banknotes is distributed to the public in Finland via the ATM network. The majority of cash returns to the central bank comes from retail shops – collected, sorted and transported by cash-in-transit companies. The Bank of Finland checks the authenticity and fitness of euro banknotes returned from circulation, withdraws unfit banknotes from circulation and replaces them with new notes.

The net issuance of banknotes by the Bank of Finland remained stronger than overall Chart 11. economic growth and private consumption Banknote issuance and economic activity in Finland (Chart 11). The growth rate of Log percentage 40 orders of EUR 50 banknotes exceeded that Changeover to euro Bank strike 1990 banknotes 2002 of other banknotes in 2015, and the trend 30 continued in 2016. The issuance of cash 20 3 appears to be increasingly affected by the 10 use of cash when traveling abroad. Domes- 1 0 tically, however, the use of cash as a 2 payment method is slowly declining. –10 According to an estimate calculated on the –20 basis of Statistics Finland’s financial –30 accounts, almost half of cash issued in 1980 1990 2000 2010 Finland is held outside the country (Chart 1. Annual change in private consumption, % 12). 2. Annual change in GDP, % 3. Annual change in issuance of banknotes, % Availability of cash weakened further Sources: Bank of Finland and Statistics Finland. States or central banks have always issued banknotes and coins specifically to ease payment and further the transfer of economic purchasing power via cash savings. As a physical means of payment, cash can be used in retail trade mainly in face-to-face business transactions, Chart 12. automated payment machines, person-to- Banknotes circulating in Finland and cash out ows abroad person payments and income transfers. As EUR million electronic payment devices advance and 16,000 14,000 commerce moves more extensively online, 1 the use of cash is declining. 12,000 Cash usage is also declining because of 10,000 8,000 its weaker availability via key distribution 2 6,000 channels. In addition, the possibilities to use 4,000 cash have recently decreased due to restric- 2,000 tions introduced in public payments such 0 as, for example, parking meters, library –2,000 fines, tax payments and public transport 1998 2001 2004 2007 2010 2013 2016 tickets. 1. Cash issued in Finland held abroad Automatia, which operates banks’ 2. Total cash in Finnish economy united ATM network, began an extensive Source: Statistics Finland. replacement of ‘Otto’ ATMs by ‘Talletu- sOtto’ cash recycling machines (CRMs) in 2015. At that time Automatia cut the

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 33 number of ATMs by a net total of 117. In with the grey economy, drug business and 2016, the ATM network was thinned terrorist financing reached such a point that further by 87 units. Automatia seeks to the Governing Council of the ECB decided maintain the number of transactions at cash in May 2016 to stop producing the highest machines sufficiently high for efficiency and value banknote – the EUR 500 note – and profitability reasons. In 2016, a total of to exclude it from the new banknote series. 7,400 cash withdrawals were made per The Banknote Committee was machine per month. mandated to make preparations for During 2016 many deposit banks practical implementation of the decision. operating in Finland announced that they After introduction of the highest denomina- would begin to charge a fee for ATM cash tions of the new Europa series – EUR 100 withdrawals exceeding a certain number of and EUR 200 banknotes, EUR 500 withdrawals per month. The purpose banknotes returning from circulation will behind the fee was not only to cover costs be permanently withdrawn from circulation to banks from cash withdrawals but also to as they return to the central banks. At the reduce the total number of cash same time, however, it was emphasized that withdrawals, since banks pay ATM central banks will continue to redeem EUR operators withdrawal-specific charges on 500 banknotes indefinitely. ATM cash withdrawals. Partly because of The decision to end the issuance of the these fees, the average withdrawal value is EUR 500 banknote at the end of 2018 was already over EUR 105. already reflected in banknotes in the euro area in the first half of 2016: returns of Issuance of EUR 500 banknotes will end EUR 500 notes were commenced and Several euro area countries have already central banks began to replace them with limited the use of large cash amounts to EUR 100, EUR 50 and EUR 200 notes hinder tax evasion-related sales that bypass (Chart 13). So far, the total volume of euro bookkeeping. In international monetary banknotes has not changed in value terms, policy debate, the existence of zero-interest- even though at the end of 2015 the share of rate cash has also been regarded as a barrier the EUR 500 note in the total value of euro to negative monetary policy rates. banknotes had already declined to 24%. In early 2016 the public debate on the alleged association of large euro banknotes Replacement of EUR 20 banknotes continues At the end of November 2015, the third denomination in order of value in the Europa series – the EUR 20 banknote – was Chart 13. put into circulation. When the new EUR 5 Issuance of euro banknotes in euro area by denomination and EUR 10 banknotes were introduced, it EUR billion was detected that the actual amounts 500 circulating in Finland were probably at 4 450 most half the total amounts put into 400 350 circulation by the Bank of Finland. This was 300 1 surprising because these small denomina- 250 3 tions are not available in ATMs and are 200 largely used as change money similar to 150 coins. For this reason, it has not been 100 5 2 assumed that much of these banknotes 50 6 0 7 migrate in wallets to other euro area 2002 2005 2008 2011 2014 countries. The stocks of the smallest EUR 5 1. EUR 500 2. EUR 200 and EUR 10 banknotes of the old series 3. EUR 100 4. EUR 50 have practically already been exhausted, 5. EUR 20 6. EUR 10 and return of the old series to the Bank of 7. EUR 5 Finland has slowed to a trickle. Source: European Central Bank. Issuance of the new EUR 20 banknotes was brisk in the first months of 2016, so that the users would become familiar with

34 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 them. In later months, issuance of the old series increased again, to exhaust the stocks. Chart 14. Therefore, the overall replacement of the Replacement of EUR 20 banknote by new series in Finland EUR 20 banknote has so far been rather 1,000 notes 160,000 slow. It picked up already towards the end 140,000 3 of 2016, however, with the depletion of the 120,000 1 Bank of Finland’s stocks of the old series November 2015 100,000 (Chart 14). 80,000 Renewal of banknote sorting machines 60,000 The Bank of Finland is responsible for 40,000 20,000 2 ensuring the fitness of banknotes in 4 circulation. In the sorting process at the 0 2002 2007 2012 central bank, banknotes go through an automated authenticity and fitness inspection. 1. Issuance of EUR 20 of the old series 2. Issuance of EUR 20 of the new series Banknote fitness checking covers checking 3. Issuance of EUR 20, total banknotes for e.g. dirt, tear, folds, graffiti and 4. Returns of EUR 20 of the old series wear. Fit banknotes are put back into Source: Bank of Finland. circulation and unfit notes are destroyed. In January 2016, The Board of the Bank of Finland decided to launch a tender procedure for the procurement of new banknote sorting machines. The new sorting machines will replace the old De La Rue Chart 15. CPS 1800 machines, which were already Counterfeit euro banknotes in Finland by denomination, approaching the end of their service life. 2002–2016 Notes/month In Dec 2016, total 1,055 notes The technology of the old machines was 300 also becoming outdated. The tender was 250 won by the German Giesecke & Devrient, which is currently a market leader in 200 banknote sorting machines used by central 150 banks in Europe. Procurement and 7 100 maintenance contracts for two BPS M7 6 5 machines were signed in September 2016, 50 4 3 and the machines will be in use from the 2 0 1 beginning of April 2017. These sorting 2002 2005 2008 2011 2014 machines can process as many as 33 1. EUR 5 2. EUR 10 3. EUR 20 banknotes per second. 4. EUR 50 5. EUR 100 6. EUR 200 7. EUR 500 Increase in number of counterfeit Source: National Bureau of Investigation. banknotes Distribution of counterfeit banknotes has previously been more common in Finland during the summer months. It has, for instance, been easier for foreign distributors The number of counterfeit banknotes to distribute counterfeits at large summer continued to grow on the previous year. In events where people use a lot of cash. the end, over 2,171 counterfeits were found In early 2016, the EUR 10 of the new in Finland, which is a record number in the banknote series was the most distributed entire history of euro banknotes in Finland. counterfeit in Finland, while in late spring About half of this was explained by a single the new EUR 50 banknote was the most case of EUR 500 counterfeit notes found in common counterfeit found in circulation. a private payment transaction in December Contrary to the norm, the number of coun- 2016. Compared with other euro area terfeits found in circulation declined this countries, however, the number of counter- time in June–July, but increased again feits found in circulation in Finland is towards the end of the year (Chart 15). among the lowest.

Bank of Finland Annual Report • 2016 35 European Summer Symposium in Other operations International Macroeconomics for the first time in Finland In 2016, the Bank of Finland co-organised Research several international scientific meetings on themes touching on its research activities. In Economic research at the Bank of Finland May, the Bank hosted the four-day meeting supports the Bank’s policy preparation, ‘European Summer Symposium in Interna- operational development and external tional Macroeconomics’, which is a brand influence. The aim of the Research unit is to of the Centre for Economic Policy Research, produce internationally top-ranking based in London. The meeting is arranged research in areas of key importance to the every other year in Tarragona, Spain, and Bank’s activities. This allows the Bank to every other year outside Spain. This meeting make a strong contribution to debate on is a high-level symposium with a very high monetary policy and financial market devel- international profile. opments, both in Finland and internation- In June, the Bank of Finland hosted a ally. The role of the Research unit in the one-day conference in Helsinki entitled Bank’s policy development remained ‘Going Cashless’, in which the participants substantial in 2016. Policy-related activities, engaged in a lively debate on alternative including activities in Eurosystem working ways to remove the lower bound on groups, supported the Bank’s efforts to nominal interest rates. One of the options increase the profile of its research was to abolish paper currency. In August, economists as public intellectuals. the Bank participated for the sixth time in the annual international seminar on ‘Risk, Impacts of demographic change and Financial Stability and Banking’, held in São immigration a key research theme Paulo, Brazil. The seminar was hosted by Important economic research themes and Banco Central do Brasil. The best research topics that kept the international research inputs presented at the seminar will be community busy in 2016 were the macroe- published in the forthcoming special issue conomic impacts of demographic change of the Journal of Financial Stability. and massive immigration (including their consequences for fiscal sustainability), the Bank of Finland Institute for impact of the prolonged period of low Economies in Transition interest rates on expected inflation and inflation outcomes and asset prices, as well The research efforts of the Bank of Finland as future monetary policy challenges and Institute for Economies in Transition new policy regimes. (BOFIT) concentrate mainly on applied Issues concerning the unequal distribu- research with a focus on monetary and tion of income and wealth are now a key exchange rate policy issues and the topic of macroeconomic research. Statistics functioning of financial systems. The show clearly that over the past 30 years or primary countries of focus are Russia and so, and particularly in the higher income China, although individual research topics bracket, income inequality has increased often require the use of more extensive markedly in some countries, such as the comparative data. United States. Finland, too, has experienced Collaboration between research, an increase in inequalities in income and monitoring and forecasting forms the wealth. foundation for the work of BOFIT’s There are, however, differences across experts. The year 2016 marked the 25th countries. In France and Japan, income Anniversary of the establishment of BOFIT. inequality has increased only slightly. The In 2016, BOFIT continued to publish international research community is (in both Finnish and English) its popular interested particularly in the factors that weekly digest of economic news items from could explain the differences between Russia and China. These go out to around countries. Entrepreneurship appears to be a 1,800 subscribers all over the world. significant, perhaps even key factor. Another aspect of BOFIT’s work was the

36 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 Box 5. Financial cycle explains long-term effects of monetary policy

In 2016, over 30 studies were published in bank capital if bank capital is scarcer than the Bank of Finland Discussion Paper series. corporate capital. In such a case, Projects focusing on macroprudential government funding may have positive analysis studied e.g. economic agents’ buffer effects if the government covers some expectations, stagnation and fiscal policy, of the possible loan losses. Public funding monetary policy and the financial cycle in may have negative effects on bankers’ and an environment of exceptionally low entrepreneurs’ incentives. Empirical analysis interest rates, as well as the interaction of also shows that there is a surprising link monetary policy and macroprudential between long-term inflation and the policies in economic stabilisation. population age structure: both young and Results show that when expectations old age groups are inflationary. are sufficiently pessimistic, it can sink the Other research projects at the Bank of economy into steady-state stagnation with Finland examined statistical methods used deflation. The most recent estimates based in predicting financial crises, a shadow rate on alternative methods show that the model with a time-varying lower bound of natural interest rate in the United States is interest rates, as well as switching costs and higher than earlier estimates would suggest. financial stability. Unit root methods have Results suggests that monetary policy, long been used in the detection of financial through the financial cycle, has a long-last- bubbles in asset prices. New results show ing impact on output and, by implication, that early warning signals identified in on real interest rates. Using monetary policy multiple time series can be combined into a alone is, however, not enough to fully composite indicator, in which case time stabilise the economy if the effectiveness of series with a higher frequency of observa- the financial market is weakened due to a tions can be used for providing timely friction caused by an incentive problem. In warning signals. In turn, the shadow rate such a case, a separate macroprudential tool model with a time-varying lower bound could be useful, particularly if the distur- outperforms the constant lower bound bances arise from the financial sector itself. model in euro area data. Research suggests Macroprudential analysis was also that the time-variation in the lower bound deployed to examine how informative is the is related to the euro area deposit facility ECB survey on inflation expectations, the rate and, thus, to monetary policy. New public funding of banks and non-financial research shows that the effect of intensified firms in times of crisis and the link between deposit market competition on the population age-structure and inflation. The probability of bank failures depends results show that because of heterogeneity critically on whether the focus is on bank across individual views, aggregated inflation competition for established customer rela- expectations in the ECB Survey of Profes- tionships or competition for the formation sional Forecasters must be analysed also on of such relationships. The former destabi- a micro level. The credit market can be lises, while the latter stabilises the banking particularly vulnerable to factors that affect market.

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 37 seminars on the Russian and Chinese economy will further increase the impact of economies. These seminars (presented in the Chinese financial markets on the global Finnish) are very popular, and the online economy. The keynote speeches were presentations in particular attract a large delivered by Kjetil Storesletten (University following. of Oslo) and Michael Melvin (University of BOFIT research is published initially in California, Santa Cruz). In October, BOFIT the Institute’s own Discussion Papers series organised a workshop in Moscow in and later in refereed scientific journals. In cooperation with the Higher School of 2016, a total of 20 Discussion Papers were Economics. The workshop was entitled published. In addition, 11 shorter reports ‘Banking in Emerging Markets: Challenges were published in the BOFIT Policy Brief and Opportunities’. series. As well as the articles of the in-house researchers, the Discussion Papers series Statistics also includes articles by visiting scholars and studies presented at BOFIT’s seminars The Bank of Finland is responsible for and workshops. A total of 28 visiting producing the Finnish data for euro area scholars from 12 countries worked with financial statistics for the European Central BOFIT in 2016. Bank. Statutory ESCB statistics and In connection with the Bank of statistics required by international organisa- Finland’s March and September forecasts for tions were produced in 2016 as required the international economy, BOFIT published and disseminated according to schedule. forecasts for the economic outlook for The Eurosystem’s largest statistics Russia and China in the immediate years project in the immediate years ahead is the ahead. The persistent difficulties in the establishment of a common granular Russian economy and the various spill-over analytical credit database. The project was effects of slowing economic growth in China launched at the Bank of Finland in 2016. have increased the demand for BOFIT The project involves the construction of analyses both in Finland and abroad. The systems for the collection and processing of number of presentations given to various data from a national credit database. The types of audiences as well as media interest systems must be ready and operational in in developments in Russia and China have 2018. remained considerable. In the first stage, the new analytical In November, the BOFIT 25th credit database will include credit granted Anniversary Conference was held at by credit institutions to non-financial Finlandia Hall. The conference brought corporations and other legal entities. In together a large number of participants future, the database may be expanded to interested in the economies of Russia, China also cover information that serves and other countries. The keynote speeches supervisory needs, as well as household were delivered by Justin Yifu Lin (Peking credit, and credit granted by corporations University, former World Bank Chief other than credit institutions engaged in Economist) and Gérard Roland (University lending. In national implementation, regular of California, Berkeley). Professor Lin was cooperation with the financial sector has quite optimistic about China’s future from the start played an important role, and growth, as long as economic policy remains all interested credit institutions have been targeted at growth. Professor Roland, in invited to join the working group. turn, examined the transition in economies 2016 also saw the launch of two new in Central and Eastern Europe in the past ESCB statistical reporting processes: one 25 years and its implications for economics covers the balance sheet items of insurance and economic policy. corporations and the other transactions In September, BOFIT organised its conducted by banks on the money markets. third conference on the Chinese economy. The first reporting of quarterly data to the The conference was co-organised by the ECB on insurance corporations was in City University of Hong Kong and focused summer 2016. The data are collected in on the interaction between the Chinese connection with the Solvency II reporting of financial system and the global economy. the insurance sector, and this reporting also The ongoing opening up of the Chinese serves the needs of the financial accounts

38 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 Box 6. Granular credit database supports decision-making

The Governing Council of the European and medium-sized enterprises (SMEs), Central Bank adopted in May 2016 because external financing of euro area Regulation (ECB/2016/13) on the establish- SMEs is based largely on bank lending. ment of a new, euro area-wide harmonised SMEs’ significance for the euro area granular credit database. As a result of the banking system is considerable, and the Regulation, euro area Member States will possibility of a more detailed analysis will start collecting, as of September 2018, therefore support euro area decision- granular credit and credit risk data, using making. harmonised definitions and data content. Following the recent financial crisis, The new database will include data on the amount of non-performing loans credit granted by credit institutions to legal increased strongly in some euro area entities (non-natural persons), the related countries. The harmonised credit database protection as well as the parties to the loans will enable a more efficient monitoring of or protections. The database will include non-performing loans and provide better approximately one hundred data attributes. tools for analysing the reasons. The more Previously, euro area national central banks detailed analysis will support euro area have collected only securities-related data decision-making, with the aim of preventing on the level of single contracts, whereas the creation of similar chains of events. data on other balance sheet items has been collected on a more general level. The credit Credit database at the Bank of Finland database that is now being established can In 2010, the Bank of Finland combined, be considered as the start of a new era as into a single data collection, the ECB’s Member States collect data based on reporting requirements for e.g. credit insti- common principles and in greater detail. tutions concerning balance-sheet, interest- rate and security-by-security data, as well as Supports decision-making and analysis the data requirements of the Bank for Inter- Many European Union Member States have national Settlements. Credit institutions a long tradition in utilising credit registers report to the Bank of Finland data on their – often operated by the national central debts and receivables only once, after which bank. However, the data content of these the Bank generates the various data for registers varies considerably from one different authorities based on their require- country to another, and therefore the data ments. The reporting of various data within collected in the individual countries are not a single data collection ensures the particularly comparable. In contrast, Nordic consistency of statistical data. national central banks (for example) have The increasingly detailed reporting not operated any credit or borrower-specific requirements for credit-specific data registers or databases. The new credit requires from central banks a capacity to database for the euro area will create a reform their operations. With the establish- dataset based on common principles and a ment of the analytical credit database, the common starting point, and that can be Bank of Finland’s statistics unit is facing its utilised in euro area decision-making, largest IT project ever. In this credit data together with statistics already being project (LuoTi) which has already started, collected. the Bank of Finland is creating a system for The granular credit database will be processing increasingly granular data. usable in, for example, the monitoring of In the first stage, the system will cross-border risks, analysis of monetary include granular credit data. In future, the policy operations, risk management, objective of the statistics unit is to financial stability surveillance and macro- incorporate the current data requirements prudential policy and research. The data into a new system entity that would will also be utilisable in banking minimise the reporting burden on credit supervision. A concrete example of the institutions, despite the increasing data possibilities provided is the analysis of requirements. lending to and the indebtedness of small

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 39 prepared by Statistics Finland. Daily money which includes the President and Vice-Presi- market statistical reporting was launched dent of the ECB and the governors of all the on 1 July 2016. The statistics cover national central banks of the 28 EU unsecured and secured financial transac- Member States. tions and some derivatives transactions The Governing Council of the ECB concluded on the euro money markets. convenes in Frankfurt twice a month on In 2016, the Bank of Finland also average. It holds monetary policy meetings prepared for the extension of ESCB every six weeks. In other meetings, the focus statistical reporting on supplementary is on other tasks and responsibilities of the pension funds in the insurance sector. In the ECB and the Eurosystem. The Governing area of securities statistics, work continued Council also makes the banking supervision on harmonising data on issuance statistics decisions concerning significant credit insti- in line with the ECB’s Centralised Securities tutions in the euro area. In 2016, the Database (CSDB). Governing Council held one meeting In addition, the Bank of Finland, in outside Frankfurt. This was held in the cooperation with Statistics Finland and the Austrian capital, Vienna. The Governing State Treasury, made preparations for Council also held teleconferences and made Finland to join the IMF’s SDDS Plus decisions using a written decision-making initiative. The SDDS Plus is the IMF’s procedure. extended standard for the dissemination of Board members and experts from the economic and financial statistics, including Bank of Finland participated in the work of several new data categories. The countries the ESCB at all stages of preparation. The that have joined the initiative are committed Bank of Finland had at least one representa- to disseminating these statistics with the tive on each of the committees and was prescribed periodicity and timeliness. represented in most of the working groups Finland will join SDDS Plus in early 2017. operating under the various committees. Governor Liikanen was Chairman of the International activities ECB’s Audit Committee, whose task is to improve ECB and Eurosystem governance The Bank of Finland participates in the and control. Deputy Governor Hakkarainen work and decision-making of the European was the Chairman of the Budget System of Central Banks (ESCB). It also has Committee. He also chaired the ad-hoc a statutory responsibility for Finland’s Forum on Supervisory Fees, which contacts with the International Monetary examined the costs and fees of banking Fund (IMF) and is a shareholder of the supervision. In 2016, a total of 17 Bank of Bank for International Settlements (BIS). In Finland employees were seconded to the addition, the Bank of Finland operates ECB on fixed-term contracts of varying diversely in many Nordic, European and length. other international fora. The ECB’s Governing Council and the Supervisory Board, which prepares The European System of supervisory decisions on euro area banks, Central Banks (ESCB) held four joint meetings in 2016, where The Eurosystem’s highest decision-making they discussed macroprudential issues. body is the Governing Council of the European Central Bank (ECB), which International Monetary Fund comprises the six members of the Executive The Governor of the Bank of Finland, Erkki Board of the ECB and the governors of the Liikanen is Finland’s representative on the national central banks of the 19 euro area highest governing body of the International countries. Monetary Fund (IMF), the Board of The Governor of the Bank of Finland, Governors. His alternate member was Erkki Liikanen is a member of the ECB’s Deputy Governor Pentti Hakkarainen. In Governing Council. Deputy Governor October 2016, the Board of Governors held Pentti Hakkarainen was the Governor’s its Annual Meetings in Washington, DC. personal alternate on the Governing The IMF’s advisory International Council. Governor Liikanen is also a Monetary and Financial Committee (IMFC) member of the ECB’s General Council, met in April and October in Washington,

