FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Finland

The supervisory and regulatory framework in Finland consists of:

• Bank of Finland
• Finnish Financial Supervision Authority (FIN-FSA)

FRSGlobal in Finland

Finland is one of the most competitive economies worldwide and has been developing in stable condition since autumn 2010.

As Finland is a part of the European Union and Finnish orientation is Eurocentric, the financial sector Finland is highly impacted by changes in regulatory framework introduced in the EU.

Through investment of its financial assets, the Bank of Finland promotes the implementation of ECB monetary policy and ensures sufficient liquidity in euro and foreign currencies in crisis situations.

Strong demand for Finnish covered bond issues eased the way for their banks to acquire market funding and cover the funding gaps. Also a broad research base provides an added advantage and a solid background to Finnish banking expertise.

Being the only Euro zone country in Northern Europe, Finland has also benefited from reduced uncertainty over interest rates and exchange rates.

Finland’s role as a bridge between the East and the West, coupled with its active participation in the international community has brought respect and standing for the country internationally.

Regulatory Environment — Finland

Statutory

Financial reporting (FINREP)
All credit institutions are required to submit to the Finnish Financial supervisory Authority (FIN-FSA), information on their income statement (A forms), balance sheet (B forms) and notes to the financial statements (T forms) on annual or quarterly basis. Additional quarterly reports on off- balance sheet commitments (P forms) are also required to be reported by all deposit banks authorized by the Finnish authority.

Non-Performing Assets (NPAs) and zero interest assets reporting
The FIN-FSA collects monthly reports on Non-Performing Assets and zero-interest assets (J tables) and State of the banking system (S tables) to monitor the credit risk position of the supervised entity. J-tables include information on the supervised entity's non-performing assets, zero-interest assets and impairment losses, while S tables include the same information sector wise and branch wise.

Prudential

Capital adequacy reporting (COREP)
Finland has adopted the Common reporting (COREP) framework for submission of their capital adequacy reports. The use of XBRL for reporting the COREP taxonomy is optional. In addition to standard COREP reports, additional reports on market risk for foreign currency and gold positions are also required to be submitted on quarterly basis.

Large exposures reporting
Supervisory entities collect quarterly reports on large exposures to monitor and control credit risks pertaining to counterparties. Any transaction exceeding the threshold limit of more than 10 percent of net capital is required to be reported to the FIN-FSA. Depending on the type of exposures faced by the counterparty whether individual or connected, credit institutions must submit reports on solo and consolidated basis using form U01 and U02.

Liquidity risk reporting
To assess the structure of assets and liabilities and monitor the liquidity risk position of credit institutions, the Fin-FSA collects quarterly reports on liquidity. These reports comprise of information on assets and liabilities of the supervised entity categorized by maturity class.

Interest rate risk reporting
The FIN-FSA collects quarterly reports on interest rate sensitivity positions. These reports include information on assets and liabilities position and off balance sheet items categorized by currency and maturity class.

Counterparty credit exposures
The largest counterparties (top fifteen) are required to report their aggregate credit exposures if their balance sheet amount is greater than or equal to 1 billion Euros to the FIN-FSA on quarterly basis.

Statistical

Monetary Financial Institutions statistics
The Bank of Finland collects statistical data on credit institutions for supervisory purposes. These statistical reports cover data on balance sheet and interest rate required by the ECB to calculate reserve requirements of credit institutions. Additional reports on Finland’s outstanding credit statistics, financial accounts statistics, and the Bank for International Settlements (BIS) banking statistics are also collected by the Bank of Finland.

Transactional

Balance of Payment reporting
BoP reporting includes monthly or quarterly reports on foreign assets and liabilities. The frequency of submission of these reports depends on the type of investment and the size of the foreign assets and liabilities.

MiFID reporting
The MiFID Directive was implemented in Finland since 2007 to Finnish securities intermediaries and Finnish branches of foreign securities intermediaries executing transactions in financial instruments. It includes reporting of all securities admitted to public trading on the recognised trading exchange except for derivatives contracts.