40 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 DC. Both meetings discussed the outlook The Bank of Finland was also for the global economy and challenges for represented at the Annual General Meeting economic policy as well as issues relating to of the BIS in June and the Extraordinary financial stability. The discussions gave General Meeting in November. support to economic policies that strengthen growth and stressed the Nordic cooperation importance of structural reforms. Changes The Nordic central banks cooperated in the structure of China’s economic growth closely throughout 2016. Central Bank and its implications for global economic Governors met in Denmark at a meeting of developments were discussed on several the governors of the Nordic central banks occasions. It was also emphasized that the and discussed e.g. monetary policy in the IMF’s resources should be maintained at environment of low interest rates, housing their current level. markets, supply of cash and coins and the The IMF has 189 member countries, change in Nordea’s organisational structure which are represented on an Executive Board which enters into force in 2017. In addition consisting of 24 Directors. Christine to Board members, experts from the Bank Lagarde, Chair of the Executive Board, is the of Finland’s various functions also met in IMF’s Managing Director, and in 2016 she the course of the year with experts of other was appointed for a second five-year term. Nordic central banks. One of the key The Nordic-Baltic constituency has a projects concerned crisis management of common representative on the Executive significant cross-border banks. Board. In 2016, coordination of economic The Nordic and Baltic central banks policy views within the constituency was led and supervisors held the biannual Nordic- by Sweden, with participation from the Bank Baltic Macroprudential Forum in of Finland and Finland’s Ministry of Finance. Stockholm in April and November. The fora The Nordic-Baltic Monetary and discussed issues relating to financial and Financial Committee (NBMFC) convened macroprudential stability. in Denmark and Sweden before the spring and autumn IMFC meetings in order to Cooperation within the European Union prepare the constituency’s policy positions. The European Systemic Risk Board (ESRB) The Bank of Finland was represented on the is part of the European System of Financial NBMFC by Deputy Governor Pentti Supervision (ESFS). The ESRB is responsible Hakkarainen. for macroprudential oversight of the The IMF’s quota and governance financial system and financial markets. The reform, which was approved in 2010, decisions of the ESRB are taken by the became effective in January 2016. The General Board. Governor Liikanen is a governance reform improved the adequacy member of the General Board with voting of the IMF’s base funding and increased the rights. voting power of emerging economies and The key responsibility of the European developing countries on the Executive Union’s Economic and Financial Committee Board. In October 2016, the Chinese yuan (EFC) is to prepare meetings of the was included in the SDR (Special Drawing ECOFIN Council of economic and finance Rights) basket. ministers of EU Member States. In 2016, the Bank of Finland was represented on the Bank for International Settlements EFC by Deputy Governor Pentti The Governor of the Bank of Finland took Hakkarainen. He participated in the part in the regular Governors’ Meetings of meetings when the Committee convened in the Bank for International Settlements (BIS). its extended composition and in the role of Discussions covered topical issues on the the Financial Stability Table. global economy and financial markets, such The Bank of Finland also participates as market liquidity, macroprudential policy in cooperation via the EU’s Economic Policy and challenges relating to growth and the Committee (EPC), which prepares the EU’s improvement of the resilience of economies. economic policy guidelines and structural Other important topics were cybersecurity policy issues. Statistical issues are discussed and the effects of climate change on in the Committee on Monetary, Financial financial stability. and Balance of Payments Statistics (CMFB)

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 41 and the European Statistical Forum. The concerned interest rates, exchange rates, Bank of Finland is also involved in the work statistics and banknotes. In 2016, around of the Organisation for Economic 1,200 calls were made to the Bank of Cooperation and Development (OECD) and Finland’s telephone hotline. is represented on the Board of Supervisors The Communication unit’s largest of the European Banking Authority (EBA). project in 2016 was the renewal of the Bank of Finland website Suomenpankki.fi. The Other international cooperation renewed website was launched at the end of The Bank of Finland continued its training January 2017. The website renewal put cooperation with the Bank of Russia in particular emphasis on four aspects: 2016, including two training sessions at the Bank of Finland. 1. The website is responsive, meaning it functions smoothly irrespective of the Communications user’s device. 2. The website serves the user as well as The Communications unit supports the possible in terms of its structure and attainment of the Bank of Finland’s vision content. and provides the Bank’s key target groups 3. The website is more flexible to maintain with information on monetary policy, and develop. financial stability, banking operations and 4. The website layout is modern and in currency supply. Using effective and specifi- line with the Bank’s current visual cally targeted communication, the Bank image. aims to keep the Finnish public well informed of the activities of the central The popularity of the Bank’s visitor centre bank. – the Bank of Finland Museum – remained In 2016, the leading topics of the Bank as high as in the previous year. The Museum of Finland’s communications were the attracted almost 14,000 visitors and hosted ECB’s expanded asset purchase programme, 20 public events during the year. In addition the Bank of Finland’s role in its implemen- to lectures for the general public, presenta- tation, and analysis of the effects of the tions of the Bank’s economic forecasts and purchases. The Bank also informed the history seminars, the Museum introduced public on the use of the new macropruden- new economic policy-related discussion tial tools. Furthermore, as part of transpar- events which were hosted by Antti Suvanto, ency in communications, the Bank began to Adviser to the Board of the Bank of publish the Governor’s monthly calendar on Finland. The Museum also organised a its website. public event at which Markus Brunnemeier, The Bank of Finland’s publication Edwards S. Sanford Professor of Economics website Eurojatalous.fi established its at Princeton University, presented his book position and attracted around 86,100 visits The Euro and the Battle of Ideas. and almost 58,700 visitors in 2016. Besides On 10 April, the Bank of Finland articles of the periodical Euro & Talous Museum opened an exhibition on the Great (and its English version, the Bank of Depression. The Museum also hosted in Finland Bulletin), 51 blog articles and 25 April the final for the Generation €uro analysis articles were published on the site. Students’ Award competition for teams of The effectiveness of communications secondary school students. This was won by was strengthened by encouraging Bank of the team from the upper secondary Etelä- Finland experts to communicate more Tapiolan lukio in Espoo. actively on social media. The Communica- The Bank of Finland prepared for tions unit provided training and support to Finland’s centenary year 2017 well in the Bank’s social media influencers. An advance. The Bank made preparations for increasing number of the Bank’s employees hosting a four-day open doors event now have a social media presence in their ‘Property of the Nation’ in the main office employment role. building. The event included an art The Bank of Finland also served the exhibition, musical performances, speeches general public via our telephone hotline and and a website-based art gallery email. The most common questions (www.kansakunnanomaisuutta.fi).

42 Bank of Finland Annual Report • 2016 Bank of Finland activities 2016 Box 7. Bank of Finland representatives at the ECB, EU and other international bodies in 2016

Bank of Finland representatives on the Governing Council of the ECB Erkki Liikanen, member Tuomas Välimäki, accompanying Katja Taipalus, accompanying person Pentti Hakkarainen, alternate person Mika Pösö, accompanying person

Bank of Finland representatives on ESCB committees International Relations Committee Organisational Development Committee Information Technology Committee Olli-Pekka Lehmussaari Mika Pösö Petteri Vuolasto Kristiina Karjanlahti (until 3 Nov 2016) Jarno Talvitie Henna Karhapää (from 14 Nov 2016) Statistics Committee Monetary Policy Committee Laura Vajanne (Until 1 Nov 2016) Accounting and Monetary Income Tuomas Välimäki Harri Kuussaari Committee Jarmo Kontulainen Anne Forsback (until 1 Sept 2016) Samu Kurri Committee on Controlling Sara Lähteenkorva (from 1 Sept 2016) Tuula Colliander Financial Stability Committee Marko Ala-Pöntiö Legal Committee Katja Taipalus Maritta Nieminen External Communications Committee Eija Brusila Risk Management Committee Jenni Hellström Antti Nurminen Richard Brander (from 27 Apr 2016) Market Infrastructure and Payment Jorma Jokisalo Committee Budget Committee Kirsi Ripatti Banknote Committee Pentti Hakkarainen, chair Heli Snellman Päivi Heikkinen Veli-Matti Lumiala Kari Takala Market Operations Committee Human Resources Conference Harri Lahdenperä Internal Auditors Committee Antti Vuorinen Marjaana Hohti Pertti Ukkonen Eija Lepola Helena Rantanen

Bank of Finland representatives on EU committees and the Supervisory Board of the Single Supervisory Mechanism General Board of the European Economic and Financial Committee Supervisory Board of the Single Systemic Risk Board (ESRB) Pentti Hakkarainen Supervisory Mechanism (SSM) Erkki Liikanen Mika Pösö, deputy member Jouni Timonen

Advisory Technical Committee of the European Banking Authority's Board Committee on Monetary, Financial ESRB of Supervisors and Balance of Payments Statistics Katja Taipalus Jouni Timonen Laura Vajanne (until 1 Nov 2016) Harri Kuussaari (from 1 Nov 2016) Economic Policy Committee Lauri Kajanoja European Statistical Forum Laura Vajanne (until 1 Nov 2016) Harri Kuussaari (from 1 Nov 2016)

Bank of Finland representatives at the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) BIS meetings of central bank governors IMF Board of Governors OECD Economic Policy Committee Erkki Liikanen Erkki Liikanen Ilkka Korhonen Pentti Hakkarainen, alternate Samu Kurri

OECD Financial Markets Committee Jyrki Haajanen

Bank of Finland activities 2016 Bank of Finland Annual Report • 2016 43 Management and personnel

Strategy tion exert an influence on banks and the financial sector, reshaping financial system structures and business models. In the work The Bank of Finland seeks to ensure that of securing the stability of the financial the Bank is known as a forward-looking system, smooth Nordic cooperation has and effective central bank and as a also come to play an even more pronounced constructive and influential member of the role. The Bank of Finland clarified the Eurosystem. The main themes of the Bank’s processes and communications related to its strategy work in 2016 were focused on work in the field of financial stability. measures aimed at 1) increasing the effec- Digitalisation is strongly modifying the tiveness of activities relating to monetary operating environments of all the Bank of policy and financial stability, 2) exploiting Finland’s core functions. One of the most digitalisation and foreseeing its effects, and fundamental key areas of change is the 3) updating the Bank’s operational practices evolution of payment methods. As a and procedures. monetary authority, the Bank of Finland The Bank continued to commit participates in ensuring the availability of resources to the development of monetary cash in Finland and oversees the reliability policy models and instruments and partici- and efficiency of the Finnish payment pated in the relevant economic debate. In system as a whole. The Bank closely addition, assessments were made of the monitors the development of cash usage impact of alternative economic scenarios and payment methods. and inflation paths on the euro area and In line with the Bank of Finland Finnish economies and on the balance sheet strategy, the Bank’s influence is based on of the Bank of Finland. The Bank was expertise, reliability and high-quality involved in conducting the ECB’s monetary research. Coaching leadership methods are policy and implementing the asset purchase deployed to encourage staff members to programmes. The purchase programmes pursue vigilance and readiness for problem- increased the size of the Bank of Finland solving, to update their working practices balance sheet. The importance of anticipat- and procedures, and to ensure that their ing, monitoring and reporting risks that skills are at the forefront. One example of could threaten the Bank’s capital adequacy the updating of working practices and was further highlighted. procedures is that, in 2016, Bank of Finland Financial stability analysis and macro- employees increasingly participated in their prudential policy have become increasingly professional capacity in social media important aspects of central bank activity in communication, thereby contributing to recent years. Digitalisation and globalisa- public discussion of topical matters.

44 Bank of Finland Annual Report • 2016 Management and personnel Box 8. Bank of Finland's mission, vision, strategy and values

Mission

The Bank of Finland works towards economic stability. Price stability, secure payment systems and reliable financial systems are prerequisites for sustainable growth, employment and the wellbeing of Finnish society.

Vision Summary of the strategy

The Bank of Finland is known as a The Bank of Finland's influence is forward-looking and effective central based on expertise, reliability and bank and as a constructive and influential research. member of the Eurosystem. We ensure the availability of competitive The vision underlines the Bank of central bank services in Finland. Finland's objective of being a forward- We participate in maintaining the looking authority, whose activities and service level of the financial markets and statements are constructive in promoting related infrastructure. the long-term robustness and stability of We maintain such capital adequacy the Finnish economy. The Bank itself aims and liquidity as is required by our to operate in the spirit of its own operations, and we honour our financial statements fostering effectiveness. accountability to Finnish society. A constructive role within the Our working processes are of high Eurosystem requires the Bank of Finland quality, technically advanced and environ- to be actively involved in developing mentally sustainable. solutions to common problems, while We build our expertise and profes- being influential imposes high expecta- sional competitiveness with an eye to the tions on the competence and communica- future, while simultaneously caring for tion skills of the Bank's personnel. the long-term wellbeing of our staff.

Values Competence – Appreciation – Responsibility The values reflect our attitude towards our own work, our colleagues and the rest of the society. Common values drive the staff's day-to-day activities and underpin the organisa- tion's working culture. The entire organisation was involved in defining the Bank's values.

Competence Appreciation Responsibility Our work builds on We strive towards common We act responsibly and we excellence and professional objectives with mutual are independent. We are a ethics. We keep our respect. We encourage open reliable and cooperative knowledge and skills at the discussion and fresh ideas. partner. forefront.

Management and personnel Bank of Finland Annual Report • 2016 45 Box 9. Bank of Finland objectives and results framework 2016–2018

Strategic guideline Indicator Objective Situation 12/2014 12/2015 12/2016 1. The Bank of Finland's ECB Governing Council > 4 New 4.1 – influence is built on members' evaluation of indicator high-level expertise and the Bank of Finland's research that combines influence both macroeconomic and financial market Quality-weighted > 32 26 27 34 perspectives. publication index for research

2. The Bank of Finland Quality of central bank > 95% of 98% 94% 95% participates in preserving services from service users' respondents satisfied the service level of the perspective financial markets and related infrastructure and Consumer satisfaction > 4 4.1 4.1 4.1 offers competitive central survey on the quality and bank services to its availability of cash customers 3. Public confidence in the Results of the Omnibus Upper quartile of the 3/12 3/12 3/12 Bank of Finland and survey carried out by the benchmark group I Influence and service capacity awareness of the Bank's market research company and the Eurosystem's Taloustutkimus activities are promoted through effective, Visits (clicks) on the Rising trend 1.8 million 2.2 million 1.9 million well-targeted Bank's website communication. 4. The Bank of Finland's Proportion of highly safe High High High High financial assets are invested and liquid investments of in a secure and productive financial assets manner in accordance with international commitments Return on financial assets > 0; 5-year moving 1.5% 1.15% 0.80% and crisis management exceeding the central bank average requirements. rate on investment currencies 5. The aim is to enable Reserve fund + provisions Provisions are EUR 5,208 EUR 5,375 EUR 5,576 stable profit distribution to relative to balance sheet increased with the million million million the State without risks aim of ensring a jeopardising the Bank's sufficiently strong capital adequacy. balance sheet under all circumstances. Distributed earnings Stable profit EUR 137,5 EUR 98,0 EUR 91.0 distribution million million million 6. The Bank of Finland is Total annual full-time- 2014: 402 annual 384 375 394* one of the most efficient equivalent jobs full-time equivalent central banks in the EU. 2015: 383 annual full-time equivalent 2016: 400 annual full-time equivalent* Total departmental Budget, EUR 52.8 EUR 52.1 EUR 53.5 operating expenses 2014: EUR 57 million million million

II Efficient use of resources and capital adequacy million 2015: EUR 56 million 2016: EUR 56 million

* Incl. temporary staff.

46 Bank of Finland Annual Report • 2016 Management and personnel Strategic guideline Indicator Objective Situation 12/2014 12/2015 12/2016 7. The quality of the Bank Fulfilled criteria as set out ≥ 93% 75% 78% 79% of Finland's analytic and in department-specific operational processes is agreements on objectives actively enhanced. and outcomes 8. The Bank of Finland's Feedback on IT equipment 93% satisfied 88% 93% 92% ICT solutions enable and services top-quality, influential work by our experts. Number of serious Objective 0 1 0 0 disruptions IT innovations that have > 3,5 3.2 3.8 3.8 increased productivity from the departments' perspective, survey result 9. The activities of the Total emissions / operating Falling trend 71.5 kg 67.5 kg 64.0 kg Bank of Finland are expenses (energy use) CO2 CO2 CO2- environmentally emissions/ emissions/ emissions/ sustainable energy use energy use energy use

III Efficiency of internal processes III Efficiency Waste kg / operating Falling trend Volume of Volume of – expenses waste waste 2.03 kg / 2.25 kg / EUR 1,000 EUR 1,000 operating operating costs costs 10. The Bank of Finland Annual implementation of Over 80% of plans 89% 90% 92% raises the expertise and personal development turn out well professional competence of plans its staff. Education level index > 5.8 6.0 6.0 6.1 11. The Bank of Finland Proportion of the minority Rising trend 33% 30% 30% cares for the long-term gender relative to the total wellbeing of its staff. number of supervisory staff Sick leave absences Below 3.5% 2.9% 3.0% 2.5% Employee satisfaction > 3.5 – 3.7 – index exceeds external IV Building the future benchmark group result Leadership index exceeds > 3.7 3.8 4.0 3.9 external benchmark group result

Management and personnel Bank of Finland Annual Report • 2016 47 Management system report to the Board member responsible for the respective area. The Bank of Finland’s core processes are The Bank of Finland’s mission, vision, strategy and values (Box 8, page 45) –– monetary policy preparation provide a guide for the Bank’s activities. –– monetary policy implementation The pillars of the management system are –– influence on domestic economic policy the division of responsibilities between –– financial stability policy. Board members and the definitions of the areas of responsibility for each department Process management helps emphasise a and core process. Other key corporate working culture based on cooperation and governance tools include the objectives and fosters a customer-oriented approach to results framework, action planning, staffing operations, operational efficiency and and budgetary ceilings and the overall effectiveness. assessment of risks, as well as performance evaluations and performance appraisal Objectives and results framework discussions. Key posts within the Bank of Finland, and particularly those exercising The objectives and results framework is one management responsibilities, are filled on a of the tools for implementing the strategy. fixed-term basis. The purpose of this is to Each strategic guideline of the Bank of ensure broad-based competence and the Finland is assigned at least one measurable updating of staff practices and procedures. objective. In addition to general indicators, each department and core process is Division of responsibilities provided with indicators to guide their between Board members activities (Bank of Finland objectives and In 2016, the division of responsibilities at results framework for 2016–2018, p. 46). the Board was as follows: Achievement of the objectives is evaluated every six months. –– Governor Erkki Liikanen was responsible for monetary policy Action planning preparation, domestic economic policy and financial market issues as well as Action planning at department and core external communications. He was a process level is conducted within a member of the Governing Council and three-year timeline. The objectives are General Council of the ECB and of the further developed into agreements on European Systemic Risk Board. objectives and outcomes, signed by the –– Deputy Governor Pentti Hakkarainen heads of department and Board members bore responsibility for monetary policy each year. The agreements outline the implementation, investment activities, objectives, performance indicators and administration, legal and international major projects. The Bank of Finland’s affairs and macroprudential policy. He budget, and the personnel and training was also Chairman of the Board of the scheme as well as evaluation of operational Financial Supervisory Authority. risk management are drawn up as part of –– Member of the Board Seppo action planning. Honkapohja was responsible for scientific research, currency supply, Personnel and budget frameworks market operations and payments, personnel and risk control for Resource deployment and medium-term investment activities and monetary planning in the departments are guided by policy. personnel and operating cost frameworks. The frameworks are set annually in Departments and core processes connection with action planning for the The Bank of Finland’s activities are next three years. The procedure contributes organised across six departments and the to achieving the Bank’s strategic objective of Internal Audit unit, which is independent of being one of the most efficient EU central the departments. The heads of department banks.

48 Bank of Finland Annual Report • 2016 Management and personnel Risk management the provision and governance of risk management and the definition of the level Risk management is part of the Bank of of risk exposure rests with the Bank’s Finland’s governance framework and is also Board, but each member of staff is linked with action planning. The Bank’s responsible for the management of risks risks are divided into strategic, financial and falling within their own job remit. operational risks. Overall responsibility for

Personnel

At the end of 2016, the Bank of Finland A new employee’s immediate superior and staff numbered 376. Of this total, 97% held colleagues are responsible for their full-time and 3% part-time positions. A initiation into the subject matter of the total of 54% of the Bank’s staff were men relevant area of responsibility. Human and 46% women. The average age of the Resources staff support internal networking staff members is 46.4 years. by organising meetings between new employees and management. Bank’s work rooted in a good working atmosphere and good management Social media in recruitment In accordance with our strategy, the Bank of communications Finland cares for the long-term wellbeing of The use of social media in recruitment our staff. Regularly conducted staff surveys communications was enhanced in the indicate that employees feel at ease working autumn by introducing the LinkedIn at the Bank. The emphasis of management Careers site, which – besides announcing work is on creating a good working job openings – also provides information on atmosphere, motivation and achievement of the central bank as a workplace and on the results. The quality of management is people working here. In addition, experts monitored using a leadership index survey, were trained in the creation of LinkedIn and management work is under constant profiles. In the future, expert profiles will be development. 2016 saw a follow-up of the more visible as part of job advertisements. 360-degree assessments for the management. The Bank’s principles for Responsible summer jobs equality were updated to conform with the The Bank of Finland supports youth amendments to the Non-discrimination Act employment by annually offering summer and the Act on Equality between Women jobs to about 50 students. In 2016, the Bank and Men. took part in the nationwide Responsible Continuous renewal of professional Summer Job campaign, aimed at challenging skills and working procedures is embedded employers to provide more and better in the Bank’s values. The Bank supports summer jobs for young people. Summer professional development by, among other work at the Bank was perceived as being things, enabling participation in interna- interesting, and summer trainees found the tional committees and working groups, on tasks diverse and responsible. Team spirit courses offered within the ESCB and and the good working atmosphere were also through seminars and job rotation. much praised. Summer trainees assigned the Bank an overall job rating of 3.8 (on a scale Initial induction material may of 1 to 4). be accessed online The material for welcoming and inducting new employees was updated in spring 2016. Going forward, new employees are initiated into the Bank’s activities and employment issues through interactive online studies. The induction course is available according to a timetable that best suits each employee.

Management and personnel Bank of Finland Annual Report • 2016 49 Table 6. Human resource management highlights1 2015 2016 Staff size Head count 31.12. 378 376 Man years 402 394 Number of newly retired employees 15 13 Average effective retirement age 60.9 v 60.8 v

Staff structure Average staff age 46.3 v 46.4 v Proportion of experts and superiors 77% 81% Proportion of women 45% 46%

Salaries and bonuses Salaries in relation to market salaries at the Bank of Finland2 99% 100% Negotiated increases 16 e 0.43% Bonuses as a proportion of payroll – – Average pay for women / average pay for men 99% 99%

Competence Training costs / payroll 3.3% 3.2% Training days / man-year 5.5 5.5 Education level index3 6.0 6.1

Wellness at work Absence rate 3.0 2.5 Employee satisfaction index 3.7 –

1 Figures refer to the Bank of Finland, unless otherwise mentioned. Figures referring to the Financial Supervisory Authority are published in the FIN-FSA Annual Report. 2 The reference group in the HAY market salary survey is made up of organisations representing the banking and financial sectors, public sector, and industrial and service sectors. The Bank of Finland's remuneration policy is targeted at the median level of the HAY market salary survey for all organisations (basic salary + benefits). The survey also includes FIN-FSA's staff salaries. 3 Education level index is calculated from the basic level of education of staff. The index varies between 1 and 8.

50 Bank of Finland Annual Report • 2016 Management and personnel Budget and operating Table 7. expenses Budget for the Bank of Finland Outturn Budgeted 2016 2017 EUR m EUR m Budget for the Bank of Finland 1. Operating expenses and income EXPENSES Ongoing objectives-driven budgetary Staff expenses 32.4 32.4 guidance and human resources planning Staff-related expenses 2.7 3.4 have led to improvements in the cost-­ Other expenses 24.9 26.8 efficiency of the Bank of Finland’s DEPRECIATION 9.7 9.9 operations. The cost-benefit analysis and Total 69.7 72.4 overall assessment of projects have been Banknote acquisition costs 10.3 6.4 upgraded by introducing a separate project Banking service expenses 5.1 5.1 model. This enables assessment of aggregate Total operating expenses 85.1 83.9 project profitability from the perspective of INCOME costs, qualitative benefits and operational Banking service income 1.3 1.3 risks. Real estate 5.8 5.3 In 2016, the Bank of Finland’s Other income 1.8 1.5 Services to FIN-FSA 4.9 4.8 operating expenses totalled EUR 85.1 Total income 13.8 13.0 million (EUR 75.6 million in 2015). Net 71.3 70.9 Budgeted operating income amounted to EUR 13.8 million. The Bank’s net operating 2. Investment expenses totalled EUR 71.3 million (for Real estate investment 4.1 6.3 more information on operating expenses Head office premises 1.1 0.8 Vantaa premises 2.9 5.4 and the budget, see Table 7). Other premises 0.1 0.1 In autumn 2016, the Bank of Finland’s IT equipment and software 3.2 4.0 budgets for 2017–2019 were drawn up and, Cash handling machines 1.6 2.4 of these, the Board ratified the budget for Security equipment 1.5 1.0 Other 0.1 0.1 2017. The budgets for 2018–2019 will be ratified at a later date. Operating expenses Total investment 10.5 13.8 and related objectives included in the Due to rounding, totals/sub-totals may not add up. budgets are monitored on a regular basis. The Board evaluates operations and cost- efficiency on the basis of quarterly budgetary monitoring. Table 8. Budget for the Bank of Finland pension fund Pension fund budget Outturn Budgeted The pension fund’s operating expenses for 2016 2017 EUR m EUR m 2016 totalled EUR 29.2 million (EUR 28.5 million in 2015). Pensions paid (EUR 26.8 1. Operating expenses and income million) constituted the largest cost item. EXPENSES This comprises EUR 27.2 million in Staff expenses 0.1 0.2 Pension fund activities expenses 0.9 0.6 pensions and EUR 0.4 million in advances Pension fund real estate expenses 0.5 0.4 from the Unemployment Insurance Fund. DEPRECIATION 0.9 0.9 Operating income amounted to EUR 11.6 PENSIONS million (Table 8). Pension fund expenses are Pensions paid 26.8 27.5 estimated to increase slightly during the Total expenses 29.2 29.6 coming budgetary period. The pension INCOME fund’s operations are presented in its own Employment pension contributions 10.0 10.1 annual report. Internal rents 1.6 1.6 Total income 11.6 11.7 Net 17.6 17.9 Due to rounding, totals/sub-totals may not add up.

Management and personnel Bank of Finland Annual Report • 2016 51 Table 9. Budget for the Financial Supervisory Budget for the Financial Supervisory Authority Authority

Outturn Budgeted The Board of the Bank of Finland ratifies 2016 2017 EUR m EUR m the budget for the Financial Supervisory 1. Operating expenses and income Authority (FIN-FSA). In 2016, the FIN-FSA’s operating expenses totalled EUR EXPENSES Staff expenses 16.0 17.0 25.7 million (EUR 26.0 million in 2015). Staff-related expenses 0.9 1.2 Total income amounted to EUR 25.7 Other expenses 3.4 4.0 million, of which supervision and DEPRECIATION 0.6 0.9 processing fees accounted for EUR 23.1 SERVICES FROM million, while the Bank of Finland’s THE BANK OF FINLAND 4.9 4.8 contribution to funding was EUR 1.3 Total operating expenses 25.7 27.9 million. The surplus for the financial year FUNDING OF OPERATIONS was EUR 1.3 million. This will be taken Supervision fees 21.6 23.9 into account in the following accounting Processing fees 1.5 1.5 Bank of Finland contribution to funding 1.3 1.4 period when setting supervision and Surplus/deficit transferred from previous year 1.3 1.1 processing fees (Table 9). Investments for Total income 25.7 27.9 2016 totalled EUR 0.9 million. The FIN-FSA’s operations are presented in its Surplus transferred to next year 1.5 0.0 own annual report. Due to rounding, totals/sub-totals may not add up.

52 Bank of Finland Annual Report • 2016 Management and personnel Environment banking system and a downsized branch network, as in the Nordic countries in general, currency supply needs to be The Bank of Finland ensured that we met efficient. Given that the use of cash as a our environmental responsibilities in 2016 means of payment has steadily diminished, by deciding to introduce district cooling at the Bank of Finland has sought to our Helsinki premises and by increasing the concentrate its own activities and, in capacity of free cooling at our Vantaa cooperation with private banks and their premises. The consumption of office paper currency supply organisations, to find and the number of outputs could be solutions for maintaining a well-functioning reduced thanks to a new printing system national currency supply framework. (table 10). A central bank may seek to save the A new telephone system based on a overall cost of currency supply by, among mobile switchboard and a decision to other things, curtailing its own banknote migrate to an environment of portable sorting. This is possible only if the other workstations improved the staff’s possibili- party to currency supply has already ties to work regardless of location. Staff performed the same sorting process. Even members increasingly used their worksta- so, a central bank always carries out the tions’ video conference system for internal final sorting in currency supply regarding meetings and external contacts. banknote authenticity and fitness. We monitor the environmental impact In the Bank of Finland’s sorting for of our operations using an environmental banknote fitness, the unfit rate for euro performance indicator that is proportionate banknotes is fairly low, which indicates that to operating expenses. In 2016, for every this sorting is needlessly carried out twice. thousand euro of operating expenses, the To reduce double sorting, banks’ own

Bank generated 63.96 kg of CO2 emissions. sorted banknote packages were introduced The equivalent volume in 2015 was 67.49 in Finland as from 2008. Accordingly, the

kg of CO2 emissions. Bank of Finland’s regional branches have Central banks are responsible for their accepted for our night safes mainly own tasks within national currency supply packages of banknotes in good condition systems but also bear overall responsibility intended for direct use in ATMs. The central for the smooth functioning of national bank does not open or sort these packages, currency supply. In a demographically small but returns them to depositors the next time country like Finland, with a concentrated they order corresponding banknotes. The

Table 10. Bank of Finland's environmental impact

Volume 2014 2015 2016 Electrical energy consumption (MWh) 8,784 8,436 8,223 Heating energy consumption (MWh) 9,150 8,349 9,059 Consumption of office and publication paper (tonnes) 41 28 10

CO2 emissions from business travel (tonnes) 1,889 1,958 1,821

CO2 emissions balance (tonnes) 5,793 5,636 5,446 Source: Bank of Finland.

Management and personnel Bank of Finland Annual Report • 2016 53 imputed savings in 2016 for avoidance of unnecessary double sorting is around 90 Chart 16. million banknotes (Chart 16). Annual totals of banknotes sorted at the Bank of Finland Savings in currency supply in Finland Moving annual total, millions of notes 600 have also been generated as a result of the fact that 1 and 2 cent euro coins have not 500 been launched for active trading. These 400 smallest euro cent denominations have been minted in Finland mainly just for 300 1 numismatic purposes. The number of the 2 200 smallest euro cents not minted can be 100 estimated by a calculation where these 3 smallest denominations are assumed to 0 2002 2005 2008 2011 2014 correspond to the average share of other euro area countries, deducted by the 1. Banknotes sorted at the Bank of Finland, annual total 2. Banknotes sorted at the Bank of Finland, excl. banks’ number of the smallest denominations own sorted banknote packages minted. For calculating the cost savings, the 3. Banks’ own sorted banknote packages, annual total unit price of these smallest euro cents is Source: Bank of Finland. considered to be their nominal price. The calculation shows that the cost savings from not minting the smallest denominations have amounted to about EUR 9 million in Finland since the launch of the euro (Chart 17). The elimination of the smallest euro cent denominations has also brought significant savings in currency supply processing costs at shops, banks and profes- Chart 17. Savings from not minting 1 and 2 cent euro coins sional money handlers’ operations, albeit it EUR million is hard to present an accurate estimate of 10 these savings. 9 3 8 7 6 2 5 4 1 3 2 1 0 2002 2007 2012 1. Savings from not minting 1 cent euro coins 2. Savings from not minting 2 cent euro coins 3. Savings from not minting 1 and 2 cent euro coins Source: Bank of Finland.

54 Bank of Finland Annual Report • 2016 Management and personnel Total risk exposure

Financial asset management, monetary policy implementation and other operational activities expose the Bank of Finland to risks. These risks are managed and prepared for by risk buffers. Operational risks are identified, as far as possible, in connection with action planning and managed in daily work on a decentralised basis.

Financial assets refinancing operations accounted for around EUR 39 billion, and longer-term The Bank of Finland has approximately refinancing operations around EUR 557 EUR 17.4 billion worth of financial assets, billion of the total. Targeted longer-term consisting of foreign reserves, holdings of refinancing operations (TLTROs) gold and assets denominated in euro. The correspond, in terms of credit risk, to financial assets are exposed to exchange standard refinancing operations, but the rate risks, interest rate risks, equity risks applicable interest rate is fixed. The interest and credit risks. rate ultimately charged on borrowing under The largest fluctuations in the value of TLTRO II refinancing operations launched the financial assets are caused by exchange in 2016 depends on counterparties’ lending rate risk. This is diversified by investing in to the private sector (Table 11). the pound sterling and the Japanese yen as Under the expanded asset purchase well as the US dollar. programme (EAPP), the Eurosystem will The bulk of the Bank’s financial assets conduct monthly asset purchases of approx- are invested in short-term bonds with an imately EUR 80 billion until March 2017, average maturity at the end of 2016 of 1.8 and thereafter of approximately EUR 60 years. The interest rate risk sensitivity of US billion until December 2017 (Chart 18). dollar-denominated investments was The EAPP consists of the covered bond increased slightly during the course of 2016. purchase program 3 (CBPP3), the asset- The credit risk attached to the financial backed securities purchase programme assets is managed by rating requirements (ABSPP), the public sector purchase and limits. The aim of investments made on programme (PSPP), and the corporate international stock markets is to diversify sector purchase programme (CSPP) the risks relating to the financial assets. launched in June 2016. A total of 80% of the PSPP is Monetary policy operations implemented in such a way that the national central banks assume responsibility for the The Eurosystem’s monetary policy risks involved in the assets they have operations are implemented on a decentral- purchased. This share includes government ised basis. The operations are based on the and government-related debt. The Bank of premise that the risks and returns are Finland’s PSPP purchases mainly comprise shared jointly, with each country’s share Finnish government bonds. Purchases of determined by its capital key. However, the bonds issued by European institutions, which risks related to the first and second covered are subject to a regime of loss-sharing, bond purchase programmes (CBPP1 and 2) account for 10% of the programme. In and the public sector purchase programme addition, the ECB’s share of purchases under (PSPP) in respect of government debt are the programme is 10%. The size of the PSPP borne individually by each central bank at the end of 2016 was EUR 1,255 billion. involved. The Bank of Finland’s balance sheet included Refinancing operations are conducted around EUR 18.9 billion in Finnish with financially sound counterparties and government bonds and government-related against adequate collateral. The risks bonds purchased under this programme. inherent in these operations are managed by Under the Securities Markets haircuts and daily valuations applied to Programme (SMP), terminated in 2012, the collateral assets. At the end of 2016, main Eurosystem purchased Spanish, Irish,

Management and personnel Bank of Finland Annual Report • 2016 55 Table 11. Volumes of monetary policy operations at the end of 2016

EUR million Eurosystem Bank of Finland's calculated contribution* Refinancing operations 595,874 10,636 Covered Bond Purchase Programme 223,217 3,984 Securities Markets Programme 102,274 1,826 Asset-Backed Securities Purchase Programme 22,830 408 Public Sector Purchase Programme 1.254,635 22,395 Corporate Sector Purchase Programme 51,069 912 * Calculated as a percentage (1.785%) of total Eurosystem (incl. ECB) operations. Sources: European Central Bank and Bank of Finland.

The total volume of Eurosystem Chart 18. monetary policy operations grew by about Developments in Eurosystem balance sheet items EUR 888 billion during the course of 2016. EUR million The volume of refinancing operations 4,000 increased by around EUR 37 billion, and of 3,500 monetary policy purchase programmes by 3,000 roughly EUR 851 billion. 2,500 1 2,000 Total risk exposure on 1,500 the balance sheet 1,000 2 500 3 The Bank of Finland’s total risk exposure is 4 0 measured using well-established methods. 2011 2012 2013 2014 2015 2016 Market and credit risks to the balance sheet 1. Balance sheet items other than monetary policy items are measured by models based on the Value- 2. Securities held for monetary policy purposes at-Risk method, with particular emphasis 3. Other monetary policy operations on the worst percentage of the model 4. Longer-term refinancing operations outcomes. As statistical models fail to Source: European Central Bank. provide a full picture of the risks involved, the risk assessment is supplemented with scenario analyses and stress tests to estimate the losses that could be incurred under Italian, Greek and Portuguese government possible, but improbable scenarios. bonds. Securities reaching maturity have Total risks to the financial assets and continued to reduce the size of this purchase monetary policy operations, in annual programme. At the end of 2016, the Bank terms, amounted to EUR 2.0 billion at the of Finland’s SMP shares according to the end of 2016 (excl. gold price risk, Chart capital key were as follows, country by yy). The calculated risk figure remained country: Spain EUR 357 million, Ireland almost unchanged from the previous year. EUR 126 million, Italy EUR 957 million, As the revaluation account for gold covers Greece EUR 220 million and Portugal EUR more than half the value of the gold, its risk 165 million. Also, the total amount of the is calculated separately. The gold price risk already terminated first and second covered was EUR 0.7 billion, while the revaluation bond purchase programmes on the Bank of account for gold was EUR 1.3 billion. In Finland’s balance sheet was only EUR 186 the ‘Notes on risk management’ section in million at the end of 2016. the Financial statements (p. 89), risks

56 Bank of Finland Annual Report • 2016 Management and personnel related to gold are included in the overall assessment. Assets purchased under the expanded Chart 19. asset purchase programme are not valued at Bank of Finland’s total risk exposure, capital and market prices. Interest rate movements do, reserves excl. gold price risk and gold revaluation accounts however, affect interest income from new EUR bn asset purchases and the financing costs of 8 7 the purchase programmes. Higher financing 4 6 costs would reduce the Bank’s net interest Risks relating 5 to different income. Purchases of public sector scenarios 3 securities, in particular, increased interest 4 3 rate risk to the Bank’s monetary policy 1 2 operations in 2016. 2 At the end of 2016, the Bank’s capital 1 and reserves totalled EUR 9.4 billion. Of 0 this, the primary capital and reserve fund Average loss Items included in if the worst 1% capital and reserves accounted for EUR 2.6 billion, provisions of the model occurs (excl. pension provision) for EUR 3.9 1. Market and credit risk billion and revaluation accounts for EUR 2. Disposable provisions 3.0 billion. The Bank of Finland’s risk 3. Disposable revaluation accounts buffers were strengthened in 2016. 4. Primary capital and reserve fund Implementation of monetary policy Source: Bank of Finland. and safeguarding the stability and functioning of the financial system are core central bank tasks and may entail losses. Preparation for risks means ensuring balance sheet strength by accumulating provisions and capital resources and by Chart 20. reducing risks to financial assets, wherever Development of risks and risk buffers, excl. gold and needed. The Bank of Finland’s capital gold revaluation account adequacy is sufficient to cover the risks EUR bn arising from the exercise of its functions. 6

5 1 4

3 2 2

1

0 2011 2012 2013 2014 2015 2016

1. Provisions and disposable revaluation accounts 2. Average loss if the worst 1% occurs Source: Bank of Finland.

Management and personnel Bank of Finland Annual Report • 2016 57 58 Photo: Peter Mickelsson. Financial statements Balance sheet

EUR million 31 Dec 2016 31 Dec 2015

ASSETS

1 Gold and gold receivables 1,731 1,534

2 Claims on non-euro area residents denominated in foreign currency 7,852 7,483 Receivables from the International Monetary Fund (IMF) 2,048 1,890 Balances with banks and security investments, external loans and other external assets 5,804 5,592

3 Claims on euro area residents denominated in foreign currency 648 417

4 Claims on non-euro area residents denominated in euro 1,803 1,443

5 Lending to euro area credit institutions related to monetary policy operations denominated in euro 6,728 690 Main refinancing operations – – Longer-term refinancing operations 6,728 690

6 Other claims on euro area credit institutions denominated in euro 31 0

7 Securities of euro area residents denominated in euro 32,761 19,662 Securities held for monetary policy purposes 25,786 12,074 Other securities 6,975 7,588

8 Intra-Eurosystem claims 26,609 25,096 Participating interest in ECB 144 144 Claims equivalent to the transfer of foreign reserves 728 728 Net claims related to the allocation of euro banknotes within the Eurosystem 3,879 4,103 Other claims within the Eurosystem (net) 21,858 20,121

9 Other assets 1,341 1,088 Coins of euro area 35 32 Tangible and intangible fixed assets 131 138 Other current assets 638 657 Other 536 261

Total assets 79,505 57,414

Totals/sub-totals may not add up due to rounding.

60 Bank of Finland Annual Report • 2016 Financial statements EUR million 31 Dec 2016 31 Dec 2015

LIABILITIES

1 Banknotes in circulation 18,492 17,790

2 Liabilities to euro area credit institutions related to monetary policy operations denominated in euro 47,665 27,559 Current accounts (covering the minimum reserve system) 29,065 25,889

Deposit facility 18,600 1,670

3 Liabilities to other euro area residents denominated in euro 31 79

4 Liabilities to non-euro area residents denominated in euro 1,625 676

5 Liabilities to euro area residents denominated in foreign currency – –

6 Liabilities to non-euro area residents denominated in foreign currency – 46

7 Counterpart of special drawing rights allocated by the IMF 1,516 1,514

8 Intra-Eurosystem liabilities – –

9 Other liabilities 32 12

10 Revaluation accounts 2,982 2,762

11 Provisions 4,468 4,317

12 Capital and reserves 2,562 2,514 Primary capital 841 841 Reserve fund 1,721 1,673

13 Profit for the financial year 131 146

Total liabilities 79,505 57,414

Financial statements Bank of Finland Annual Report • 2016 61 Profit and loss account

EUR million 1 Jan–31 Dec 2016 1 Jan–31 Dec 2015

1 Interest income 483 313

2 Interest expenses –14 –3

3 NET INTEREST INCOME 469 310

4 Foreign exchange rate differences 27 26

5 Securities price differences 74 47

Valuation losses related to currencies and securities –49 –19

6 Change in foreign exchange rate and price difference provision –53 –54

NET RESULT OF FINANCIAL OPERATIONS, WRITE-DOWNS AND RISK PROVISIONS 469 310

7 Income and expenses on fees and commissions –2 –1

8 Net result of pooling of monetary income –190 –38

9 Share in ECB profit 5 3

10 Other central banking income 20 18

CENTRAL BANKING PROFIT 302 291

11 Other income 31 31

Operating expenses –101 –76 12 Staff costs –48 –49

13 Pension fund contribution – 17

14 Administrative expenses –32 –30

15 Depreciation of fixed assets –10 –9

16 Banknote procurement costs –10 –4

17 Other expenses –0 –0

OPERATING PROFIT 232 246

Profit for the pension fund – – 18 Income of the pension fund 32 52

19 Expenses of the pension fund –32 –52

20 Changes in provisions –101 –100

21 PROFIT FOR THE FINANCIAL YEAR 131 146

62 Bank of Finland Annual Report • 2016 Financial statements The Board’s proposal on the distribution of profit

The Board proposes to the Parliamentary Supervisory Council that EUR 39,569,338.99 of the profit of EUR 130,569,338.99 be transferred to the reserve fund in accordance with section 21, subsection 2 of the Act on the Bank of Finland and that the remaining EUR 91,000,000.00 be made available for the needs of the State.

Helsinki, 22 February 2017

THE BOARD OF THE BANK OF FINLAND

Erkki Liikanen, Chairman

Seppo Honkapohja Marja Nykänen Olli Rehn

./. Mika Pösö

Financial statements Bank of Finland Annual Report • 2016 63 Accounting conventions

1. General accounting conventions The Bank of Finland observes the economic-based accounting principles and techniques adopted by the Governing Council of the ECB, and the Bank’s annual accounts are drawn up in accordance with these harmonised principles. In accordance with section 11 of the Act on the Bank of Finland, the Parliamentary Supervisory Council confirms, on the proposal of the Board, the principles applied in drawing up the annual accounts. The Bank of Finland’s profit and loss account also comprises incomes and expenses of the Bank’s pension fund and of the Financial Supervisory Authority. The pension fund’s investment portfolio is valued monthly at the market price of the last day of the month.

2. Revaluation of items denominated in foreign currency and gold Items denominated in foreign currency and gold are converted into euro at the exchange rate prevailing on the balance sheet date. Foreign currency-denominated items have been revaluated on a currency-by-currency basis. Revaluation differences related to foreign exchange rate movements and securities price movements are treated separately. Unrealised gains are recorded in revaluation accounts. Unrealised losses are taken to the profit and loss account if they exceed previous corresponding unrealised revaluation gains registered in the revaluation accounts. Unrealised losses taken to the profit and loss account are not reversed against any future unrealised gains in subsequent years. In the case of gold, no distinction is made between price and exchange rate differences; rather, a single revaluation is made. Realised gains and losses related to foreign exchange rate movements during the financial year are calculated on the basis of the daily net average cost method. Foreign exchange rates used in the financial statements are presented in the table below.

Currency 2016 2015 US dollar 1.0541 1.0887 Japanese yen 123.4000 131.0700 Swedish krona 9.5525 9.1895 Swiss franc 1.0739 1.0835 Pound sterling 0.8562 0.7340 Canadian dollar 1.4188 1.5116 Special Drawing Rights (SDR) 0.7846 0.7857 Gold 1,098.0460 973.2250

3. Valuation and amortisation of securities Income and expenses are recognised in the period in which they are earned or incurred. Realised income and expenses are entered in the profit and loss account. The difference between the acquisition price and nominal value of securities is entered as income or expense over the maturity of the security. Gains and losses related to securities price movements have been calculated using the average cost method. Unrealised gains are recorded in revaluation accounts. Unrealised losses are taken to the profit and loss account if they exceed previous corresponding unrealised revaluation gains registered in the revaluation accounts. Unrealised losses taken to the profit and loss account are not reversed against any future unrealised gains in subsequent years. Both euro-denomi- nated and foreign currency-denominated securities are valued on a security-by-security basis. If unrealised losses are entered in the profit and loss account in respect of a security or a currency, the average price of the security or the net average rate of the currency is adjusted correspondingly before the beginning of the next financial year. Reverse repurchase agreements, or reverse repos, are recorded as collateralised inward deposits on the assets side of the balance sheet. Repurchase agreements, or repos, are recorded as collateralised outward loans on the liabilities side of the balance sheet. Securities sold under repurchase agreements remain on the Bank’s balance sheet.

64 Bank of Finland Annual Report • 2016 Financial statements The pension fund’s investment portfolios are valued monthly at the market price of the last day of the month.

Securities held for monetary policy purposes Securities currently held for monetary policy purposes are accounted for at amortised cost subject to impairment, regardless of the holding intention.

Securities other than those held for monetary policy purposes Marketable securities and similar assets are valued either at the mid-market prices or on the basis of the relevant yield curve prevailing on the balance sheet date, on a security-by-security basis. For 2016, mid-market prices on 30 December 2016 were used.

4. Accounting conventions relating to intra-ESCB balances Intra-Eurosystem balances result from cross-border payments in the EU that are settled in central bank money in euro. These transactions are for the most part initiated by private entities. They are primarily settled in TARGET2 – the Trans-European Automated Real-time Gross settlement Express Transfer system. These transactions give rise to bilateral balances in the TARGET2 accounts of EU central banks. These bilateral balances are then assigned to the ECB on a daily basis, leaving each national central bank (NCB) with a single net bilateral position vis-à-vis the ECB only. Intra-Eurosystem balances of the Bank of Finland vis-à-vis the ECB arising from TARGET2, as well as other intra-Eurosystem balances denominated in euro (e.g. interim profit distributions to NCBs, monetary income results), are presented on the balance sheet of the Bank of Finland as a single net asset or liability position and disclosed under ‘Other claims within the Eurosystem (net)’. Intra-ESCB balances versus non-euro area NCBs not arising from TARGET2 are disclosed either under ‘Claims on non-euro area residents denominated in euro’ or ‘Liabilities to non-euro area residents denominated in euro’. Intra-Eurosystem balances arising from the Bank of Finland’s participating interest in the ECB are reported under ‘Participating interest in ECB’. Intra-Eurosystem balances arising from the allocation of euro banknotes within the Eurosystem are included as a single net asset under ‘Net claims related to the allocation of euro banknotes within the Eurosystem’ (see the section ‘Banknotes in circulation’). Intra-Eurosystem balances arising from the transfer of foreign reserve assets to the ECB by NCBs joining the Eurosystem are denominated in euro and reported under ‘Claims equivalent to the transfer of foreign reserves’.

5. Valuation of fixed assets Fixed assets have been valued at acquisition price less depreciation. Depreciation is calculated on a straight-line basis over the expected economic lifetime of an asset, starting from the second calendar month following acquisition. The counteritem of buildings and land capitalised in the 1999 balance sheet at market prices is the revaluation account. Depreciation in respect of buildings and land has been entered by adjusting the revaluation account downwards so that depreciation does not affect the Bank’s income or expense.