Suspicious Transactions Reports (STR)
These reports are required to be submitted to the FIN–FSA on an ad hoc basis in case suspicious transactions are observed that might involve money laundering or terrorist financing activities.

What’s Coming up — Finland

Regulatory changeover

Finland’s banking and insurance industry will soon undergo major regulatory changeover. Since beginning of 2011, the Finnish Financial Supervisory Authority (FIN-FSA) is working toward preparing new set of individual regulations and guidelines.

Reforms incorporating national and EU level changes will progress in stages and will be implemented by 2012 end.

Substantial changes to capital adequacy regulation for the financial sector

Owing to the debt crisis, the FIN-FSA has started an enhanced monitoring of liquidity positions of banks, investment returns and also solvency of insurance companies.

Basel III

The changes to capital requirements concerning market risk and risks related to re-securitisation (CRD III amendments) will become effective on December 31, 2011.

The most significant initiative for Finnish credit institutions is the pending Basel III reform (CRD 4), which includes major changes for credit institutions, due for implementation in 2013–2018.

To foster financial stability the FIN-FSA is in favour of implementing the Basel III amendments which aim to tighten capital and liquidity requirements of banks (Liquidity Coverage Ratio and Net Stable Funding Ratio) as scheduled in the Basel Committee of Banking and Supervision recommendations.

Solvency II

Simultaneously, solvency reforms are being prepared at two levels; EU level for insurance companies and national level for employee pension insurance companies.

From the perspective of ensuring uniform policyholder protection and a level playing field for large and small insurance companies, the FIN-FSA seeks to extend the coverage of Solvency II requirements to all insurance companies and associations in compliance with the pro rata principle.

Liquidity Risk Management

With lessons learnt from the recent liquidity crunch, banks are going beyond simple static financial ratios and gap reports as measures of liquidity risk management.

Recent efforts by the European Banking Authority – EBA (formerly Committee of European Banking Supervisors- CEBS), the Basel Committee on Banking Supervision (BCBS) and the UK FSA, in terms of principles and recommendations have set greater emphasis on liquidity risk management.

Since the BCBS issued its final paper, ‘Principles for Sound Liquidity Risk Management and Supervision’, banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheets.

By modelling their liquidity contingency plans against such scenarios, the measure of a bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of its plan against such crisis.

In December 2010, the BCBS introduced two quantitative metrics: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

LCR aims at strengthening a bank’s short-term liquidity profile by identifying the level of liquidity buffer to be held to cover short-term funding gaps under severe liquidity stress, and under a time horizon of 30 days. NSFR defines the minimum acceptable amount of stable funding in an extended firm-specific stress scenario over a time horizon of 1 year, with the objective to strengthen a bank’s medium- to long-term liquidity profile.

The FIN-FSA in coordination with the Ministry of Finance has been actively participating in the harmonisation efforts of the EC. Once the CRD IV proposals concerning liquidity reforms are finalised, the FIN-FSA seeks to implement the Basel III liquidity norms into its national regulation. This is to prevent liquidity problems spilling over from Finnish banks. This is to mitigate liquidity problems faced by Finnish banks going forward.

The FIN-FSA recently held a seminar for credit institutions explaining the detailed overview of the CRD IV proposals vs. Basel III recommendations and its impact on the Finnish banking industry.

The FIN FSA currently monitors the liquidity position of credit institutions by collecting quarterly reports on assets and liabilities broken down by maturity class as per standard RA4.7 Reporting of liquidity risk.

With our solution and experts keeping eye on global regulatory change, banks need not worry about the changes in reporting requirements.

Solvency II

Solvency II, a fundamental and wide-ranging review of the capital adequacy regime for the European insurance industry, aims to strengthen prudential regulation and improve policyholder protection.

January 1, 2014 is the new expected proposed date for implementation of Solvency II across all member states of the European Union (EU).

The project initiated by the European Commission as an advancement to Solvency I aims to enhance a revised set of EU-wide capital requirements and risk management standards.