The economic lifetimes of assets are calculated as follows: – Computers, related hardware and software, and motor vehicles: 4 years – Machinery and equipment: 10 years – buildings: 25 years.

Fixed assets with a value of less than EUR 10,000 are written off in the year of acquisition.

Financial statements Bank of Finland Annual Report • 2016 65 6. Banknotes in circulation The ECB and the 19 euro area NCBs, which together comprise the Eurosystem, issue euro banknotes.1 The total value of euro banknotes in circulation is allocated to the NCBs on the last banking day of each month in accordance with the banknote allocation key.2 The ECB has been allocated a share of 8% of the total value of euro banknotes in circulation, whereas the remaining 92% has been allocated to NCBs according to the banknote allocation key. This is disclosed under the balance sheet liability item ‘Banknotes in circulation’. The difference between the value of euro banknotes allocated to each NCB in accordance with the banknote allocation key and the value of euro banknotes that it actually puts into circulation also gives rise to remunerated intra-Eurosystem balances. These claims or liabilities, which incur interest3, are disclosed under the sub-item ‘Intra-Eurosystem claims/liabilities: Net claim/ liability related to the allocation of euro banknotes within the Eurosystem’. In the Bank of Finland’s balance sheet, the item is on the asset side. The monetary income on euro banknotes is allocated in proportion to the NCBs’ paid-up shares in the capital of the ECB. The interest income and expense on these balances is cleared through the accounts of the ECB and is disclosed under ‘Net interest income’. The ECB’s capital key is adjusted every five years and whenever a new Member State joins the European Union. The income accruing to the ECB on the share of 8% of the total value of euro banknotes in circulation is generally distributed to the NCBs.4

7. Changes in accounting conventions There were no changes in accounting conventions in the financial year 2016.

8. Monetary income Monetary income accruing to NCBs in the performance of monetary policy functions in the European System of Central Banks is calculated and allocated to NCBs in accordance with the ESCB Statute and any decisions by the ECB’s Governing Council.

Interim profit distribution The Governing Council of the ECB has decided that the seigniorage income of the ECB, which arises from the 8% share of euro banknotes allocated to the ECB, and the ECB’s (net) income arising from securities purchased under the a) securities markets programme, b) the third covered bond purchase programme, c) asset-backed securities purchase programme and d) the public sector purchase programme shall be due in full to the NCBs in the same financial year it accrues. Unless otherwise decided by the Governing Council, the ECB distributes this income in January of the following year in the form of an interim distribution of profit5. The amount of the ECB’s income on euro banknotes in circulation may be reduced in accordance with any decision by the Governing Council in respect of expenses incurred by the ECB in connection with the issue and handling of euro banknotes. Before the end of the year the Governing Council decides whether all or part of the ECB’s income arising from securities purchased under the above-mentioned programmes and, if necessary, all or part of the ECB’s income on euro banknotes in circulation should be retained to the extent necessary to ensure that the amount of the distributed income does not exceed the ECB’s net profit for that year. The Governing Council may also decide to transfer all or part of the ECB’s income arising from securities held for monetary policy purposes and, if necessary, all or part of the ECB’s income on euro banknotes in circulation to a provision for foreign exchange rate, interest rate, credit and gold price risks.

1 Decision of the European Central Bank of 13 December 2010 on the issue of euro banknotes (ECB/2010/29), OJ L 35, 9.2.2011, p. 26. 2 ‘Banknote allocation key’ means the percentages that result from taking into account the ECB’s share in the total euro banknote issue and applying the subscribed capital key to the NCBs’ share in that total. 3 Decision (EU) 2016/2248 of the European Central Bank of 3 November 2016 on the allocation of monetary income of the national central banks of Member States whose currency is the euro (ECB/2016/36). 4 Decision (EU) 2015/298 of the European Central Bank of 15 December 2014 on the interim distribution of the income of the European Central Bank (ECB/2014/57) (recast), OJ L 53, 25.2.2015, p. 24. 5 Decision (EU) 2015/298 of the European Central Bank of 15 December 2014 on the interim distribution of the income of the European Central Bank (ECB/2014/57) (recast), OJ L 53, 25.2.2015, p. 24.

66 Bank of Finland Annual Report • 2016 Financial statements Key for subscription of the ECB’s capital from 1 January 2015 ESCB, capital key, % Eurosystem, capital key, % Nationale Bank van België/Banque Nationale de Belgique 2.4778 3.52003 Deutsche Bundesbank 17.9974 25.56743 Eesti Pank 0.1928 0.27390 Banc Ceannais na hÉireann/Central Bank of Ireland 1.1607 1.64892 Bank of Greece 2.0332 2.88842 Banco de España 8.8409 12.55961 Banque de France 14.1793 20.14334 Banca d’Italia 12.3108 17.48904 Central Bank of Cyprus 0.1513 0.21494 Latvijas Banka 0.2821 0.40076 Lietuvos bankas 0.4132 0.58700 Banque centrale du Luxembourg 0.2030 0.28839 Bank Ċentrali ta’ Malta/Central Bank of Malta 0.0648 0.09206 De Nederlandsche Bank 4.0035 5.68748 Oesterreichische Nationalbank 1.9631 2.78883 Banco de Portugal 1.7434 2.47672 Banka Slovenije 0.3455 0.49083 Národná banka Slovenska 0.7725 1.09743 Suomen Pankki – Finlands Bank 1.2564 1.78487 Subtotal Eurosystem 70.3916 100.0000 Българска народна банкаа (Bulgarian National Bank) 0.8590 Česká národní banka 1.6075 Danmarks Nationalbank 1.4873 Hrvatska narodna banka 0.6023 Magyar Nemzeti Bank 1.3798 Narodowy Bank Polski 5.1230 Banca Naţională a României 2.6024 Sveriges riksbank 2.2729 Bank of England 13.6743 Subtotal for non-euro area NCBs 29.6084 Total 100.0000

9. Pension fund In 2001 the decision was made to create a pension fund in the Bank of Finland’s balance sheet for the management of the Bank’s pension liability. The purpose of this measure, which came into force from the beginning of 2002, is to ensure that the funds related to the coverage of the pension liability are invested in a lucrative manner. A separate annual report will be prepared on the pension fund of the Bank of Finland. The assets of the pension fund are recorded in the Bank of Finland’s balance sheet item ‘Other assets’. The ECB guideline on accounting and financial reporting does not regulate accounting for the pension fund. The pension fund’s investments are valued at market price, and revaluations are recognised in profit or loss. The fund’s financial statements are drafted using market prices prevailing in the last day of the year. The pension fund’s real estate is recorded in the balance sheet at value prevailing on transfer date less annual depreciation. If the balance sheet value of real estate has been covered by revaluation, the corresponding depreciation is recorded by reversing the revaluation so that depreciation has no impact on the pension fund’s income or expense.

10. Recording of provisions Provisions can be made in the annual accounts, if they are necessary for safeguarding the real value of the Bank’s funds or for smoothing out variations in profit and loss arising from changes in exchange rates or market value of securities. Provisions can be made, as necessary, to cover the Bank’s pension liabilities.

11. Off-balance sheet commitments Gains and losses arising from off-balance sheet items are treated in the same manner as gains and losses arising from on-balance sheet items. Forward foreign exchange transactions are taken into account when the net average cost of a currency position is calculated.

Financial statements Bank of Finland Annual Report • 2016 67 Notes on the balance sheet

Assets

1. Gold and gold receivables The Bank’s holdings of gold total 1,576,487 troy ounces (1 troy ounce = 31.103 g). In the annual accounts, gold has been valued at market price. At the beginning of 1999 the Bank of Finland – and the other national central banks (NCBs) participating in the Eurosystem – transferred about 20% of its gold holdings to the ECB.

Gold 31 Dec 2016 31 Dec 2015 Holdings (troy ounces, million) 1.6 1.6 Price: EUR per troy ounce 1,098.0 973.2 Market price (EUR m) 1,731.1 1,534.3 Change in market value (EUR m) 196.8 –22.9

2. Claims on non-euro area residents denominated in foreign currency The item consists of claims on non-euro area residents denominated in foreign currency and included in the Bank’s foreign reserves, and holdings of special drawing rights (SDRs) allocated by the International Monetary Fund (IMF).

2.1 Receivables from the International monetary fund (IMF)

Breakdown of receivables from the IMF denominated in foreign currency 31 Dec 2016 31 Dec 2015 EUR m SDR m EUR m SDR m Reserve tranche in the IMF 357.6 280.5 181.8 142.8 SDRs 1,430.4 1,122.2 1,429.8 1,123.4 Other receivables from the IMF 260.0 204.0 278.7 219.0 Total 2,047.9 1,606.7 1,890.3 1,485.2

EUR/SDR exchange rate in financial years 2015 and 2016 2016 2015 End-March 0.8080 0.7794 End-June 0.7950 0.7954 End-September 0.7998 0.7986 End-December 0.7846 0.7857

On 26 January 2016, the IMF increased its quotas. As a result, Finland’s quota in the IMF increased to SDR 2,410.6 million at the end of 2016 (2015: SDR 1,263.8 million). The reserve tranche is the part of the Bank’s quota that has been paid to the IMF in foreign currency. Another part of the quota was formerly paid to the IMF in Finnish markka. The IMF has lent this part back to the Bank of Finland. The net effect of the Finnish markka quota on the Bank’s balance sheet is zero, since the above-mentioned receivables and the liability are included in the same balance sheet item. The Bank of Finland’s SDR allocation amounts to EUR 1,430.4 million. The SDRs are reserve assets created and allocated by the IMF to its member countries. They are used in currency transac- tions as normal currency units. The value of ‘Receivables from the IMF’ changes on the basis of foreign exchange transactions between the member countries. In addition, its value is affected by interests earned and paid as well as remuneration on the Bank’s claims in the IMF. The Bank of Finland’s receivables from the IMF total EUR 2,047.9 million.

68 Bank of Finland Annual Report • 2016 Financial statements In summer 2010, the Accounting and Monetary Income Committee (AMICO) of the ESCB made a decision on the treatment of SDR hedging trades which differs from the general currency-specific valuation principle. Sales of SDR component currencies made for hedging against the SDR exchange rate risk are regarded as reductive items in calculating the amount and market valuation of SDR items. Hence, such sales do not decrease the amount of component currencies and do not have an effect on the market valuation of the respective currencies. In 2016, the Bank of Finland discontinued SRD hedging. As a result, receivables from the IMF increased from the previous year.

2.2. Balances with banks and security investments, external loans and other external assets This item includes foreign currency-denominated bank deposits and security investments, as well as external loans and other external assets denominated in foreign currency.

Breakdown of claims on non-euro area residents denominated in foreign currency 31 Dec 2016 31 Dec 2015 Change EUR m EUR m EUR m Deposits 85.1 92.8 –7.7 Coupon papers 4,735.9 4,830.2 –94.2 Discount papers 99.2 628.0 –528.8 Other 884.2 41.3 842.9 Total 5,804.4 5,592.2 212.2

Currency breakdown of securities of non-euro area residents denominated in foreign currency 31 Dec 2016 31 Dec 2015 Currency EUR m % EUR m % Pound sterling 458.1 9.5 777.2 14.2 US dollar 4,109.6 85.0 4,161.0 76.2 Japanese yen 267.5 5.5 520.0 9.5 Total 4,835.2 100.0 5,458.2 100.0

Remaining maturity of securities of non-euro area residents denominated in foreign currency 31 Dec 2016 31 Dec 2015 Maturity EUR m % EUR m % Up to 1 year 1,158.7 24.0 1,391.0 25.5 Over 1 year 3,676.4 76.0 4,067.2 74.5 Total 4,835.2 100.0 5,458.2 100.0

3. Claims on euro area residents denominated in foreign currency This item consists of foreign currency-denominated deposits and securities, a s well as other claims on euro area residents denominated in foreign currency.

Breakdown of claims on euro area residents denominated in foreign currency 31 Dec 2016 31 Dec 2015 Change EUR m EUR m EUR m Deposits – – – Coupon papers 716.1 441.0 275.2 Discount papers – – – Other –68.1 –23.7 –44.4 Total 648.0 417.2 230.8

Financial statements Bank of Finland Annual Report • 2016 69 Currency breakdown of securities of euro area residents denominated in foreign currency 31 Dec 2016 31 Dec 2015 Currency EUR m % EUR m % Pound sterling 202.4 28.3 127.8 29.0 US dollar 513.8 71.7 313.1 71.0 Total 716.1 100.0 441.0 100.0

Remaining maturity of securities of euro area residents denominated in foreign currency 31 Dec 2016 31 Dec 2015 Maturity EUR m % EUR m % Up to 1 year 185.4 25.9 228.8 51.9 Over 1 year 530.7 74.1 212.1 48.1 Total 716.1 100.0 441.0 100.0

4. Claims on non-euro area residents denominated in euro This item includes euro-denominated deposits with non-euro area banks, coupon bonds and discount papers issued outside the euro area as well as other euro-denominated claims.

Claims on non-euro area residents denominated in euro 31 Dec 2016 31 Dec 2015 Change EUR m EUR m EUR m Deposits 381.6 144.9 236.7 Coupon papers 1,421.2 1,298.1 123.1 Discount papers – – – Other 0.1 0.2 –0.1 Total 1,802.9 1,443.2 359.7

Remaining maturity of securities of non-euro area residents denominated in euro 31 Dec 2016 31 Dec 2015 Maturity EUR m % EUR m % Up to 1 year 388.6 27.3 566.3 43.6 Over 1 year 1,032.7 72.7 731.8 56.4 Total 1,421.2 100.0 1,298.1 100.0

5. Lending to euro area credit institutions related to monetary policy operations denominated in euro This item includes monetary policy instruments used by the Bank of Finland to implement monetary policy as part of the Eurosystem. The item consists of interest-bearing credit to Finnish credit institutions, and the amount recorded is determined by the credit institutions’ liquidity needs. The Eurosystem’s total claims on monetary policy operations amount to EUR 595,873 million, of which the Bank of Finland holds EUR 6,728.3 million on its balance sheet. In accordance with Article 32.4 of the ESCB Statute, any risks from monetary policy operations, if they were to materialise, should eventually be shared in full by the Eurosystem NCBs, in proportion to the prevailing ECB capital key shares. Losses can only materialise if both the counterparty fails and the recovery of funds received from the resolution of the collateral provided by the counterparty is not sufficient. It should be noted that for specific collateral which can be accepted by NCBs at their own discretion, risk sharing has been excluded by the Governing Council of the ECB.

70 Bank of Finland Annual Report • 2016 Financial statements 5.1 Main refinancing operations Main refinancing operations (MROs) are liquidity providing reverse transactions which are executed with a weekly frequency and a maturity of one week. They are conducted as fixed rate tender procedures. Main refinancing operations play a key role in achieving the aims of steering interest rate, managing market liquidity and signalling the monetary policy stance.

5.2 Longer-term refinancing operations These operations (LTROs) aim to provide counterparties with additional longer-term refinancing. In 2016 operations were conducted with maturities equal to the reserve maintenance period and with maturities of 3–48 months. The operations were conducted at fixed rate with allotment of the total amount bid. Additionally, in March 2016 the Governing Council introduced a new series of targeted longer-term refinancing operations (TLTRO II). These operations have a four-year maturity, with a possibility of repayment after two years. The applicable interest rate for TLTRO II operations depends on the individual lending benchmark of the respective counterparty between the date of allotment and January 2018. The actual rate will be set in 2018 and will be between the MRO rate and the deposit facility rate at the time of the allotment. Given that the actual rate is only known in 2018 and a reliable estimate is not possible at this juncture, the deposit facility rate has been used for calculating the TLTRO II interest for 2016, as this is deemed a prudent approach.

5.3 Fine-tuning reverse operations Fine-tuning reverse operations aim to regulate the market liquidity situation and steer interest rates, particularly to smooth the effects on interest rates caused by unexpected market fluctu- ations. Owing to their nature, they are executed on an ad-hoc basis.

5.4 Structural reverse operations These are reverse open-market transactions through standard tenders to enable the Eurosystem to adjust its structural liquidity position vis-à-vis the financial sector.

5.5 Marginal lending facility Counterparties may use the marginal lending facility to obtain overnight liquidity from NCBs against eligible assets.

5.6 Credits related to margin calls This item refers to cash paid to counterparties in those instances where the market value of the collateral exceeds an established trigger point implying an excess of collateral with respect to outstanding monetary policy operations.

Lending to euro area credit institutions related to monetary policy operations denominated in euro 31 Dec 2016 31 Dec 2015 Change EUR m EUR m EUR m Main refinancing operations – – – Longer-term refinancing operations 6,728.3 690.3 6,038.0 Fine-tuning reverse operations – – – Structural reverse operations – – – Marginal lending facility – – – Credits related to margin calls – – – Total 6,728.3 690.3 6,038.0

Financial statements Bank of Finland Annual Report • 2016 71 6. Other claims on euro area credit institutions denominated in euro This item consists of euro-denominated deposits and balances with euro area credit institutions.

31 Dec 2016 31 Dec 2015 Change EUR m EUR m EUR m Current accounts 0.1 0.2 –0.1 Reverse repurchase agreements 30.6 – 30.6 Emergency Liquidity Assistance – – – Total 30.8 0.2 30.5

7. Securities of euro area residents denominated in euro In order to report securities held for monetary policy purpose separately, the item ‘Securities of euro area residents denominated in euro’ has been divided into two sub-positions: ‘Securities held for monetary policy purposes’ and ‘Other securities’.

7. 1 Securities held for monetary policy purposes As at 31 December 2016 this item consisted of securities acquired by the Bank of Finland within the scope of the three covered bond purchase programmes6, the securities markets programme (SMP)7, the public sector purchase programme (PSPP)8 and the corporate sector purchase programme (CSPP)9. Purchases under the first covered bond purchase programme (CBPP1) were completed on 30 June 2010, while the second covered bond purchase programme (CBPP2) ended on 31 October 2012. The SMP was terminated on 6 September 2012. In 2016 the Eurosystem programmes constituting the expanded asset purchase programme (EAPP)10, i.e. the third covered bond purchase programme (CBPP3)11, the asset- backed securities purchase programme (ABSPP)12 and the public sector purchase programme (PSPP)13, were supplemented with the corporate sector purchase programme (CSPP)14 as a fourth component. Under this programme, NCBs may purchase investment-grade euro- denominated bonds issued by non-bank corporations established in the euro area. From April 2016 until March 2017, the combined monthly EAPP purchases by the NCBs and the ECB increased from EUR 60 billion to EUR 80 billion on average. In December 2016, the Governing Council decided to continue the net EAPP purchases after March 2017 at a monthly pace of EUR 60 billion until the end of December 2017 or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If, in the meantime, the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the programme in terms of size and/or duration. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the EAPP.

6 Decision ECB/2009/16 of 2 July 2009 on the implementation of the covered bond purchase programme (OJ L 175, 4.7.2009, p. 18); decision ECB/2011/17 of 3 November 2011 on the implementation of the second covered bond purchase programme (OJ L 297, 16.11.2011, p. 70) and decision ECB/2014/40 of 15 October 2014 on the implementation of the third covered bond purchase programme (OJ L 335, 22.11.2014, p. 22). 7 Decision ECB/2010/5 of 14 May 2010 establishing a securities markets programme (OJ L 124, 20.5.2010, p. 8). 8 Decision ECB/2015/10 of 4 March 2015 on a secondary markets public sector asset purchase programme (OJ L 121, 14.5.2015, p. 20), as amended. 9 Decision ECB/2016/16 of 1 June 2016 establishing a corporate sector purchase programme (OJ L 157, 15.6.2016, p. 28). 10 Further details for the EAPP can be found on the ECB’s website. [https://www.ecb.europa.eu/mopo/implement/omt/html/ index.en.html.] 11 Decision ECB/2014/40 of 15 October 2014 on the implementation of the third covered bond purchase programme (OJ L 335, 22.11.2014, p. 22). 12 Decision ECB/2014/45 of 19 November 2014 on the implementation of the asset-backed securities purchase programme, as amended. 13 Under this programme, the ECB and the NCBs may purchase, in the secondary market, euro-denominated securities issued by euro area central, regional or local governments, recognised agencies located in the euro area and international organisations and multilateral development banks located in the euro area. 14 Under this programme, NCBs may purchase investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area.

72 Bank of Finland Annual Report • 2016 Financial statements The securities purchased under all of these programmes are valued on an amortised cost basis subject to impairment (see ‘Valuation and amortisation of securities’ under ‘Accounting conventions’). The amortised cost of the securities held by the Bank of Finland, as well as their market value (which is not recorded on the balance sheet or in the profit and loss account but is provided for comparison purposes only), are as follows:

Securities held for monetary policy purposes 31 Dec 2016 31 Dec 2015 Change EUR m EUR m EUR m Balance Market Balance Market Balance Market sheet value sheet value sheet value value value value First covered bond purchase programme (CBPP1) 15.1 15.4 74.2 75.8 –59.1 –60.4 Second covered bond purchase programme (CBPP2) 170.7 178.2 185.8 196.2 –15.1 –18.0 Third covered bond purchase programme (CBPP3) 3,603.4 3,660.8 2,537.9 2,534.5 1,065.5 1,126.3 Securities markets programme (SMP) 1,606.0 1,784.9 1,972.8 2,203.0 –366.8 –418.1 Public sector asset purchase programme (PSPP sovereign) 18,902.4 19,140.1 7,303.5 7,270.3 11,598.90 11,869.9 Public sector asset purchase programme (PSPP supra) – – – – – – Asset-backed securities purchase programme (ABSPP) – – – – – – Corporate sector purchase programme (CSPP) 1,488.2 1,473.4 – – 1,488.2 1,473.4 Total 25,785.7 26,252.9 12,074.1 12,279.7 13,711.5 13,973.2

The Governing Council assesses on a regular basis the financial risks associated with the securities held under these programmes. Annual impairment tests are conducted on the basis of the estimated recoverable amounts as at the year-end and are approved by the Governing Council. In accordance with Article 32.4 of the ESCB Statute, losses from holdings of securities purchased under the SMP, CBPP3 and CSPP as well as securities of supranational organisa- tions (supra) purchased under the PSPP, if they were to materialise, are shared in full by the Eurosystem NCBs, in proportion to the prevailing ECB capital key shares. The following table shows, for each programme, total holdings of Eurosystem NCBs and the Bank of Finland’s share held on the balance sheet.

Held by NCBs On the Bank of Finland’s balance sheet 31 Dec 2016 31 Dec 2015 31 Dec 2016 31 Dec 2015 EUR m EUR m EUR m EUR m Securities markets programme (SMP) 94,802.9 114,080.0 1,606.0 1,972.8 Third covered bond purchase programme (CBPP3) 186,965.4 131,882.8 3,603.4 2,537.9 Public sector asset purchase programme (PSPP supra) 139,639.0 59,759.6 – – Corporate sector purchase programme (CSPP) 51,069.3 – 1,488.2 – Total 472,476.6 305,722.3 6,697.5 4,510.7

As a result of impairment tests of monetary policy securities conducted as at 31 December 2016, the Governing Council decided that all future cash flows on these securities are expected to be received.

Financial statements Bank of Finland Annual Report • 2016 73 7.2 Other securities This item includes coupon bonds and discount papers issued in the euro area as well as investments in equity funds located in the euro area.

Breakdown of other securities of euro area residents denominated in euro 31 Dec 2016 31 Dec 2015 Change EUR m EUR m EUR m Coupon papers 5,232.6 6,128.1 –895.5 Discount papers 1,451.1 1,328.1 123.0 Equity funds 291.8 132.2 159.6 Total 6,975.5 7,588.3 –612.8

Remaining maturity of other securities of euro area residents denominated in euro 31 Dec 2016 31 Dec 2015 Maturity EUR m % EUR m % Up to 1 year 2,893.7 43.3 3,291.2 44.1 Over 1 year 3,790.1 56.7 4,164.9 55.9 Total 6,683.7 100.0 7,456.1 100.0

8. Intra-Eurosystem claims

8.1 Participating interest in ECB Pursuant to Article 28 of the ESCB Statute, the NCBs are the sole subscribers to the capital of the ECB. Subscriptions depend on shares which are fixed in accordance with Article 29.3 of the ESCB Statute and which are subject to adjustment every five years. The share in the ECB’s capital of each NCB participating in the Eurosystem is determined on the basis of a so-called capital key. The capital key is calculated relative to the population and gross domestic product of each country. It is adjusted every five years and whenever new members join the EU. The Bank of Finland’s percentage share in the ECB’s capital has been 1.2564 % since 1 January 2015.

8.2 Claims equivalent to the transfer of foreign reserves Item ‘Claims equivalent to the transfer of foreign reserves’ includes the share of foreign reserve assets, EUR 728.1 million, transferred by the Bank of Finland to the ECB when Finland joined the Eurosystem. These claims are denominated in euro at a value fixed at the time of their transfer. The claims are remunerated at the latest available marginal rate for the Eurosystem’s main refinancing operations, adjusted to reflect a zero return on the gold component.

8.3 Net claims related to the allocation of euro banknotes within the Eurosystem Net claim related to the allocation of euro banknotes within the Eurosystem consists of a so-called CSM item (Capital Share Mechanism) relating to the subscription of ECB’s capital, less the so-called ECB issue figure. The amount of euro banknotes in circulation under the CSM is adjusted in the balance sheet to correspond to the ECB’s capital key. The figure for ECB issue represents the ECB’s share (8%) of euro banknotes in circulation. For both figures, the counter entry is recorded under the balance sheet liability item ‘Banknotes in circulation’.15 At the end of 2016, the balance sheet item totalled EUR 3,878.6 million (EUR 4,102.8 million in 2015). The decrease in comparison to 2015 was due to the increase of 6.3% in banknotes put into circulation by the Bank of Finland, while banknotes in circulation in the

15 According to the accounting regime chosen by the Eurosystem on the issue of euro banknotes, a share of 8% of the total value of the euro banknotes in circulation is allocated to the ECB on a monthly basis. The remaining 92% of the value of the euro banknotes in circulation are allocated to the NCBs also on a monthly basis, whereby each NCB shows in its balance sheet a share of the euro banknotes issued corresponding to its paid-up share in the ECB’s capital. The difference between the value of the euro banknotes allocated to the NCB according to the aforementioned accounting regime, and the value of euro banknotes put into circulation, is recorded as ‘Net claims/liabilities related to the allocation of euro banknotes within the Eurosystem’.

74 Bank of Finland Annual Report • 2016 Financial statements Eurosystem as a whole only increased by 3.8% from 2015. The remuneration of these claims is calculated at the latest available marginal rate for the Eurosystem’s main refinancing operations.

8.4 Other claims within the Eurosystem (net) or liability item Other liabilities within the Eurosystem (net)

Other claims/liabilities within the Eurosystem (net) 31 Dec 2016 31 Dec 2015 Change EUR m EUR m EUR m Due to/from ECB in respect of TARGET2 (including balances held with Eurosystem banks through correspondent accounts) 22,031.0 20,144.3 1,886.7 Net result of pooling of monetary income –189.9 –38.2 –151.7 Due from ECB in respect of the ECB’s interim profit distribution 17.2 14.5 2.8 Other claims/(liabilities) within the Eurosystem (net) – – – Total 21,858.4 20,120.6 1,737.7

The balance of EUR 21,858.4 million as at 31 December 2016 consisted of three components: 1) the position of the Bank of Finland vis-à-vis the ECB in respect of the transfers issued and received through TARGET2 by the ESCB national central banks, including the ECB, plus the balances held with Eurosystem central banks through correspondent accounts; 2) the position vis-à-vis the ECB in respect of the pooling and allocation of monetary income within the Eurosystem pending settlement; 3) the Bank of Finland’s position vis-à-vis the ECB in respect of the ECB’s interim profit distribution and any amounts receivable or refundable. The year-end net transfers via TARGET2 had a credit balance of EUR 22,031.0 million. The remuneration of this position is calculated daily at the marginal interest rate of Eurosystem main refinancing operations. The position vis-à-vis the ECB in respect of the annual pooling and allocation of monetary income within the Eurosystem NCBs had a debit balance of EUR –189.9 million at year-end (see ‘Net result of pooling of monetary income’ in the notes on the profit and loss account). With respect to 2016, the Governing Council decided to distribute EUR 966 million from the ECB’s income derived from banknotes in circulation, the SMP-related security portfolio and the EAPP (see ‘Interim profit distribution’ under ‘Accounting conventions’). The Bank’s share amounted to EUR 17.2 million.

9. Other assets This item consists of the Bank of Finland’s holdings of euro coins, fixed assets (buildings, machinery and equipment) and investment assets (shares and other equity). The item also includes pension fund asset and investment items, valuation results of off-balance sheet items, accruals and other assets.

Tangible fixed assets 31 Dec 2016 31 Dec 2015 Change Book value EUR m EUR m EUR m Land 8.5 8.5 – Buildings 100.9 107.2 –6.3 Machinery and equipment 11.1 8.6 2.4 Art and numismatic collection 0.5 0.5 0.0 Total 121.0 124.9 –3.9

Financial statements Bank of Finland Annual Report • 2016 75 Intangible fixed assets 31 Dec 2016 31 Dec 2015 Change Book value EUR m EUR m EUR m IT systems 10.5 13.3 –2.8 Total 10.5 13.3 –2.8

Other holdings and sundry assets 31 Dec 2016 31 Dec 2015 Change EUR m EUR m EUR m Coins of euro area 35.2 31.8 3.4 Shares and other equity 25.1 24.9 0.1 Pension fund’s investments 612.9 631.8 –18.9 Accruals 532.8 258.5 274.4 Other sundry assets 3.3 2.9 0.4 Total 1 209.3 949.9 259.4

76 Bank of Finland Annual Report • 2016 Financial statements Liabilities

1. Banknotes in circulation This item consists of the Bank of Finland’s share, in accordance with the ECB’s capital key and adjusted for the share allocated to the ECB, of the total amount of euro banknotes in circulation. In 2016 the total value of euro banknotes in circulation increased by 3.8%. According to the allocation key, the Bank of Finland had euro banknotes in circulation worth EUR 18,492.5 million at the end of the year, compared with EUR 17,789.9 at the end of 2015. The value of the euro banknotes actually issued by the Bank of Finland in 2016 increased by 6.3% from EUR 13,687.1 million to EUR 14,613.9 million. As this was less than the allocated amount, the difference of EUR 3,878.6 million (4,102.8 million in 2015) is shown under asset sub-item ‘Net claim related to the allocation of euro banknotes within the Eurosystem’.

31 Dec 2016 31 Dec 2015 Banknotes in circulation EUR m EUR m EUR 5 86.0 89.8 EUR 10 –56.9 –40.4 EUR 20 2,899.0 2,810.3 EUR 50 9,248.3 8,454.9 EUR 100 –750.6 –689.1 EUR 200 462.5 426.5 EUR 500 2,725.6 2,635.2 Total 14,613.9 13,687.1 ECB issue –1,608.1 –1,547.0 CSM figure 5,486.7 5,649.8 Banknotes in circulation in accordance with the ECB’s capital key 18,492.5 17,789.9

2. Liabilities to euro area credit institutions related to monetary policy operations denominated in euro This item consists of interest bearing liabilities to credit institutions and includes credit institutions’ minimum reserve account balances, the deposit facility and fixed-term deposits. The item results for the Bank of Finland from the performance of monetary policy functions as part of the Eurosystem. The minimum reserve system aims at stabilising money market interest rates and increasing the structural liquidity needs of the banking system. The average of credit institutions’ daily minimum reserve account balances must be at least as high as the reserve requirement during a maintenance period.

2.1 Current accounts (covering the minimum reserve system) Current accounts contain the credit balances of the transaction accounts of credit institutions that are required to hold minimum reserves. Banks’ minimum reserve balances have been remunerated since 1 January 1999 at the prevailing marginal interest rate for the Eurosystem’s main refinancing operations. From June 2014, either a zero interest rate or the deposit facility rate, whichever is lower, has been applied to banks’ excess reserve balances.

2.2 Deposit facility The deposit facility refers to overnight deposits placed by banks that access the Eurosystem’s liquidity absorbing standing facility at the pre-specified rate.

2.3 Fixed-term deposits Fixed-term deposits are fine-tuning liquidity absorbing operations that take the form of deposits.

2.4 Fine-tuning reverse operations Fine-tuning reverse operations are used to offset high liquidity imbalances.

2.5 Deposits related to margin calls This item refers to deposits made by counterparties in those instances where the market value of the collateral pledged falls short of an established trigger point.

Financial statements Bank of Finland Annual Report • 2016 77 Liabilities to euro area credit institutions related to monetary policy operations denominated in euro 31 Dec 2016 31 Dec 2015 Change EUR m EUR m EUR m Current accounts (covering the minimum reserve system) 29,065.0 25,888.6 3,176.40 Deposit facility 18,600.2 1,670.0 16,930.20 Fixed-term deposits – – – Fine-tuning reverse operations – – – Deposits related to margin calls – – – Total 47,665.2 27,558.6 20,106.60

3. Liabilities to other euro area residents denominated in euro This item consists of euro-denominated liabilities to the public sector and credit institutions other than those subject to the reserve requirement.

4. Liabilities to non-euro area residents denominated in euro This item consists of balances of international organisations and non-euro area banks with the Bank of Finland and repurchase agreements with non-euro area counterparties.

5. Liabilities to euro area residents denominated in foreign currency The Bank of Finland had no liabilities to euro area residents denominated in foreign currency as of 31 December 2016.

6. Liabilities to non-euro area residents denominated in foreign currency The Bank of Finland had no liabilities to non-euro area residents denominated in foreign currency as of 31 December 2016.

7. Counterpart of special drawing rights allocated by the IMF This item is the counteritem of SDRs (cf. item on the asset side). Originally the amount of SDRs and their counteritem were equal. As a result of transactions, the Bank of Finland’s claims related to SDRs were smaller than their counteritem on the liabilities side of the balance sheet at the end of 2016. On the liabilities side, the counteritem was SDR 1,189.5 million. In the balance sheet, the item is presented in euro, valued at the rate prevailing on the last day of the year (EUR 1,516.2 million).

8. Intra-Eurosystem liabilities This item includes the net balances of other central banking accounts and the ECB account relating to TARGET2, if the Bank of Finland has a net liability against the Eurosystem in the period under review. Intra-Eurosystem liabilities and claims have been elaborated on in more detail in the notes on the balance sheet under assets item ‘Intra-Eurosystem claims’. At the end of financial year 2016, the Bank of Finland had no intra-Eurosystem liabilities.

9. Other liabilities

31 Dec 2016 31 Dec 2015 Change Other liabilities EUR m EUR m EUR m Accruals 30.0 13.6 16.4 Accounts payable – – – Other 2.4 –2.0 4.4 Total 32.5 11.6 20.9

10. Revaluation accounts The item includes unrealised valuation gains arising from the market valuation of foreign currency-denominated items and securities. The item also includes revaluations of land and buildings and other valuation differences arising from changes in accounting practice in 1999.

78 Bank of Finland Annual Report • 2016 Financial statements 31 Dec 2016 31 Dec 2015 Change Revaluation accounts EUR m EUR m EUR m Gold 1,342.1 1,145.3 196.8 Foreign currencies: USD 1,207.6 1,081.9 125.7 GBP 57.8 188.3 –130.4 JPY 112.0 83.3 28.7 SDR 9.1 2.4 6.6 Other currencies 0.2 0.2 0.0 Securities 50.9 76.6 –25.7 Equity funds 27.1 1.3 25.8 Other revaluations 175.1 182.6 –7.6 Total 2,981.8 2,762.0 219.8

11. Provisions Under section 20 of the Act on the Bank of Finland, provisions can be made in the annual accounts, if they are necessary for safeguarding the real value of the Bank’s funds or for smoothing out variations in profit and loss arising from changes in exchange rates or market values of securities. At the end of 2016 these provisions totalled EUR 4,468 million. Provisions consist of a general provision, provision against real value loss, pension provision and foreign exchange rate and price difference provision. The pension provision is made to cover Bank of Finland’s pension liabilities. The Bank of Finland’s pension liabilities total EUR 563.7 million: 108.7% of this amount is covered by the pension provision, i.e. EUR 612.9 million. The change in the pension provision consists of a reduction of EUR –0.4 million in the revaluation account and a loss of EUR –2.0 million for the pension fund which was covered by reducing the pension provision.

Total Changes in Total Changes in Total provisions provisions­ provisions provisions­ provisions Provisions (EUR m) 31 Dec 2014 2015 31 Dec 2015 2016 31 Dec 2016 Foreign exchange rate and price difference provision 728 54 782 53 834 General provision 1,595 50 1,645 50 1,695 Provision against real value loss 1,225 50 1,275 51 1,326 Pension provision 616 –0 615 –2 613 Total 4,163 154 4,317 151 4,468

12. Capital and reserves This item consists of the Bank’s primary capital and reserve fund. Under section 21 of the Act on the Bank of Finland, the loss shall be covered from the reserve fund, if the annual accounts of the Bank show a financial loss. If the reserve fund is insufficient to cover part of the loss, the uncovered part may be left temporarily uncovered. Any profits in subsequent years shall be used first to cover such uncovered losses.

Capital and reserves (EUR m) 31 Dec 2016 31 Dec 2015 Change Primary capital 840.9 840.9 – Reserve fund 1,721.0 1,672.9 48.1 Total 2,562.0 2,513.9 48.1

13. Profit for the financial year The profit for the financial year 2016 totalled EUR 130.6 million.

Profit for the financial year (EUR m) 2016 2015 Change Transferred for the needs of the State 91.0 98.0 –7.0 Bank of Finland’s share of profit (transferred to reserve fund) 39.6 48.1 –8.5 Total 130.6 146.1 –15.5

Financial statements Bank of Finland Annual Report • 2016 79 Notes on the profit and loss account

1. Interest income Interest income from and outside the euro area totalled EUR 482.6 million. Of this, EUR 70.8 million consisted of foreign currency-denominated interest income and EUR 411.8 million of euro-denominated interest income. Interest income on ESCB items totalled EUR 5.6 million. Of this, EUR 0.1 million consisted of claims equivalent to the transfers of foreign reserves to the ECB. Interest income due to the claims and liabilities pertaining to the ECB’s share of euro banknotes, the application of the ECB capital key and the adjustments, EUR 0.4 million, is entered on a net basis. Interest income on TARGET2 balances totalled EUR 5.1 million. The interest rate on overnight deposits was negative throughout the year, which means that interest has been charged on central bank deposits. This so-called negative interest accrues on both overnight deposits and minimum reserve deposits in excess of the minimum reserve requirements.

2016 2015 Euro- Foreign Total Euro- Foreign Total denomi- currency- denomi- currency- Interest income received outside nated denomi- nated denomi- the euro area (EUR m) nated nated Gold investments – – – – – – Non-euro area coupon bonds 3.6 55.4 59.0 9.6 51.2 60.8 Non-euro area discount papers – 0.5 0.5 – 0.2 0.2 Non-euro area deposits 1.0 0.6 1.6 0.2 1.4 1.6 Other – 6.0 6.0 – 1.0 1.0 Total 4.6 62.6 67.2 9.8 53.8 63.6

2016 2015 Euro- Foreign Total Euro- Foreign Total denomi- currency- denomi- currency- Interest income received nated denomi- nated denomi- from the euro area (EUR m) nated nated Euro area coupon bonds 7.6 8.1 15.7 35.0 4.9 39.9 Euro area discount papers –4.9 – –4.9 –1.0 0.0 –1.0 Euro area deposits 0.2 0.0 0.2 0.0 0.1 0.1 Dividends on euro-denominated investments 5.2 – 5.2 1.0 – 1.0 ESCB items 5.6 – 5.6 14.6 – 14.6 Monetary policy items 137.2 – 137.2 140.3 – 140.3 Interest income from negative interest rates 256.0 – 256.0 53.1 – 53.1 Other 0.4 0.1 0.5 0.3 1.4 1.7 Total 407.2 8.2 415.4 243.2 6.4 249.6

2016 2015 Euro- Foreign Total Euro- Foreign Total denomi- currency- denomi- currency- Total interest income nated denomi- nated denomi- (EUR m) nated nated Interest income received outside the euro area 4.6 62.6 67.2 9.8 53.8 63.6 Interest income received from the euro area 407.2 8.2 415.4 243.2 6.4 249.6 Total 411.8 70.8 482.6 253.0 60.2 313.2

80 Bank of Finland Annual Report • 2016 Financial statements 2. Interest expenses

2016 2015 Euro- Foreign Total Euro- Foreign Total denomi- currency- denomi- currency- Interest expenses paid outside nated denomi- nated denomi- the euro area (EUR m) nated nated Non-euro area deposits –0.9 –0.0 –0.9 –0.2 –0.3 –0.5 Other – –1.4 –1.4 – –0.8 –0.8 Total –0.9 –1.4 –2.3 –0.2 –1.1 –1.3

2016 2015 Euro- Foreign Total Euro- Foreign Total denomi- currency- denomi- currency- Interest expenses paid nated denomi- nated denomi- in the euro area (EUR m) nated nated ESCB items – – – – – – Monetary policy items –8.9 – –8.9 –1.1 – –1.1 Other –2.8 – –2.8 –0.1 –0.6 –0.7 Total –11.7 – –11.7 –1.2 –0.6 –1.8

2016 2015 Euro- Foreign Total Euro- Foreign Total denomi- currency- denomi- currency- nated denomi- nated denomi- Total interest expenses (EUR m) nated nated Interest expense paid outside the euro area –0.9 –1.4 –2.3 –0.2 –1.1 –1.3 Interest expense paid in the euro area –11.7 – –11.7 –1.2 –0.6 –1.8 Total –12.6 –1.4 –14.0 –1.4 –1.7 –3.1

3. Net interest income

31 Dec 2016 31 Dec 2015 Net interest income EUR m EUR m Interest income Financial assets 83.8 105.2 Monetary policy items 137.2 140.3 Negative interest on monetary policy items 256.0 53.1 ESCB claims 5.6 14.6 Total 482.6 313.2 Interest expenses Financial assets –5.1 –2.0 Monetary policy items –8.9 –1.1 ESCB liabilities – – Total –14.0 –3.1 NET INTEREST INCOME 468.6 310.0

4. Foreign exchange rate differences This item includes realised exchange rate gains and losses as well as valuation losses arising from the sale of currency positions. In 2016 gains related to foreign exchange rate movements amounted to EUR 27.4 million.

5. Securities price differences This item includes realised gains and losses as well as valuation losses arising from the sale of securities. In the accounts, securities are treated on a security-by-security basis. In 2016 the realised gains related to securities price movements totalled EUR 25.2 million.

Financial statements Bank of Finland Annual Report • 2016 81 6. Change in foreign exchange rate and price difference provision Realised net gains arising from foreign exchange rate and price differences, EUR 52.7 million, were used to increase provisions in accordance with the financial reporting policy. All provisions have been specified in the notes on the balance sheet under liabilities.

7. Income and expenses on fees and commissions The item includes fees and commissions related to investment activities.

8. Net result of pooling of monetary income

31 Dec 2016 31 Dec 2015 Monetary income EUR m EUR m Net monetary income pooled by the Bank of Finland 366.7 198.3 Net monetary income allocated to the Bank of Finland 176.8 160.3 Net monetary income according to the capital allocation key –189.9 –38.0 Corrections to monetary income reallocation of previous years –0.0 –0.2

The amount of each Eurosystem NCB’s monetary income is determined by measuring the actual annual income that derives from the earmarkable assets held against its liability base. The liability base consists mainly of the following items: banknotes in circulation; liabilities to euro area credit institutions related to monetary policy operations denominated in euro; intra-Euro- system liabilities of the NCBs arising from the issuance of ECB debt certificates; net intra-Euro- system liabilities resulting from TARGET2 transactions; net intra-Eurosystem liabilities related to the allocation of euro banknotes within the Eurosystem. Any interest paid on liabilities included within the liability base is to be deducted from the monetary income to be pooled. The earmarkable assets consist mainly of the following items: lending to euro area credit institutions related to monetary policy operations denominated in euro; securities held for monetary policy purposes; intra-Eurosystem claims equivalent to the transfer of foreign reserve assets to the ECB; net intra-Eurosystem claims resulting from TARGET2 transactions; net intra-Eurosystem claims related to the allocation of euro banknotes within the Eurosystem; a limited amount of each NCB’s gold holdings in proportion to each NCB’s capital key share. Gold is considered to generate no income. Securities held for monetary policy purposes under Decision ECB/2009/16 of 2 July 2009 on the implementation of the covered bond purchase programme, Decision ECB/2011/17 of 3 November 2011 on the implementation of the second covered bond purchase programme and Decision ECB/2015/10 of 4 March 2015 on a secondary markets public sector asset purchase programme are considered to generate income at the latest available marginal rate for the Eurosystem’s main refinancing operations. Where the value of a NCB’s earmarkable assets exceeds or falls short of the value of its liability base, the difference shall be offset by applying to the value of the difference the latest available marginal rate for the Eurosystem’s main refinancing operations. The monetary income pooled by the Eurosystem is to be allocated among the NCBs according to the subscribed ECB’s capital key. The difference between the monetary income pooled by the Bank of Finland amounting to EUR 366.7 million and reallocated to the Bank of Finland amounting to EUR 176.8 million is the net result arising from the calculation of monetary income.

9. Share in ECB profit The ECB distributed EUR 270 million profit for the financial year 2015, of which the Bank of Finland’s share recorded for the financial year 2016 totalled EUR 4.8 million.

10. Other central banking income This item includes the Bank of Finland’s share, EUR 17.2 million, in income on euro banknotes and the SMP- and EAPP-related portfolios distributed by the ECB in the form of interim profit distribution for the financial year 2016. The item also includes dividends received on shares in the BIS, EUR 2.9 million.

82 Bank of Finland Annual Report • 2016 Financial statements 11. Other income This item consists of the Financial Supervisory Authority’s supervision and processing fees, EUR 23.2 million, income from real estate, EUR 4.8 million, as well as commissions and fees.

12. Staff costs

31 Dec 2016 31 Dec 2015 Staff costs EUR m EUR m Salaries and fees 38.3 39.3 Employer’s payments to the pension fund 7.4 7.5 Other staff-related costs 2.7 2.5 Total 48.4 49.4

2016 2015 Number of Number of Average staff size staff staff Bank of Finland 373 379 Financial Supervisory Authority 181 189 Total 554 568

2016 Basic salaries paid to the members of the Board EUR Erkki Liikanen 262,466 Pentti Hakkarainen 236,859 Seppo Honkapohja 193,239 Total 692,564

Fringe benefits (meal benefit, company-paid telephone and company car) paid to the members of the Board totalled EUR 40,949. Pension benefits of the members of the Board are determined according to the Bank of Finland’s Pension Rule, without special terms and under same terms and conditions as confirmed in the Rule for other personnel. As applicable, the Bank of Finland’s Pension Rule is in line with the State Employees’ Pension Scheme. A former board member may be paid compensation for income loss if the person may not, because of qualifying period provisions, accept employment from elsewhere or if the pension from the Bank of Finland is less than the compensation for income loss. Full compensa- tion for income loss amounts to 60% of salary and is paid for one year, adjusted with the pension paid by the Bank, so that the sum of full compensation and pension do not exceed 60% of salary.

13. Pension fund contribution No pension fund contributions were made in the financial year 2016. In 2015 the Bank’s pension fund repaid pension fund contributions of EUR 16.5 million to the Bank.

14. Administrative expenses

31 Dec 2016 31 Dec 2015 Administrative expenses EUR m EUR m Supplies and purchases 0.5 0.7 Machinery and equipment 6.5 3.4 Real estate 9.3 8.8 Staff-related expenses 3.6 3.7 Purchase of services 10.0 11.1 Other 1.9 1.7 Total 31.8 29.5

This item includes rents, meetings and interest group-related costs, expenses arising from the purchase of services and cost of equipment. Expenses involved in training, travel and recruitment of staff are also recorded under this item.