The objective of the new system is to introduce more sophisticated solvency requirements for insurers, to guarantee that they have sufficient capital to withstand adverse events, such as floods, storms or big car accidents and offer some protection against systemic economic failures.

Currently, EU solvency requirements cover insurance risks, whereas in future insurers would be required to hold capital also against market risk (e.g. a fall in the value of an insurer's investments), credit risk (e.g. when debt obligations are not met) and operational risk (e.g. malpractice or system failure). This will help to increase their financial soundness with implementation of sound economic risk management practices in insurance industry.

With the demand for a more streamlined approach towards supervision, the Directive would enable insurance groups to be supervised more efficiently, through a College of Supervisors appointed among the supervisory authorities in the home country that would have specific responsibilities to be exercised in close cooperation with the relevant national supervisors.

The group supervisor would ensure that group-wide risks are not overlooked and would enable groups to operate more efficiently, while providing policyholders with a high level of protection. Groups that are sufficiently diversified may also be allowed to lower their capital requirements under certain conditions.

The Directive often referred as Basel II for insurers is based on a three pillar approach which is similar to the banking sector (Basel II) but adapted for insurance.

The three Pillars of this new regime are structured as below:

The new provisions of Solvency II will be adopted under the Lamfalussy process:

In January 2011 the Omnibus II Directive proposed changes aligning the level 1 text with the Lisbon Treaty and amending the text to reflect the EU’s new supervisory structure

Level 1 – The European Commission adopts formal proposal for the directive (regime’s main outline and high level standards) approved by the European Parliament and the European Council.

Level 2 – Includes introduction of delegated acts developed by the European Commission. The European Commission is advised by the European Insurance and Occupational Pensions Authority, EIOPA (formerly Committee of European Insurance and Occupational Pension Supervision) - representing all insurance supervisors throughout the EEA.

Level 3 – The EIOPA adopts guidelines and recommendations, carries out peer review, mediates and settles agreements, takes action in emergency situations, facilitates delegation of tasks and responsibilities, monitors and assesses market developments, undertakes economic analyses and fosters investor protection.

Level 4 – Enforcement of European Union law (EIOPA and European Commission). The Commission ensures all member states have implemented the legislation correctly.

Maximum harmonisation is assumed with the new Solvency II framework Directive. This means European rules will be implemented in all countries of the European Economic Area (i.e. the EU including Iceland, Liechtenstein and Norway). The EIOPA has recommended Bermuda, Switzerland and Japan to be the first countries assessed for equivalence with EU insurance regulations under Solvency II. This will facilitate the preservation of a level playing field in Europe, with equal protection of all policyholders within Europe and equivalent jurisdictions.

The EIOPA also proposes to use XBRL taxonomy, the harmonised Solvency II reporting format to be used for transmission of the Quantitative Reporting Templates (QRT).

The new Solvency II requirements with challenges and opportunities ahead will be more risk-sensitive and more sophisticated than in the past, thus enabling a better coverage of the real risks run by any particular insurer.

Insurance companies in Europe have already started their implementation processes and self assessments before the final directive comes into force. Through this exercise and by using the results of QIS 5 companies aim to analyse the factors driving the capital requirements, judge current arrangements and assess Solvency Capital Requirements (SCR).

When it comes to insurance, the Scandinavian market has its own special characteristics and an impressive degree of diversity. Large Scandinavian players like Norway, Denmark, Finland and Sweden are technically quite advanced and have the know-how to meet the Solvency II requirements without much difficulty.

To improve their competency in preparation of Solvency II the FIN FSA conducted advanced and intensive trainings for their staff and professionals on some specific areas such as internal models.

The FIN-FSA also launched an internal project aimed at safeguarding the supervisor’s readiness for the introduction of revised Solvency II rules and supporting supervised entities in their preparations. The results of the most recent impact assessment (QIS5) indicate that Solvency II will not pose overwhelming problems for the insurance sector, despite increase in their solvency requirements.