Financial statements Bank of Finland Annual Report • 2016 83 15. Depreciation of fixed assets

31 Dec 2016 31 Dec 2015 Depreciation of tangible fixed assets EUR m EUR m Land – – Buildings 2.8 2.5 Machinery and equipment 2.9 2.5 Art and numismatic collection – – Total 5.7 5.1

31 Dec 2016 31 Dec 2015 Depreciation of intangible fixed assets EUR m EUR m IT systems 4.6 4.2 Total 4.6 4.2

Depreciations do not include depreciations arising from the revaluation of land and buildings.

16. Banknote procurement costs Banknote procurement costs totalled EUR 10.3 million.

17. Other expenses The bulk of other expenses is related to the use and maintenance of property.

18. Income of the pension fund This item includes income of the Bank of Finland pension fund’s investment activities, EUR 17.2 million. The item also includes the Bank of Finland’s and Financial Supervisory Authority’s employer contributions as well as employee’s share of premium income, EUR 10.0 million.

19. Expenses of the pension fund This item includes expenses of the Bank of Finland pension fund’s investment activities, EUR 0.5 million, pensions paid, EUR 27.2 million, management costs and depreciations of fixed assets managed by the pension fund.

20. Changes in provisions This item includes the increase of the provision against real valaue loss, EUR 51 million and the increase of the general provision, EUR 50 million. All provisions have been specified in the notes on the balance sheet under liabilities.

21. Profit for the financial year The profit for the financial year 2016 totalled EUR 130,6 million. The Board proposes to the Parliamentary Supervisory Council that EUR 91 million of the profit be made available for the needs of the State.

Off-balance sheet commitments This item contains the Bank of Finland’s derivative contracts.

31 Dec 2016 31 Dec 2015 Derivative contracts EUR m EUR m Nominal value of FX futures contracts Purchase agreements – 245.6 Sales agreements – –273.4 Market value of FX-swap contracts 36.6 3.3 Market value of IRS contracts – – Market value of FX forward contracts – 0.0 Total 36.6 –24.5

84 Bank of Finland Annual Report • 2016 Financial statements Appendices to the financial statements

EUR million 31 Dec 2016 31 Dec 2015

Shares and other interests, nominal value

Bank for International Settlements (BIS)1 22.4 (1.96%) 22.4 (1.96%) Shares in housing companies 2.5 2.5 Other shares and interests 0.1 0.0 Total 25.1 24.9

Bank of Finland’s liability share in the APK fund 0.3 0.3

Liability arising from pension commitments Bank of Finland’s pension liability2 563.7 576.1 – of which covered by reserves 612.9 615.3

Customer service office Deposits 24.4 24.5 Loans 3.3 3.4

1 In parentheses, the Bank of Finland’s relative holdings of the BIS shares in circulation. 2 Pension liability for 2016 includes indexation of pensions and paid-up policies entering into force on 1 January 2017.

The Bank of Finland’s real estate

Building Address Year of completion Volume m3 (approx.)

Helsinki Rauhankatu 16 1883/1961/2006 52,100 Rauhankatu 19 1954/1981 40,500 Snellmaninkatu 61 1857/1892/2001 24,600 Snellmaninkatu 21 1901/2003 3,400 Ramsinniementie 34 1920/1983/1998 4,800 Oulu Kajaaninkatu 8 1973 17,200 Vantaa Turvalaaksontie 1 1979 324,500 Inari Saariseläntie 9 1968/1976/1998 6,100

1 Transferred to the ownership of the Bank of Finland’s pension fund from the beginning of 2002.

Financial statements Bank of Finland Annual Report • 2016 85 Five-year review The following table presents the Bank of Finland’s balance sheets and profit and loss accounts for the past five financial years.

BALANCE SHEET (EUR m) 2016 2015 2014 2013 2012

Assets

Gold and gold receivables 1,731 1,534 1,557 1,373 1,988

Claims on non-euro area residents denominated in foreign currency 7,852 7,483 7,020 6,585 6,171

Receivables from the International Monetary Fund (IMF) 2,048 1,890 1,913 1,955 2,097 Balances with banks and security investments, external loans and other external assets 5,804 5,592 5,106 4,630 4,074 Claims on euro area residents denominated in foreign currency 648 417 360 297 404

Claims on non-euro area residents denominated in euro 1,803 1,443 1,044 1,347 1,970

Lending to euro area credit institutions related to monetary policy operations denominated in euro 6,728 690 722 2,475 3,681

Main refinancing operations – – 15 – – Longer-term refinancing operations 6,728 690 707 2,475 3,681 Other claims on euro area credit institutions denominated in euro 31 0 37 0 0

Securities of euro area residents denominated in euro 32,761 19,662 11,316 10,063 11,471

Securities held for monetary policy purposes 25,786 12,096 3,568 3,717 4,555 Other securities 6,975 7,588 7,748 6,346 6,915 Intra-Eurosystem claims 26,609 25,096 24,584 26,539 74,382

Participating interest in ECB 144 144 144 141 141 Claims equivalent to the transfer of foreign reserves 728 728 728 722 722 Net claims related to the allocation of euro banknotes within the Eurosystem 3,879 4,103 3,962 3,522 3,248 Other claims within the Eurosystem (net) 21,858 20,121 19,749 22,154 70,270 Other assets 1,341 1,088 1,082 1,052 1,115

Coins of euro area 35 32 29 23 27 Tangible and intangible fixed assets 131 138 143 149 155 Other current assets 638 657 698 641 607 Other 536 261 213 238 326 Total assets 79,505 57,414 47,722 49,731 101,182

86 Bank of Finland Annual Report • 2016 Financial statements BALANCE SHEET (EUR m) 2016 2015 2014 2013 2012

Liabilities

Banknotes in circulation 18,492 17,790 16,793 15,753 15,044

Liabilities to euro area credit institutions related to monetary policy operations denominated in euro 47,665 27,559 20,308 23,803 73,799

Current accounts (covering the minimum reserve system) 29,065 25,889 20,233 14,303 31,698

Deposit facility 18,600 1,670 75 – 37,101

Fixed-term deposits (liquidity-absorbing fine-tuning operations) – – – 9,500 5,000

Liabilities to other euro area residents denominated in euro 31 79 2 55 801

Liabilities to non-euro area residents denominated in euro 1,625 676 2 527 1,004

Liabilities to euro area residents denominated in foreign currency – – – 0 0

Liabilities to non-euro area residents denominated in foreign currency – 46 58 66 139

Counterpart of special drawing rights allocated by the IMF 1,516 1,514 1,418 1,330 1,387

Intra-Eurosystem liabilities – – – – –

Other liabilities 32 12 22 21 24

Revaluation accounts 2,982 2,762 2,304 1,556 2,609

Provisions 4,468 4,317 4,163 3,939 3,708

Capital and reserves 2,562 2,514 2,501 2,442 2,332

Primary capital 841 841 841 841 841

Reserve fund 1,721 1,673 1,660 1,601 1,491

Profit for the financial year 131 146 150 239 337

Total liabilities 79,505 57,414 47,722 49,731 101,182

Financial statements Bank of Finland Annual Report • 2016 87 PROFIT AND LOSS ACCOUNT (EUR m) 2016 2015 2014 2013 2012

Interest income 483 313 329 565 1 110

Interest expenses –14 –3 –12 –23 –113

Net interest income 469 310 317 542 998

Foreign exchange rate differences 27 26 16 –6 14

Securities price differences 25 28 34 37 218

Change in foreign exchange rate and price difference provision –53 –54 –50 –31 –232

Net result of financial operations, write-downs and risk provisions 469 310 317 542 998

Income and expenses on fees and commissions –2 –1 –0 –1 –1

Net result of pooling of monetary income –190 –38 1 –111 –343

Share in ECB profit 5 3 1 8 1

Provisions in respect of counterparty risk in monetary policy operations – – – 6 11

Other central banking income 20 18 18 28 133

Central banking profit 302 291 337 472 800

Other income 31 31 31 33 47

Operating expenses –101 –76 –43 –94 –92

Staff costs –48 –49 –50 –52 –52

Pension fund contribution – 17 57 – –

Administrative expenses –32 –30 –30 –29 –29

Depreciation of fixed assets –10 –9 –8 –8 –8

Banknote procurement costs –10 –4 –11 –5 –3

Other expenses –0 –0 –0 –0 –1

Operating profit 232 246 325 411 754

Profit for the pension fund – – – 34 47

Changes in provisions –101 –100 –175 –206 –464

Profit for the financial year 131 146 150 239 337

Totals/sub-totals may not add up due to rounding.

88 Bank of Finland Annual Report • 2016 Financial statements Notes on risk management

Risk management and control of investment of financial assets Investment activities are exposed to risks that risk management seeks to identify, measure and limit. In managing these risks, the Bank of Finland uses widely employed risk management methods, market and credit risk models as well as sensitivity analyses. Risk management of investment activities by the Bank of Finland has been entrusted jointly to the Administration Department’s Risk Control and Financial Accounting division and the Banking Operations Department. Risk control of investment activities and reporting on risks and returns are the responsibility of the former. Risks to investment activities are reported daily to the staff involved in operational investment activities and monthly to the Bank of Finland Board. Reports on developments in investment returns are produced at monthly intervals. Returns are considered quarterly in the Markets Committee, chaired by the Board member responsible for investment activities. The Board considers risks and returns more extensively twice a year. Cases of non-compliance with the limits imposed are reported immediately. An extensive report on total financial risks is submitted to the Board at quarterly intervals. The Bank of Finland also has a Risk Committee whose mandate is to conduct independent assessments and control of investment risks and the related risk management. It does not make decisions on investment activities and risk management, but may submit matters to the Board for information or decision, as necessary. The Risk Committee is chaired by the Board member responsible for risk control and convenes in two compositions. One discusses financial risks and the other, operational risks.

Decision-making framework for investment of financial assets and risk management Decisions on investment of financial assets and related risk management are taken by the Bank of Finland Board, the Markets Committee and, in the case of operational matters, also by the Investment Group and the Risk Group. The Board is responsible for decisions on investment activities objectives, investment policy and risk management principles. Such decisions relate, among other things, to the size of the Bank’s own financial assets and foreign reserves, currency distribution of foreign reserves, the strategic allocation of the investment portfolio by investment category, the leeway permitted in investment activities by investment category and the level of interest rate and credit risks. The Board also decides on maximum credit risk limits. Within the limits imposed by the Board, the Markets Committee makes detailed decisions on the investment of the Bank’s financial assets and risk management. Such decisions include the criteria for counterparties and issuers and more specific credit risk limits. The chair of the Markets Committee, who is also responsible for decision-making on the Committee, is the Board member responsible for the Bank of Finland’s own investments. The emphasis of work in the Investment Group and the Risk Group is on the preparation of matters to be considered by higher decision-making bodies. In addition, the Investment Group acts as an internal decision-maker within the Banking Operations Department and as coordinator of matters common to the investment and risk control functions. The Head of Banking Operations chairs the Investment Group and makes decisions therein. The Head of Risk Control and Financial Accounting in the Administration Department chairs the Risk Group and makes decisions therein.

Financial statements Bank of Finland Annual Report • 2016 89 The Bank of Finland’s estimated total risk, including gold The Bank of Finland’s total risks are discussed in the section ‘Total risk exposure’ (p. 55–57). The figures presented there exclude gold, owing to its large revaluation account. When all risks – including gold – are added together, the Bank of Finland’s total risk exposure is estimated at about EUR 2.3 billion annually.

Risk measures and breakdowns

Table 1. Breakdown of debt securities and deposits in the Bank of Finland’s financial assets, by credit rating1

31 Dec 2016 31 Dec 2015 Credit rating EUR m EUR m

AAA 5,795 6,444

AA+ 3,503 3,931

AA 2,967 2,630

AA– 232 159

A+ 1,599 1,013

A 321 156

A– 251 160

BBB+ 77 134

BBB 0 10

BBB– 0 0

Below BBB– 0 0

No credit rating 19 200

Total 14,763 14,835

1 Covered bonds have been classified according to their own credit rating and not the credit rating of their issuer. The Bank of Japan is dealt with according to the credit rating of the government. Due to changes in the items included in the table, the comparison figures for 31 December 2015 have been re-calculated respectively. Due to rounding, the totals may not add up. Source: Bank of Finland.

90 Bank of Finland Annual Report • 2016 Financial statements Table 2. Breakdown of debt securities in the Bank of Finland’s financial assets, by home country of issuer (according to debt security’s market value)

Country or region 31 Dec 2016 31 Dec 2015 EUR m EUR m Euro area 7,003 7,264 Germany 2,534 2,699 France 1,862 2,112 Netherlands 1,006 991 Belgium 560 404 Finland 502 656 Austria 470 327 Ireland 44 38 Spain 21 22 Luxembourg 4 15 Europe excl. euro area 1,500 2,038 United Kingdom 540 952 Sweden 421 525 Norway 375 367 Denmark 116 170 Switzerland 48 25 America 3,675 3,475 United States 2,971 3,146 Canada 705 329 Asia and Oceania 765 891 Japan 408 601 Australia 289 243 Singapore 38 47 South Korea 29 – International institutions 820 1,107 Total 13,762 14,775

Due to rounding, totals and subtotals may not correspond to the sum of all figures. Source: Bank of Finland.

Table 3. Sensitivity of the Bank of Finland’s financial assets to exchange rate and interest rate changes

EUR m 2016 2015

Change in the value of Bank of Finland’s financial assets after appreciation of the euro exchange rate by 15% relative to foreign reserve currencies and gold as at 31 Dec –1,081 –1,012 Change in the value of Bank of Finland’s financial assets after an interest rate rise of 1%, with the amount, composition and modified duration for the financial assets as at 31 Dec –265 –247 Source: Bank of Finland.

Financial statements Bank of Finland Annual Report • 2016 91 Definitions and concepts – Market risk means the risk that the net value of assets will decline due to changes in market prices. Market price changes refer to changes in, for example, interest rates, exchange rates, the price of gold or stock prices, which are referred to as interest rate risk, exchange rate risk, gold price risk or equity risk, respectively. – Credit risk means the risk of financial losses arising from changes in the creditworthiness of a counterparty to a financial transaction or a securities issuer or from default by a counterparty or issuer. – Liquidity risk means the risk that assets cannot be made available when the need arises, or their conversion into cash would cause additional costs. – Operational risk refers to the risk of extra costs or losses resulting from inadequate or failed internal processes, personnel, systems or external events. – Investment portfolio refers to that part of the Bank of Finland’s assets used to secure the value of financial assets and the Bank’s ongoing ability to meet its central bank commitments. The Bank of Finland’s investment portfolio includes both foreign currency- denominated and euro-denominated assets. – Foreign reserves consist of unhedged foreign currency investments and claims. These include the foreign currency investment portfolio and net receivables from the IMF. – Cash refers to covered and uncovered short-term bank deposits. – Modified duration is a measure of interest rate risk, indicating how much the value of a fixed-income investment or investments changes in response to a small change in interest rates. For example, if the modified duration is 2 and interest rates rise by 1%, the value of the fixed-income investments falls by 2%. – The VaR figure at a certain confidence level means a loss in excess of which a loss occurs with a probability corresponding to the confidence level in question, over a target horizon. For example, if VaR 99% on a one-day horizon is EUR 3 million, this means there is a 1% probability the current day’s result will be worse than a loss of EUR 3 million (and a 99% probability the result will be better). – Expected Shortfall (ES) at a certain confidence level indicates the size of the expected loss in the event that the loss exceeds the VaR-level loss for that confidence level. For example, with an ES of 99%, this is an average loss of 1% on risk realisations.

92 Bank of Finland Annual Report • 2016 Financial statements Auditor’s report

In our capacity as the auditors elected by Parliament, we have audited the accounting records, financial state- ments and administration of the Bank of Finland for the financial year 2016 in accordance with generally ac- cepted auditing standards. During the financial year the Bank’s Internal Audit audited the Bank’s accounting records and activities. We have examined the internal audit reports. We have read the Bank’s annual report and received representations from the Board concerning the Bank’s activities. The financial statements have been drawn up in accordance with the principles of financial statements approved by the Parliamentary Supervisory Council and current rules and regulations. The financial state- ments give a true and fair view of the Bank’s financial position and results. We propose that the profit and loss account and balance sheet for the financial year audited by us be approved. We recommend that the profit for the financial year be disposed of as proposed by the Board.

Helsinki, 10 March 2017

Sanna Lauslahti

Esko Kiviranta Antti Rinne

Markku Koskela Tom Sandell Authorised Public Accountant Authorised Public Accountant, JHT (Public Administration and Finance Accountant)

Financial statements Bank of Finland Annual Report • 2016 93 Statement regarding the audit as defined in Article 27 of the Statute of the European System of Central Banks and the European Central Bank

To the Bank of Finland

Report on the audit of financial statements

Opinion

In our opinion, the financial statements give a true and fair view of the Bank of Finland’s financial position and results, in accordance with the Accounting Principles and Methods approved by the Governing Council of the European Central Bank and the Act on the Bank of Finland, and comply with statutory requirements.

Object of the audit We have audited the financial statements of the Bank of Finland (business identity code 0202248-1) for the year ended 31 December 2016. The financial statements comprise the balance sheet, the profit and loss account and notes.

Basis for opinion

We conducted our audit in accordance with good auditing practice in Finland. Our responsibilities under good auditing practice are further described in the ‘Auditor’s responsibilities for the audit of the financial statements’. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence We are independent of the Bank of Finland in accordance with the ethical requirements that are applicable in Finland and are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

Responsibilities of the Board of the Bank of Finland for the financial statements

The Board of the Bank of Finland is responsible for the preparation of financial statements that give a true and fair view of the Bank of Finland’s financial position and results, in accordance with the laws and regulations governing the preparation of the Bank’s financial statements, and that comply with statutory requirements. The Bank of Finland Board is also responsible for such internal control as it determines necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Bank of Finland Board is responsible for assessing the Bank’s ability to continue as going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting. The financial statements are prepared using the going concern basis of accounting unless there is an intention to liquidate the Bank or cease operations, or there is no realistic alternative but to do so.

Auditor’s responsibilities for the audit of financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with good auditing practice will always detect material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

94 Bank of Finland Annual Report • 2016 Financial statements As part of an audit in accordance with good auditing practice, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

– Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is suffi- cient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. – Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control. – Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. – Conclude on the appropriateness of the Bank of Finland Board’s use of the going concern basis of accoun- ting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we con- clude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern. – Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events so that the financial statements give a true and fair view.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Helsinki, 28 February 2017 PricewaterhouseCoopers Oy Ab Authorised Public Accountants

Juha Tuomala Authorised Public Accountant

Financial statements Bank of Finland Annual Report • 2016 95 Appendices

Monetary policy measures of the Eurosystem in 2016

January–December In accordance with the decisions of the Governing Council of the ECB, main refinancing operations and longer-term regular and non-standard refinancing operations continued to be conducted as fixed rate tender procedures with full allotment. In the three-month longer-term refinancing operations, the rate applied was fixed at the average of the rates on the main refinancing operations over the life of the respective operation. February On 5 February, the ECB decided to publish the Eurosystem’s aggregate net financial assets and provided additional information on the related Agreement on Net Financial Assets (ANFA). ANFA is an agreement between the national central banks of the euro area and the ECB. It sets rules and limits for such holdings of national central banks as are related to the discharge of their national tasks. The ECB publishes the Eurosystem’s aggregate net financial assets. The national central banks, in turn, will publish their respective net financial assets at the time of publication of their annual financial accounts. At the end of 2015, the Eurosystem’s aggregate net financial assets stood at EUR 490 billion. Net financial assets have grown by 5% per year on average since the introduction of euro banknotes in 2002. Consequently, net financial assets have grown at a slower pace than the total value of banknotes in circulation, which grew by 9% per year on average over the same period. ANFA limits the capacity of national central banks to create liquidity. This seeks to ensure that central bank holdings do not hamper achievement of monetary policy objectives. ANFA was previously a confidential document. The ECB and the national central banks of the Eurosystem, however, took the unanimous decision that publishing the agreement along with an explanatory document would promote transparency. March The Governing Council of the ECB decided to set loan-level data reporting requirements for the eligibility as collateral of non-marketable debt instruments backed by public sector credit claims. The aim is to improve the transparency of these instruments. On 10 March, the Governing Council of the ECB took the following monetary policy decisions. The interest rate on the main refinancing operations of the Eurosystem was decreased by 0.05 of a percentage point to 0.00%, starting from the operation to be settled on 16 March. The interest rate on the marginal lending facility was decreased by 0.05 of a percentage point to 0.25%, and the interest rate on the deposit facility by 0.10 of a percentage point to –0.40%, with effect from 16 March. Monthly purchases under the expanded asset purchase programme were increased from EUR 60 billion to EUR 80 billion, starting in April. Going forward, investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area may also be acquired under the programme. The aim is to further strengthen the pass- through of the Eurosystem’s asset purchases to the financing conditions of the real economy. Consequently, in combination with other non-standard monetary policy measures, the corporate sector purchase programme will provide further monetary policy accommodation and contribute to a return of inflation rates back to target, i.e. levels below, but close to, 2% over the medium term. The ECB decided to launch a second series of targeted longer-term refinancing operations (TLTRO II) in June 2016. The maturity of each operation will be four years, and the interest rate can be as low as the interest rate on the deposit facility prevailing at the time of take-up. The four new TLTROs will reinforce the ECB’s accommodative monetary policy stance and incentivise new lending. At the same time, the Governing Council of the ECB decided to make changes to the public sector purchase programme. The issuer and issue share limits for the purchases of securities issued by eligible international organisations or multilateral development banks were increased to 50%. In addition, as from April 2016, the allocation for these securities in the monthly

96 Bank of Finland Annual Report • 2016 Appendices purchases under the public sector purchase programme will be reduced from 12% to 10%. To maintain the 20% risk-sharing regime, the ECB’s share of monthly purchases under the public sector purchase programme will be increased from 8% to 10%. At its meeting of 16 March, the Governing Council of the ECB also decided that the Eurosystem’s minimum credit quality threshold for eligible collateral will apply to debt instruments issued or guaranteed by the Republic of Cyprus. These instruments became ineligible as from 1 April. The decision was based on the fact that, upon request of the Republic of Cyprus, the application of the economic adjustment programme of the International Monetary Fund was terminated, and as from 1 April Cyprus could no longer be seen as complying with the European Union / International Monetary Fund programme, which is a precondition for non-application of the minimum credit quality threshold. April On 21 April, the Governing Council of the ECB decided on the key technical parameters of the corporate sector purchase programme. The basis for determining the eligibility of corporate sector securities to be purchased under the programme will be the Eurosystem’s collateral framework, i.e. the rules that lay down which assets are acceptable as collateral for Eurosystem credit operations. June At its meeting of 2 June, the Governing Council of the ECB decided that purchases under the corporate sector purchase programme will start on 8 June. In addition, the Governing Council finalised the details of the technical implementation of the purchase programme. Bonds held under the corporate sector purchase programme will be made available for lending as of 18 July 2016. National central banks will publish a list of the ISIN codes of the bonds purchased under the programme and update it on a weekly basis. The Governing Council also decided that the first operation in the second series of targeted longer-term refinancing operations (TLTRO II) would be conducted on 22 June. On 22 June, the Governing Council of the ECB decided to reinstate the eligibility of debt instruments issued or guaranteed by the Hellenic Republic, having assessed the effects of the European Stability Mechanism programme of financial assistance for Greece. The Governing Council considered Greece to be in compliance with the European Union / International Monetary Fund programme, and therefore the Eurosystem’s minimum credit quality threshold for eligible collateral will not apply to debt instruments issued or guaranteed by the Hellenic Republic. The debt instruments in question will, however, be subject to specific haircuts. The decision entered into force on 29 June 2016. The Governing Council of the ECB also decided to consider, at a later stage, purchases of debt instruments issued by the Hellenic Republic under the public sector purchase programme. October On 5 October, a decision was made on changes to the collateral eligibility criteria for unsecured bank bonds. The changes ensure eligibility of these debt instruments even if they were to become statutorily subordinated relative to the issuer’s other senior debt instruments, provided that their status is not also contractually subordinated. Moreover, it was decided to restrict the collateral usage limit for these instruments so that their collateral value may not exceed 2.5%, after any applicable haircuts, of the total value of all assets submitted by the counterparty as collateral; this limit was previously 5%. These adjustments reflect preparations for legislative changes that EU Member States have made in transposing the EU Bank Recovery and Resolution Directive into national law. The amended rules entered into force on 1 January 2017. The ECB will review the eligibility of unsecured bank bonds during the course of 2017. November On 3 November, the ECB published the following Guidelines: – ECB/2016/31 updating Guideline ECB/2014/60 on the implementation of the Eurosys- tem monetary policy framework – ECB/2016/32 updating Guideline ECB/2015/35 on valuation haircuts – ECB/2016/33 updating Guideline ECB/2014/31 on additional temporary measures re- lating to Eurosystem refinancing operations and eligibility of collateral. Application of the new Guidelines began on 1 January 2017.

The main amendments to the Guidelines dealt with acceptable coupon structures of collateral assets and resultant negative cash flows, criteria for designated repositories for loan-level data submissions regarding asset-backed securities, protection against set-off risk related to credit

Appendices Bank of Finland Annual Report • 2016 97 claims, as well as general requirements for external credit assessment institutions and disclosure requirements for covered bond ratings. In addition, the changes served to implement the decisions of 5 October on the eligibility of unsecured bank bonds. The changes made to haircut schedules for assets used as collateral mean that valuation haircuts for asset-backed securities will be determined by the average time remaining until repayment. Furthermore, the Governing Council of the ECB decided on changes taking effect later in 2017 concerning the determination of valuation haircuts for floating-rate assets and risk control measures for retained covered bonds with extendible maturities, used by the issuer itself. December At its meeting of 8 December, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility would remain unchanged at 0.00%, 0.25% and –0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases. Purchases under the expanded asset purchase programme, included in non-standard monetary policy measures, will continue at a monthly pace of EUR 80 billion until the end of March 2017. From April 2017, the purchases are intended to continue at a monthly pace of EUR 60 billion. Such purchases are to be carried out until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with the inflation aim. In addition, the Governing Council decided to change some of the parameters of the asset purchase programme to ensure the continued smooth implementation of the Eurosystem’s asset purchases.

98 Bank of Finland Annual Report • 2016 Appendices Key measures affecting the financial markets in 2016

Measures by the European System of Central Banks

February On 5 February 2016, the Governing Council approved amendments to the Eurosystem oversight policy framework for retail payment systems. April On 5 April 2016, the Governing Council adopted public guidance laying down the procedure to be followed by the ECB in reviewing the qualification of capital instruments as Additional Tier 1 (AT1) and Tier 2 (T2) instruments. The guidance also specifies the information that should be provided by significant supervised entities that include such instruments in calculating their AT1 or T2 capital. May On 18 May 2016, the Governing Council adopted Regulation ECB/2016/13 on the collection of granular credit and credit risk data and Decision ECB/2016/14 amending Decision ECB/2014/6 on the organisation of preparatory measures for the collection of granular credit data by the European System of Central Banks. June On 9 June 2016, the Governing Council approved the harmonisation of the remuneration of the guarantee funds of systemically important payment systems (SIPS) held with the Eurosystem at the interest rate applied on the deposit facility. The harmonised remuneration rate will be reflected in the bilateral agreements between SIPS operators and the respective Eurosystem central banks as soon as practically possible and within three months of the publication of the Governing Council decision, i.e. by 24 September 2016 at the latest. The Governing Council further approved the application of the interest rate in effect for the deposit facility to all guarantee funds of financial market infrastructures held with the Eurosystem. July On 15 July 2016, the Governing Council approved a revised Eurosystem oversight policy framework document which describes the role of the Eurosystem in the field of oversight of payment, clearing and settlement systems and payment instruments. The revised document takes stock of major developments that have affected the Eurosystem oversight function since the last version was published in 2011, notably the publication of the CPSS IOSCO Principles for financial market infrastructures, the adoption of the European Market Infrastructure Regulation (EMIR), the adoption of the Central Securities Depositories Regulation (CSDR), the adoption of Regulation ECB/2014/28 on oversight requirements for systemically important payment systems (the SIPS Regulation) and the launch of TARGET2-Securities. August On 2 August 2016, the Governing Council adopted Regulation ECB/2016/22 amending Regulation ECB/2012/24 concerning statistics on holdings of securities, Guideline ECB/2016/23 amending Guideline ECB/2013/7 concerning statistics on holdings of securities, and Recommendation ECB/2016/24 on the data quality management framework for statistics on holdings of securities. The amending legal acts provide for the collection of additional accounting and credit risk attributes from banking groups with a view to better analysing risks and exposures within the financial system and enhancing the ECB’s analysis of the monetary policy transmission mechanism. They also extend the list of reporting banking groups to cover all significant groups directly supervised by the ECB. The three legal acts, which were published in the Official Journal of the European Union, are available on the ECB’s website. On 18 August 2016, the Governing Council approved new links as eligible for use in Eurosystem­ credit operations in view of the third T2S migration wave. The comprehensive list of all eligible links, last updated on 12 September 2016 with new links operational as of that date, is available on the ECB’s website. September On 23 September 2016, the Governing Council approved the introduction of a billing threshold and a minimum billing amount, both set at €150, for TARGET2-Securities (T2S) services. These changes, which fully comply with the pricing policy for T2S as defined in Guideline ECB/2012/13, will apply to the monthly billing of central banks and central securities depositories for their usage of T2S services. The production and delivery of monthly automatic invoices, which are generated by T2S and based on billing data that reflect the actual consumption of T2S services, will not be affected by the introduction of the threshold.

Appendices Bank of Finland Annual Report • 2016 99 Main opinions issued by the Bank of Finland in 2016

Opinions concerning legislation on and development of the financial markets

Opinion Subject Date

To the Commerce Commit- Government Bill to Parliament for Acts amending the Mutual 15 Feb tee of the Funds Act and the Act on the Financial Supervisory Authority Finnish Parliament (HE 3/2016 vp) Government report: European Commission’s Green Paper on retail fi- 29 Feb nancial services (E 8/2016 vp) Communication of the Government to Parliament (U 40/2016 vp) on 13 Sep the European Commission’s proposal for a Regulation of the European Parliament and of the Council on establishing a Union programme to support specific activities enhancing the involvement of consumers and other financial services end-users in Union policy-making in the field of financial services for the period 2017-2020 Government Bill to Parliament for an Act amending the Act on the 26 Oct contributions to the Financial Stability Authority (HE 189/2016)

To the Financial Superviso- FIN-FSA Regulations and guidelines on accounting, financial state- 26 Jan ry Authority ments and annual reports in the financial sector Regulations and guidelines on the reporting of loan-to-value ratios; re- 8 Feb visions to Regulations and guidelines 1/2014: Risk reporting by credit institutions FIN-FSA Director General’s proposal to the Board on macroprudential 10 Feb policy FIN-FSA Regulations and guidelines X/2016: Authorisations to pursue 10 Mar the business of a credit institution and notifications on Finnish credit institutions’ operations abroad and foreign credit institutions’ opera- tions in Finland FIN-FSA Director General’s proposal to the Board on macroprudential 17 May policy FIN-FSA Director General’s proposal to the Board on macroprudential 26 Aug policy FIN-FSA Regulations and guidelines X/2016: Payment institutions and 29 Aug persons providing payment services without authorisation FIN-FSA Regulations and guidelines on the governance of employee 28 Oct pension insurance companies FIN-FSA Director General’s proposal to the Board on macroprudential 15 Nov policy Regulations and guidelines on the reporting of interest rate and liquidi- 1 Dec ty risk; revisions to Regulations and guidelines 1/2014: Risk reporting by credit institutions

100 Bank of Finland Annual Report • 2016 Appendices Opinion Subject Date

To the Ministry of Finance Memorandum of the working group on the reform of the Anti-Money 22 Jan Laundering Act Memorandum of the working group on key information for packaged 2 Feb retail investment products Draft Government Bill for Acts amending the Securities Markets Act 7 Mar and certain related Acts Draft Government Bill for Acts amending the Act on Credit Institutions 19 Apr and certain related Acts (PAD) Draft Government Bill for Acts amending the Act on the contributions 5 Jul to the Financial Stability Authority and the Act on the Financial Stabi- lity Authority Government Bill for an Act on bondholder representatives 9 Sep Confirmation of the sum total of contributions to the Investors’ Com- 14 Sep pensation Fund in 2016 Reform of the Mutual Funds Act, evaluation memorandum 15 Dec

To the Ministry of Justice Required amendments to the Companies Act, evaluation 9 Aug memorandum

Appendices Bank of Finland Annual Report • 2016 101 Bank of Finland publications in 2016

Periodical publications

Euro & talous Five issues (in Finnish) were published online at www.eurojatalous.fi.

Bank of Finland Bulletin Five issues were published online at www.bofbulletin.fi.

Research Newsletter Two issues of the online research bulletin (in Finnish and English).

Annual report Published separately in Finnish, Swedish and English.

Research publications

Expository studies A:117 Tapio Korhonen Rahoitus- ja valuuttamarkkinoiden tulkintaa (‘Interpretation of the financial and exchange markets’; in Finnish only).

Discussion Papers 33 online studies and reports in the areas of macroeconomics and financial markets were published in English.

Statistical publications International Reserves and Foreign Currency Liquidity, a monthly publication (in English).

Studies published by the Institute for Economies in Transition

Research publications 20 online studies were published in the BOFIT Discussion Papers series (in English).

11 online reports were published in the BOFIT Policy Brief series (in Finnish or English).

Monitoring publications BOFIT Viikkokatsaus, a weekly online publication (in Finnish).

BOFIT Weekly, a weekly online publication (in English).

BOFIT Venäjä-ennuste, a bi-annual online publication on the Russian economy (in Finnish).

BOFIT Forecast for Russia, a bi-annual online publication (in English).

BOFIT Kiina-ennuste, a bi-annual online publication on the Chinese economy (in Finnish).

BOFIT Forecast for China, a bi-annual online publication (in English).

Orders and subscriptions Brochures can be ordered on the Bank of Finland website at www.bof.fi > Media and publications > Publications > Printed brochures forder form.

A comprehensive list of publications is available on the Bank of Finland website at www.bof.fi > Media and publications > Publications.

102 Bank of Finland Annual Report • 2016 Appendices Supplementary tables

Totals/sub-totals may not add up because of rounding. 0 less than half the final digit shown . logically impossible .. data not available – nil _ change in contents of series Table 1.

Monthly balance sheet of the Bank of Finland, EUR m

ASSETS Jan Feb Mar

1 Gold and gold receivables 1,534 1,534 1,534

2 Claims on non-euro area residents denominated in foreign currency 7,180 7,511 7,446 2.1 Receivables from the IMF 1,890 2,070 2,066

2.2 Balances with banks and security investments, external loans and other external assets 5,289 5,441 5,380

3 Claims on euro area residents denominated in foreign currency 681 608 621

4 Claims on non-euro area residents denominated in euro 1,522 1,466 1,824 4.1 Balances with banks, security investments and loans 1,522 1,466 1,824

4.2 Claims arising from the credit facility under ERM II – – –

5 Lending to euro area credit institutions related to monetary policy operations denominated in euro 690 690 690 5.1 Main refinancing operations – – –

5.2 Longer-term refinancing operations 690 690 690

5.3 Fine-tuning reverse operations – – –

5.4 Structural reverse operations – – –

5.5 Marginal lending facility – – –

5.6 Credits related to margin calls – – –

6 Other claims on euro area credit institutions denominated in euro 88 104 36

7 Securities of euro area residents denominated in euro 20,360 21,049 21,945 7.1 Securities held for monetary policy purposes 12,859 13,635 14,497

7.2 Other securities 7,501 7,414 7,448

8 General government debt denominated in euro – – –

9 Intra-Eurosystem claims 50,661 69,894 62,801 9.1 Participating interest in ECB 144 144 144

9.2 Claims equivalent to the transfer of foreign reserves 728 728 728

9.3 Claims related to the issuance of ECB debt certificates – – –

9.4 Claims related to TARGET and correspondent accounts (net) 45,846 65,080 58,033

9.5 Other intra-Eurosystem claims (net) 3,942 3,942 3,896

10 Other assets 1,087 1,051 1,045

Total assets 83,803 103,907 97,943

Totals/sub-totals may not add up due to rounding. Source: Bank of Finland.

104 Bank of Finland Annual Report • 2016 Supplementary tables Apr May Jun Jul Aug Sep Oct Nov Dec

1,709 1,709 1,709 1,872 1,872 1,870 1,870 1,870 1,731

7,398 7,563 7,695 7,801 7,779 7,745 7,745 7,716 7,852 2,013 2,013 2,013 2,033 2,027 2,012 2,012 2,012 2,048

5,385 5,550 5,682 5,768 5,752 5,734 5,733 5,704 5,804

563 597 563 534 571 578 583 640 648

1,576 1,405 1,467 1,484 1,357 1,400 1,354 1,467 1,803 1,576 1,405 1,467 1,484 1,357 1,400 1,354 1,467 1,803

– – – – – – – – –

725 725 825 3,460 3,460 4,958 4,958 4,959 6,728 – – 100 – – – – 1 –

725 725 725 3,460 3,460 4,958 4,958 4,958 6,728

– – – – – – – – –

– – – – – – – – –

– – – – – – – – –

– – – – – – – – –

87 72 13 45 471 51 40 0 31

22,895 23,994 25,140 26,585 27,751 29,157 30,650 31,783 32,761 15,643 16,860 18,065 19,540 20,510 22,038 23,414 24,745 25,786

7,252 7,135 7,075 7,045 7,241 7,119 7,236 7,039 6,975

– – – – – – – – –

75,263 67,718 53,616 68,796 63,861 61,849 56,442 57,481 26,609 144 144 144 144 144 144 144 144 144

728 728 728 728 728 728 728 728 728

– – – – – – – – –

70,494 62,949 48,883 63,988 59,053 57,078 51,671 52,693 22,031

3,897 3,897 3,860 3,936 3,936 3,899 3,899 3,915 3,706

1,048 1,051 1,047 1,121 1,117 1,209 1,167 1,165 1,341

111,264 104,835 92,076 111,698 108,240 108,817 104,807 107,082 79,505

Supplementary tables Bank of Finland Annual Report • 2016 105 Table 1. (cont.)

LIABILITIES Jan Feb Mar

1 Banknotes in circulation 17,448 17,489 17,614

2 Liabilities to euro area credit institutions related to monetary policy operations denominated in euro 53,841 73,248 67,458 2.1 Current accounts (covering the minimum reserve system) 43,361 43,425 40,233

2.2 Deposit facility 10,480 29,823 27,225

2.3 Fixed-term deposits – – –

2.4 Fine-tuning reverse operations – – –

2.5 Deposits related to margin calls – – –

3 Other liabilities to euro area credit institutions denominated in euro – – –

4 Liabilities to other euro area residents denominated in euro 31 31 31 4.1 General government – – –

4.2 Other liabilities 31 31 31

5 Liabilities to non-euro area residents denominated in euro 1,187 1,748 1,469

6 Liabilities to euro area residents denominated in foreign currency – – –

7 Liabilities to non-euro area residents denominated in foreign currency 4 83 25 7.1 Deposits, balances and other liabilities 4 83 25

7.2 Liabilities arising from the credit facility under ERM II – – –

8 Counterpart of special drawing rights allocated by the IMF 1,514 1,514 1,514

9 Intra-Eurosystem liabilities – – – 9.1 Liabilities related to promissory notes backing the issuance of ECB debt certificates – – –

9.2 Liabilities related to TARGET and correspondent accounts (net) – – –

9.3 Other intra-Eurosystem liabilities (net) – – –

10 Other liabilities 339 355 395

11 Revaluation accounts 2,762 2,762 2,762

12 Capital and reserves 6,677 6,677 6,677 12.1 Primary capital 841 841 841

12.2 Reserve fund 1,673 1,673 1,673

12.3 Pension provisions 615 615 615

12.4 Other provisions 3,548 3,548 3,548

Total liabilities 83,803 103,907 97,943

Totals/sub-totals may not add up due to rounding. Source: Bank of Finland.

106 Bank of Finland Annual Report • 2016 Supplementary tables Apr May Jun Jul Aug Sep Oct Nov Dec

17,628 17,695 17,837 18,012 17,976 18,001 18,059 18,205 18,492

81,134 74,821 61,630 80,722 76,763 77,693 73,366 75,695 47,665 44,644 38,352 31,960 47,103 50,828 54,095 54,586 54,318 29,065

36,490 36,469 29,670 33,619 25,935 23,598 18,780 21,377 18,600

– – – – – – – – –

– – – – – – – – –

– – – – – – – – –

– – – – 381 50 – – 31

0 0 57 15 15 10 0 10 0 – – 57 – – – – – –

0 0 0 15 15 10 0 10 0

1,189 1,070 1,262 1,283 1,388 1,356 1,655 1,421 1,625

– – – – – – – – –

0 4 0 – 11 20 11 17 – 0 4 0 – 11 20 11 17 –

– – – – – – – – –

1,472 1,472 1,472 1,496 1,496 1,487 1,487 1,487 1,516

– – – – – – – – –

– – – – – – – – –

– – – – – – – – –

– – – – – – – – –

153 183 228 273 314 395 425 441 163

2,710 2,710 2,710 3,018 3,018 2,925 2,925 2,925 2,982

6,977 6,879 6,8796,879 6,879 6,879 6,879 6,879 7,030 841 841 841 841 841 841 841 841 841

1,721 1,721 1,721 1,721 1,721 1,721 1,721 1,721 1,721

615 615 615 615 615 615 615 615 613

3,800 3,702 3,702 3,702 3,702 3,702 3,702 3,702 3,855

111,264 104,835 92,076 111,698 108,240 108,817 104,807 107,082 79,505

Supplementary tables Bank of Finland Annual Report • 2016 107 Table 2.

Key interest rates of the Eurosystem

Fixed rate tenders Variable rate tenders Interest rate on main refinancing operations Minimum bid rate

Decision date Effective % Decision date Effective %

22 Dec 1998 1 Jan 1999 3.00 8 Jun 2000 28 Jun 2000 4.25 8 Apr 1999 14 Apr 1999 2.50 31 Aug 2000 6 Sep 2000 4.50 4 Nov 1999 10 Nov 1999 3.00 5 Oct 2000 11 Oct 2000 4.75 3 Feb 2000 9 Feb 2000 3.25 10 May 2001 15 May 2001 4.50 16 Mar 2000 22 Mar 2000 3.50 30 Aug 2001 5 Sep 2001 4.25 27 Apr 2000 4 May 2000 3.75 17 Sep 2001 19 Sep 2001 3.75 8 Jun 2000 15 Jun 2000 4.25 8 Nov 2001 14 Nov 2001 3.25 5 Dec 2002 11 Dec 2002 2.75 8 Oct 2008 15 Oct 2008 3.75 6 Mar 2003 7 Mar 2003 2.50 6 Nov 2008 12 Nov 2008 3.25 5 Jun 2003 6 Jun 2003 2.00 4 Dec 2008 10 Dec 2008 2.50 1 Dec 2005 6 Dec 2005 2.25 15 Jan 2009 21 Jan 2009 2.00 2 Mar 2006 8 Mar 2006 2.50 5 Mar 2009 11 Mar 2009 1.50 8 jun 2006 15 Jun 2006 2.75 2 Apr 2009 8 Apr 2009 1.25 3 Aug 2006 9 Aug 2006 3.00 7 May 2009 13 May 2009 1.00 5 Oct 2006 11 Nov 2006 3.25 7 Apr 2011 13 Apr 2011 1.25 7 Dec 2006 13 Dec 2006 3.50 7 Jul 2011 13 Jul 2011 1.50 8 Mar 2007 14 Mar 2007 3.75 3 Nov 2011 9 Nov 2011 1.25 7 Jun 2007 13 Jun 2007 4.00 8 Dec 2011 14 Dec 2011 1.00 3 Jul 2008 9 Jul 2008 4.25 5 Jul 2012 11 Jul 2012 0.75 2 May 2013 8 May 2013 0.50 7 Nov 2013 13 Nov 2013 0.25 5 Jun 2014 11 Jun 2014 0.15 4 Sep 2014 10 Sep 2014 0.05 10 Mar 2016 16 Mar 2016 0.00

Standing facilities

Interest rate on deposit facility Interest rate on marginal lending facility

Decision date Effective % %

22 Dec 1998 1 Jan 1999 2.00 4.50 22 Dec 1998 4 Jan 1999 2.75 3.25 21 Jan 1999 22 Jan 1999 2.00 4.50 8 Apr 1999 9 Apr 1999 1.50 3.50 4 Nov 1999 5 Nov 1999 2.00 4.00 3 Feb 2000 4 Feb 2000 2.25 4.25 16 Mar 2000 17 Mar 2000 2.50 4.50 27 Apr 2000 28 Apr 2000 2.75 4.75 8 Jun 2000 9 Jun 2000 3.25 5.25 31 Aug 2000 1 Sep 2000 3.50 5.50 5 Oct 2000 6 Oct 2000 3.75 5.75

108 Bank of Finland Annual Report • 2016 Supplementary tables Standing facilities

Interest rate on deposit facility Interest rate on marginal lending facility

Decision date Effective % %

10 May 2001 11 May 2001 3.50 5.50 30 Aug 2001 31 Aug 2001 3.25 5.25 17 Sep 2001 18 Sep 2001 2.75 4.75 8 Nov 2001 9 Nov 2001 2.25 4.25 5 Dec 2002 6 Dec 2002 1.75 3.75 6 Mar 2003 7 Mar 2003 1.50 3.50 5 Jun 2003 6 Jun 2003 1.00 3.00 1 Dec 2005 6 Dec 2005 1.25 3.25 2 Mar 2006 8 Mar 2006 1.50 3.50 8 Jun 2006 15 Jun 2006 1.75 3.75 3 Aug 2006 9 Aug 2006 2.00 4.00 5 Oct 2006 11 Oct 2006 2.25 4.25 7 Dec 2006 13 Dec 2006 2.50 4.50 8 Mar 2007 14 Mar 2007 2.75 4.75 7 Jun 2007 13 Jun 2007 3.00 5.00 3 Jul 2008 9 Jul 2008 3.25 5.25 8 Oct 2008 8 Oct 2008 2.75 4.75 8 Oct 2008 9 Oct 2008 3.25 4.25 6 Nov 2008 12 Nov 2008 2.75 3.75 4 Dec 2008 10 Dec 2008 2.00 3.00 15 Jan 2009 21 Jan 2009 1.00 3.00 5 Mar 2009 11 Mar 2009 0.50 2.50 2 Apr 2009 8 Apr 2009 0.25 2.25 7 May 2009 13 May 2009 0.25 1.75 7 Apr 2011 13 Apr 2011 0.50 2.00 7 Jul 2011 13 Jul 2011 0.75 2.25 3 Nov 2011 9 Nov 2011 0.50 2.00 8 Dec 2011 14 Dec 2011 0.25 1.75 5 Jul 2012 11 Jul 2012 0,00 1.50 2 May 2013 8 May 2013 0.00 1.00 7 Nov 2013 13 Nov 2013 0.00 0.75 5 Jun 2014 11 Jun 2014 –0.10 0.40 4 Sep 2014 10 Sep 2014 –0.20 0.30 3 Dec 2015 9 Dec 2015 –0.30 0.30 10 Mar 2016 16 Mar 2016 –0.40 0.25

* In times of a negative interest rate on the deposit facility, the deposit rate has also been applied to deposits in excess of the minimum reserves, and extensively to other deposits as well. Source: European Central Bank.

Supplementary tables Bank of Finland Annual Report • 2016 109 Table 3.

Reserve base of euro area credit institutions subject to reserve requirements, EUR bn

Reserve base Total Liabilities to which a 1% Liabilities to which a 0% as of: reserve coefficient is applied reserve coefficient is applied

Deposits (overnight, up Debt securities Deposits (over Repos Debt securities to 2 years’ agreed up to 2 years’ 2 years’ agreed over 2 years’ maturity and agreed maturity maturity and agreed maturity notice period) notice period)

1 2 3 4 5 6

2015 Nov 18,630.0 10,925.6 505.6 2,180.5 1,269.6 3,748.7

2016 Jan 18,515.9 10,998.5 477.4 2,163.5 1,237.3 3,639.1 Feb 18,662.1 11,048.5 499.3 2,176.6 1,299.8 3,637.9 Mar ...... Apr 18,728.4 11,140.0 490.2 2,159.3 1,331.5 3,607.5 May 18,842.2 11,219.8 492.9 2,151.9 1,345.7 3,631.8 Jun ...... Jul 18,845.7 11,328.3 491.9 2,110.5 1,346.5 3,568.6 Aug 18,857.6 11,294.1 489.3 2,094.9 1,413.8 3,565.6 Sep ...... Oct 18,918.8 11,351.3 567.2 2,031.4 1,432.8 3,536.3 Nov ......

Source: European Central Bank.

Reserve base of Finnish credit institutions subject to reserve requirements, EUR m

Reserve base Total Liabilities to which a 1% Liabilities to which a 0% as of: reserve coefficient is applied reserve coefficient is applied

Deposits (overnight, up Debt securities Deposits (over Repos Debt securities to 2 years’ agreed up to 2 years’ 2 years’ agreed over 2 years’ maturity and agreed maturity maturity and agreed maturity notice period) notice period)

1 2 3 4 5 6

2015 Nov 387,462 229,986 8,197 16,953 48,736 83,589 2016 Jan 387,621 245,608 8,366 17,575 34,097 81,975 Feb 411,441 267,876 8,854 17,680 34,540 82,492 Mar ...... Apr 410,566 262,158 9,185 18,207 38,764 82,253 May 421,050 270,343 9,163 18,322 40,858 82,364 Jun ...... Jul 404,624 264,078 8,953 18,395 31,072 82,126 Aug 399,685 259,539 9,014 18,255 31,206 81,672 Sep ...... Oct 384,527 244,656 11,454 22,377 27,462 78,578 Nov 386,302 249,051 11,338 22,248 23,654 80,011

Source: Bank of Finland.

110 Bank of Finland Annual Report • 2016 Supplementary tables Table 4.

Reserve maintenance of euro area credit institutions subject to reserve requirements, EUR bn1

Maintenance Required reserves Actual reserves Excess reserves Deficiencies Interest rate on period ending in minimum reserves, %

1 2 3 4 5

2015 Dec 113.0 493.8 380.8 0.0 0.05

2016 Jan 113.3 557.1 443.8 0.0 0.05 Feb ...... Mar 113.8 556.5 442.6 0.0 0.05 Apr 114.3 570.0 455.6 0.0 0.00 May ...... Jun 115.0 623.8 508.7 0.0 0.00 Jul 115.8 657.5 541.6 0.0 0.00 Aug ...... Sep 116.7 748.8 632.1 0.0 0.00 Oct 117.8 777.4 659.6 0.0 0.00 Nov ...... Dec 117.4 823.9 706.5 0.0 0.00

2017 Jan 118.8 919.0 800.3 0.0 0.00

Source: European Central Bank.

Reserve maintenance of Finnish credit institutions subject to reserve requirements, EUR m

Maintenance Required reserves Actual reserves Excess reserves Deficiencies Interest rate on period ending in minimum reserves, %

1 2 3 4 5

2015 Dec 2,518.8 28,702.3 26,183.5 0.0 0.05

2016 Jan 2,245.1 34,455.7 32,210.6 0.0 0.1 Feb ...... Mar 2,355.7 40,234.0 37,878.2 0.0 0.1 Apr 2,513.7 39,922.3 37,408.6 0.0 0.0 May ...... Jun 2,741.2 39,689.8 36,948.6 0.0 0.0 Jul 2,687.4 36,286.5 33,599.1 0.0 0.0 Aug ...... Sep 2,769.0 49,077.3 46,308.3 0.0 0.0 Oct 2,704.2 48,442.7 45,738.5 0.0 0.0 Nov ...... Dec 2,659.4 53,366.9 50,707.5 0.0 0.0

2017 Jan 2,535.0 44,210.3 41,675.2 0.0 0.00 Source: Bank of Finland.

Supplementary tables Bank of Finland Annual Report • 2016 111 Table 5.

Euro area monetary aggregate M3 and corresponding items of Finnish monetary financial institutions1 Euro area monetary aggregate M3 Liabilities of Finnish monetary financial institutions included in euro area M32 Stock4, 12-month 3-month Stock, 12-month 3-month EUR bn change 3,4, mov avg of EUR bn change 3, mov avg of % 12-month % 12-month change 3,4, % change 3, % 1 2 3 4 5 6 2012 9,788.4 3.5 3.6 140.3 0.5 1.1 2013 9,830.4 0.9 1.2 145.2 4.1 3.8 2014 10,322.1 3.8 3.5 147.9 1.3 0.9 2015 10,831.1 4.7 4.9 156.9 5.2 5.7 2016 11,374.7 5.0 4.9 160.1 1.8 2.3

2016 Jan 10,911.7 4.9 5.0 160.4 8.9 7.7 Feb 10,958.9 4.7 5.2 161.5 9.1 7.9 Mar 10,993.1 5.1 5.0 159.3 5.6 7.8 Apr 11,029.0 5.1 5.0 162.7 8.8 6.9 May 11,067.7 5.2 4.9 160.4 6.2 5.7 Jun 11,119.4 4.8 5.1 159.9 2.2 4.3 Jul 11,181.0 4.9 5.1 161.7 4.6 4.3 Aug 11,213.1 5.1 5.1 161.6 6.0 4.8 Sep 11,251.3 5.2 4.9 161.8 3.9 3.5 Oct 11,259.8 5.0 4.8 157.0 0.7 3.1 Nov 11,344.7 5.1 4.8 158.0 4.7 2.4 Dec 11,374.7 4.5 4.9 160.1 1.8 2.3

1 Excl. negotiable instruments held by central governments and non-euro area residents. 2 Excl. notes and coins held by the public. 3 Calculated from monthly differences in stocks adjusted for reclassifications, other revaluations, exchange rate variations and any other change which do not arise from transactions. 4 Seasonally and calendar effect adjusted. Sources: European Central Bank and Bank of Finland.

Table 6.

Key market interest rates

Eonia Euribor rates (actual/360) Yields on Finnish rate government bonds

1-month 2-month 3-month 6-month 9-month 12-month 5-year 10-year 1 2 3 4 5 6 7 8 9 2012 0.23 0.325 0.431 0.571 0.824 0.973 1.108 0.875 1.886 2013 0.09 0.130 0.177 0.221 0.337 0.441 0.536 0.815 1.863 2014 0.10 0.131 0.170 0.209 0.308 0.391 0.475 0.506 1.436 2015 –0.11 –0.072 –0.043 –0.020 0.053 0.103 0.167 0.099 0.725 2016 –0.32 –0.338 –0.298 –0.264 –0.164 –0.098 –0.034 –0.352 0.356

2016 Jan –0.23 –0.222 –0.182 –0.145 –0.060 –0.013 0.043 –0.061 0.777 Feb –0.24 –0.246 –0.219 –0.184 –0.115 –0.063 –0.008 –0.197 0.527 Mar –0.29 –0.308 –0.264 –0.229 –0.134 –0.074 –0.012 –0.231 0.526 Apr –0.34 –0.341 –0.287 –0.249 –0.138 –0.073 –0.010 –0.264 0.459 May –0.34 –0.348 –0.295 –0.257 –0.145 –0.079 –0.013 –0.274 0.450 Jun –0.33 –0.356 –0.307 –0.268 –0.162 –0.096 –0.028 –0.346 0.329 Jul –0.33 –0.369 –0.330 –0.295 –0.188 –0.124 –0.056 –0.482 0.117 Aug –0.34 –0.370 –0.335 –0.298 –0.189 –0.119 –0.048 –0.492 0.060 Sep –0.34 –0.371 –0.337 –0.302 –0.199 –0.127 –0.057 –0.505 0.075 Oct –0.35 –0.371 –0.338 –0.309 –0.207 –0.132 –0.069 –0.480 0.169 Nov –0.35 –0.373 –0.339 –0.313 –0.215 –0.133 –0.074 –0.397 0.412 Dec –0.35 –0.370 –0.337 –0.316 –0.218 –0.137 –0.080 –0.452 0.456

Sources: European Central Bank, Reuters and Bloomberg.

112 Bank of Finland Annual Report • 2016 Supplementary tables Table 7.

Nominal competitiveness indicators for Finland and effective exchange rate of the euro calculated by the ECB Narrow indicator1 Narrow euro area Broad indicator1 Effective exchange rate indicator1 of the euro, narrow group of countries1 January–March 1999 = 100 1 2 3 4

2012 100.3 99.8 103.0 105.2 2013 103.7 101.3 105.2 110.9 2014 105.7 102.2 107.6 110.0 2015 100.4 99.8 105.6 99.1 2016 102.1 100.6 107.8 100.5

2016 Jan 100.9 100.1 108.0 99.2 Feb 102.3 100.7 108.8 100.7 Mar 101.4 100.3 107.7 100.2 Apr 101.5 100.3 107.7 100.8 May 101.7 100.4 108.0 100.8 Jun 101.4 100.3 107.7 100.2 Jul 102.1 100.6 107.6 100.6 Aug 102.4 100.7 107.9 100.9 Sep 102.7 100.8 108.0 101.0 Oct 103.4 101.1 107.8 101.6 Nov 103.3 101.1 107.9 100.5 Dec 102.1 100.6 107.0 99.6 1 An upward movement of the index represents an appreciation of the euro. The narrow indicator comprises 12 countries, 1999, the narrow plus euro area indicator 23 countries, and the broad indicator 37 countries. Sources: European Central Bank and Bank of Finland.

Table 8.

Harmonised Index of Consumer Prices for euro area and Finland, annual change, %

Euro area Finland

1 2

2012 2.5 3.2 2013 1.4 2.2 2014 0.4 1.2 2015 0.0 –0.2 2016 0.2 0.4

2016 Jan 0.3 0.0 Feb –0.2 –0.1 Mar 0.0 0.0 Apr –0.2 0.3 May –0.1 0.3 Jun 0.1 0.3 Jul 0.2 0.5 Aug 0.2 0.5 Sep 0.4 0.6 Oct 0.5 0.6 Nov 0.6 0.7 Dec 1.1 1.1

Sources: Eurostat and Statistics Finland.

Supplementary tables Bank of Finland Annual Report • 2016 113 Table 9.

Key euro exchange rates, currency value of one euro

US dollar Japanese yen

Low Average High Low Average High 1 2 3 4 5 6

2012 1.2089 1.2848 1.3454 94.63 102.49 113.87 2013 1.2768 1.3281 1.3814 113.93 129.66 145.02 2014 1.2141 1.3285 1.3953 134.95 140.31 149.03 2015 1.0552 1.1095 1.2043 126.52 134.31 145.21 2016 1.0364 1.1069 1.1569 111.17 120.20 132.25

2016 Jan 1.0742 1.0860 1.0920 127.19 128.32 132.25 Feb 1.0884 1.1093 1.1347 122.86 127.35 131.99 Mar 1.0856 1.1100 1.1385 122.94 125.39 127.90 Apr 1.1252 1.1339 1.1432 122.32 124.29 128.07 May 1.1139 1.1311 1.1569 122.23 123.21 124.50 Jun 1.0998 1.1229 1.1389 111.80 118.45 122.16 Jul 1.0982 1.1069 1.1157 111.17 115.25 117.88 Aug 1.1078 1.1212 1.1339 112.66 113.49 115.01 Sep 1.1146 1.1212 1.1296 112.49 114.22 115.85 Oct 1.0872 1.1026 1.1236 112.96 114.47 116.00 Nov 1.0548 1.0799 1.1095 114.24 116.93 120.48 Dec 1.0364 1.0543 1.0762 121.20 122.39 123.40

Pound sterling Swedish krona

Low Average High Low Average High 7 8 9 10 11 12

2012 0.77835 0.81087 0.8482 8.2077 8.7041 9.1356 2013 0.81075 0.84926 0.8789 8.2931 8.6515 9.0604 2014 0.77730 0.80612 0.8383 8.7661 9.0985 9.6234 2015 0.69630 0.72584 0.7842 9.1141 9.3535 9.6557 2016 0.73235 0.81948 0.9049 9.1381 9.4689 10.0025

2016 Jan 0.73235 0.75459 0.77182 9.1696 9.2826 9.3527 Feb 0.75330 0.77559 0.78935 9.2835 9.4105 9.5188 Mar 0.76728 0.78020 0.79155 9.2235 9.2848 9.3728 Apr 0.77475 0.79230 0.80808 9.1381 9.2027 9.2928 May 0.75925 0.77779 0.79284 9.1803 9.2948 9.3709 Jun 0.76595 0.79049 0.83400 9.2238 9.3338 9.4610 Jul 0.83275 0.84106 0.85300 9.3900 9.4742 9.5673 Aug 0.83910 0.85521 0.87060 9.4299 9.4913 9.5833 Sep 0.83535 0.85228 0.87090 9.4945 9.5655 9.6218 Oct 0.87318 0.89390 0.90485 9.5930 9.7073 9.8650 Nov 0.84800 0.86894 0.90173 9.7538 9.8508 10.0025 Dec 0.83488 0.84441 0.85618 9.5525 9.7095 9.8030

Source: European Central Bank.

114 Bank of Finland Annual Report • 2016 Supplementary tables Table 10.

Other euro exchange rates, currency value of one euro, average

Czech Danish Hungarian Lithuanian Latvian Polish koruna krone forint litas lats zloty

1 2 3 4 5 6

2012 25.149 7.444 289.249 3.453 0.697 4.185 2013 25.980 7.458 296.873 3.453 0.701 4.197 2014 27.536 7.455 308.706 3.453 .. 4.184 2015 27.279 7.459 309.996 .. .. 4.184 2016 27.034 7.445 311.438 .. .. 4.363

2016 Jan 27.027 7.462 314.679 .. .. 4.407 Feb 27.040 7.463 310.365 .. .. 4.397 Mar 27.051 7.457 311.154 .. .. 4.293 Apr 27.031 7.443 311.462 .. .. 4.311 May 27.026 7.439 314.581 .. .. 4.404 Jun 27.061 7.437 313.984 .. .. 4.400 Jul 27.042 7.439 314.353 .. .. 4.396 Aug 27.025 7.441 310.205 .. .. 4.300 Sep 27.022 7.447 308.678 .. .. 4.321 Oct 27.022 7.440 307.000 .. .. 4.308 Nov 27.033 7.441 308.816 .. .. 4.391 Dec 27.031 7.436 312.235 .. .. 4.436

Swiss Norwegian Bulgarian Croatian Romanian Russian franc krone lev kuna leu rouble

7 8 9 10 11 12

2012 1.205 7.475 1.956 7.522 4.459 39.926 2013 1.231 7.807 1.956 7.579 4.419 42.337 2014 1.215 8.354 1.956 7.634 4.444 50.952 2015 1.068 8.950 1.956 7.614 4.445 68.072 2016 1.090 9.291 1.956 7.533 4.490 74.145

2016 Jan 1.094 9.590 1.956 7.658 4.531 83.864 Feb 1.102 9.563 1.956 7.636 4.481 85.616 Mar 1.092 9.430 1.956 7.559 4.467 77.939 Apr 1.093 9.322 1.956 7.495 4.472 75.433 May 1.106 9.304 1.956 7.498 4.499 74.474 Jun 1.089 9.328 1.956 7.520 4.523 73.147 Jul 1.087 9.369 1.956 7.493 4.486 71.242 Aug 1.088 9.303 1.956 7.487 4.459 72.795 Sep 1.092 9.197 1.956 7.500 4.450 72.239 Oct 1.089 9.001 1.956 7.507 4.494 69.009 Nov 1.076 9.081 1.956 7.521 4.510 69.532 Dec 1.075 9.025 1.956 7.540 4.516 65.378

Sources: European Central Bank and Bank of Finland.

Supplementary tables Bank of Finland Annual Report • 2016 115 Table 10. (cont.)

Turkish Australian Canadian Chinese yuan Hong Kong Indonesian South Korean lira dollar dollar renminbi dollar rupiah won

13 14 15 16 17 18 19

2012 2.314 1.241 1.284 8.105 9.966 12045.733 1447.691 2013 2.534 1.378 1.368 8.165 10.302 13856.597 1453.903 2014 2.906 1.472 1.466 8.186 10.302 15748.918 1398.142 2015 3.025 1.478 1.419 6.973 8.601 14870.389 1256.544 2016 3.343 1.488 1.466 7.352 8.592 14720.830 1284.181

2016 Jan 3.271 1.551 1.545 7.139 8.451 15069.758 1307.558 Feb 3.264 1.556 1.532 7.266 8.633 14985.332 1349.770 Mar 3.207 1.482 1.470 7.222 8.615 14629.577 1314.887 Apr 3.214 1.480 1.456 7.346 8.795 14932.216 1300.579 May 3.323 1.546 1.463 7.386 8.781 15188.824 1329.461 Jun 3.274 1.517 1.448 7.402 8.716 14969.034 1310.595 Jul 3.279 1.469 1.443 7.391 8.586 14520.912 1264.046 Aug 3.321 1.469 1.456 7.454 8.696 14757.314 1245.548 Sep 3.328 1.477 1.468 7.482 8.696 14697.518 1244.116 Oct 3.391 1.447 1.459 7.420 8.553 14361.099 1243.022 Nov 3.550 1.433 1.452 7.388 8.376 14398.176 1256.710 Dec 3.692 1.436 1.407 7.298 8.180 14135.710 1248.476

Malaysian New Philippine Singapore Thai South IMF ringgit Zealand peso dollar baht African SDRs dollar rand 20 21 22 23 24 25 26

2012 3.967 1.587 54.246 1.605 39.928 10.551 0.839 2013 4.186 1.621 56.427 1.662 40.830 12.833 0.874 2014 4.345 1.600 58.979 1.682 43.147 14.404 0.874 2015 4.337 1.593 50.522 1.525 38.028 14.172 0.793 2016 4.583 1.589 52.556 1.528 39.043 16.266 0.796

2016 Jan 4.716 1.665 51.654 1.556 39.249 17.759 0.786 Feb 4.641 1.673 52.816 1.560 39.507 17.499 0.796 Mar 4.517 1.648 51.722 1.525 39.089 17.122 0.796 Apr 4.423 1.646 52.598 1.531 39.780 16.570 0.805 May 4.575 1.663 52.951 1.549 40.064 17.336 0.802 Jun 4.573 1.596 52.176 1.521 39.622 16.960 0.798 Jul 4.447 1.551 52.102 1.495 38.794 15.945 0.796 Aug 4.514 1.549 52.254 1.511 38.916 15.420 0.801 Sep 4.611 1.533 53.359 1.524 38.935 15.731 0.802 Oct 4.604 1.541 53.304 1.526 38.666 15.359 0.798 Nov 4.684 1.510 53.160 1.523 38.155 15.035 0.791 Dec 4.701 1.498 52.493 1.514 37.730 14.614 0.783

Sources: European Central Bank and Bank of Finland.

116 Bank of Finland Annual Report • 2016 Supplementary tables Table 11.

Irrevocable euro conversion rates as from 1 Jan 1999

Country Currency Units of Euro since Country Currency Units of Euro since currency currency per euro per euro

Austria schilling 13.7603 1 Jan 1999 Portugal escudo 200.482 1 Jan 1999 Belgium franc 40.3399 1 Jan 1999 Creece drachma 340.750 1 Jan 2001 Germany mark 1.95583 1 Jan 1999 Slovenia tolar 239.640 1 Jan 2007 Spain peseta 166.386 1 Jan 1999 Cyprus pound 0.585274 1 Jan 2008 Finland markka 5.94573 1 Jan 1999 Malta lira 0.429300 1 Jan 2008 France franc 6.55957 1 Jan 1999 Slovakia koruna 30.1260 1 Jan 2009 Ireland pound 0.787564 1 Jan 1999 Estonia kroon 15.6466 1 Jan 2011 Italy lira 1936.27 1 Jan 1999 Latvia lats 0.702804 1 Jan 2014 Luxembourg franc 40.3399 1 Jan 1999 Lithuania litas 3.4528 1 Jan 2015 Netherlands guilder 2.20371 1 Jan 1999

Source: European Union.

Table 12.

Exchange rate mechanism ERM II

Currency Central rate Fluctuation band, Upper rate* Lower rate* Valid from EUR 1 = % Danish krone 7.46038 ± 2.25 7.62824 7.29252 4 Jan 1999

* Intervention at the margin is, in principle, automatic and unlimited. Source: European Central Bank.

Table 13.

Banknote denominations sorted at the Bank of Finland, number in millions

Euro banknotes 2011 2012 2013 2014 2015 2016

500 euro 1.8 1.8 1.4 1.2 1.0 1.0 200 euro 1.1 1.0 0.8 0.7 0.7 0.5 100 euro 6.9 6.9 5.6 5.7 5.4 5.0 50 euro 86.9 79.4 60.3 65.4 66.1 65.9 20 euro 168.2 149.0 114.6 112.1 105.3 96.0 10 euro 39.6 37.9 32.3 30.4 27.4 28.8 5 euro 47.1 46.3 37.5 33.9 31.2 33.3

Total 351.6 322.3 252.5 249.4 237.1 230.5

Source: Bank of Finland.

Supplementary tables Bank of Finland Annual Report • 2016 117 Organisation of the Bank of Finland

1 February 2017

PARLIAMENTARY SUPERVISORY COUNCIL Matti Vanhanen, Chairman, Pentti Oinonen, Vice Chairman, Olavi Ala-Nissilä, Kalle Jokinen, Seppo Kääriäinen, Jutta Urpilainen, Pia Viitanen, Ville Vähämäki, Ben Zyskowicz

Anton Mäkelä, Secretary to the Parliamentary Supervisory Council

BOARD Erkki Liikanen Seppo Honkapohja Marja Nykänen Olli Rehn Governor Deputy Governor Member of the Board Member of the Board

Mika Pösö, Secretary to the Board

DEPARTMENTS Monetary Policy Financial Stability Banking Operations Cash Department and Research and Statistics Harri Lahdenperä Päivi Heikkinen Tuomas Välimäki Katja Taipalus

Forecasting Macroprudential Investments Currency Juha Kilponen Analysis Division Jarno Ilves Miika Syrjänen Paavo Miettinen International and Market Operations Property Management Monetary Economy Macroprudential Elisa Newby Paavo Perttu Hanna Freystätter (acting) Policy Division Jouni Timonen Payment and Settlement Security Institute for Economies Division Erkko Badermann in Transition Oversight of Market Jussi Terho (BOFIT) Infrastructure Iikka Korhonen Heli Snellman

Research Financial Statistics Jouko Vilmunen Elisabeth Flittner

Statistical Analysis and Information Services Harri Kuussaari

General Secretariat Administration Mika Pösö Veli-Matti Lumiala

Communications Information Management Administrative Services Information Technology Jenni Hellström Mia Ristimäki Hannu Vesalainen Petteri Vuolasto

European and Strategy and Organisation Language Services • IT Infrastucture International Affairs Taina Seitovirta Kari Sipilä Mika Pösö Senior Secretarial Staff Personnel and • IT Service Management Legal Affairs Financial Control Sami Kirjonen Maritta Nieminen Antti Vuorinen • IT Systems Development Risk Control and Kirsti Ikonen Financial Accounting Antti Nurminen

Internal Audit Pertti Ukkonen

The Financial Supervisory Authority, headed by Anneli Tuominen, operates in association with the Bank of Finland.

 Suomen Pankin vuosikertomus • 2012 138 BANK OF FINLAND ANNUAL REPORT 2016