Member of the Board Tuomas Välimäki Bank of Finland Economic crises have expanded the frontiers of monetary policy implementation Bank of Finland Bulletin press conference 25 August 2020

1. The Board of Bank of Finland
Economic crises have expanded the
frontiers of monetary policy
implementation
Press conference 25 August 2020
Tuomas Välimäki

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The Bank of Finland’s activities in financial markets
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Key messages
• In recent months, monetary policy aiming at price stability has been
implemented through extensive market operations designed to support
economic growth, employment and financial intermediation in the euro area.
• During the coronavirus pandemic, the Bank of Finland has
− made extensive bond purchases within the framework of the monetary policy purchase
programme,
− provided banks record-high levels of monetary policy credit at low interest rates,
− relaxed (and continues to relax) collateral policy related to monetary policy credit,
− relaunched investments in the domestic commercial paper market.
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The Bank of Finland’s activities in financial markets
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Economic uncertainty at a record high in the wake of
the coronavirus pandemic
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-2
-1
0
1
2
3
4
5
6
1997 2001 2005 2009 2013 2017 2021
Uncertainty indicator Historical average
Index (S.D.)
Sources: Bloomberg and calculations by the Bank of Finland.
The index reflects the normalised uncertainty indicator formed based on the VIX index and the global
EPU index. The value of the index indicates how many standard deviations above or below its historical
average the indicator is. Source: Lindblad et al. 2020.
Collapse of Lehman Brothers
COVID-19 pandemic
Escalation of trade war
Terror attack (9/11)
Bursting of the
IT bubble
Escalation of
euro crisis
Brexit vote

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Monetary policy – objective, stance and implementation
Price stability objective:
Annual rate of euro area inflation below, but close to, 2%.
Monetary policy stance:
Financial conditions (normally interest rates) at a level ensuring that the rate of
inflation is consistent with the target over the medium term.
Monetary policy implementation:
Financial market measures designed to steer short-term interest rates and
influence other asset prices.
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Three principles governing pre-crisis monetary policy
implementation
1. Central banks are able to steer short-term market rates.
2. Changes in short-term rates are directly reflected in other financial
market rates and prices.
3. The level of interest rates may be adjusted as required by the monetary
policy objective.
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Conditions for monetary policy implementation fell
apart
1. With the collapse of the interbank market, the central bank was faced with a situation where
neutral liquidity demand was hard to define.
→ more difficult to steer interest rates
2. The level and volatility of risk premia increased notably in response to the sovereign debt
crisis.
→ more difficult to calibrate the monetary policy stance
3. The equilibrium real interest rate has been declining for several years already.
→ extensive monetary policy stimulus would have required an interest rate clearly below zero
→apparent need for non-standard monetary policy measures
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Non-standard measures of monetary policy
1. Negative interest rates
2. Forward guidance
3. Targeted long-term refinancing operations
4. Large-scale securities purchases
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Maintaining price stability and economic growth
with unconventional monetary policy

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Refinancing operations by the Eurosystem
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0
250
500
750
1 000
1 250
1 500
1 750
2008 2010 2012 2014 2016 2018 2020
Lähde: EKP.
mrd. euroa
Long-term refinancing
operationsRefinancing operations
below 12 months
During the
pandemic,
euro area
banks have
been granted
affordable
TLTRO III
refinancing in
the amount of
EUR 1 423
billion.
EUR bn
Source: ECB

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0
5
10
15
20
25
mrd. euroa
Refinancing operations by the Bank of Finland
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During the
pandemic,
the Bank of
Finland has
granted
banks
TLTRO III
refinancing
in the
amount of
EUR 17
billion.
Lähde: Suomen Pankki
EUR bn
Source: ECB

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No credit without collateral
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14. | Julkinen | SP/FIVA-EI RAJOITETTU
0 %
20 %
40 %
60 %
80 %
100 %
Public sector bonds Covered bonds Bank loans Other securities
January February March April May June July
Monetary policy collateral submitted to the Bank of
Finland in 2020 by collateral type
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Source: Bank of Finland.
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0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
2.1.2015 8.1.2016 20.1.2017 23.1.2018 28.1.2019 30.1.2020
Collateral pledged to the Bank of Finland Outstanding monetary policy credit
EUR
billion
2015 2016 2017 2018 2019 2020
Monetary policy collateral submitted to the Bank of
Finland has doubled in 2020 to over EUR 30 billion
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Source: Bank of Finland.

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The Bank of Finland’s national measures related to the
collateral framework
• The Bank of Finland’s temporary framework for additional credit claims
(ACC) effective as of 1 September 2020
• Enables the use of bank loans not fulfilling all the general eligibility criteria as
collateral
• The ACC framework has been approved by the ECB Governing Council
• The minimum credit quality requirement for the loans is a rating of BB+ (normally
BBB-)
• Also loans to Finnish companies with a guarantee granted by Finnvera Plc in
response to the Finnish government’s COVID-19 measures are acceptable
• The Bank of Finland bears all the risks associated with collateral submitted under
the ACC framework
• The minimum size of credit claims for domestic use was lowered on 1
April 2020
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Monetary policy purchases of securities

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0
500
1 000
1 500
2 000
2 500
3 000
3 500
2008 2010 2012 2014 2016 2018 2020
Lähde: EKP.
mrd. euroa
The Eurosystem’s monetary policy purchases
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Quantitative easing
Coronavirus
pandemic
EUR bn
Source: ECB

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The Bank of Finland’s monetary policy purchases of
securities
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PSPP
CBPP3
CSPP
PEPP
0
10
20
30
40
50
60
9.2014 3.2015 9.2015 3.2016 9.2016 3.2017 9.2017 3.2018 9.2018 3.2019 9.2019 3.2020
Balance sheet value
(EUR bn)
Public sector purchase programme (PSPP) Covered bond purchase programmes (CBPP3)
Corporate sector purchase programme (CSPP) Pandemic emergency purchase programme (PEPP)
Source: Bank of Finland balance sheet.
The Bank of Finland’s monetary policy purchases of securities
25 Aug 2020
bofbulletin.fi

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Bank of Finland investment activities
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Bank of Finland market operations
Monetary policy purchases
Foreign currency reserves
Euro-denominated
financial assets
Monetary policy context;
joint decision-making
Security, liquidity and return;
independent decision-making
EUR 57 billion
EUR 11 billion
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Finnish commercial paper market
• A typical characteristic for the Finnish market (e.g. key role of banks)
• Over 100 companies have a commercial paper programme (not all are active)
• Of these, less than 60 fulfil the Bank of Finland’s risk management criteria
• The outstanding amount of the Finnish commercial paper market totalled
EUR 4.2 billion in February
• The Bank of Finland does not purchase securities issued by the public sector
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Purchases of Finnish commercial paper
• The market for domestic commercial paper weakened rapidly in mid-March, as
traditional investors started to retreat from the market.
• In response, the Board decided that the Bank of Finland would re-enter this
market, from which it had departed in early 2018. The volume of purchases was
initially set at EUR 500 million, but was quickly increased to EUR 1 billion.
• The daily volume of purchases was over EUR 150 million at highest. After a few
weeks the situation had calmed down, and Bank’s purchases slowed down
significantly.
• Although the purchases are part of the Bank’s investment activities, they also
support financial intermediation – ease the pressure on companies’ credit limits.
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Bank of Finland Bulletin 4/2020 articles:
− Implementation of monetary policy purchase programmes at the Bank of
Finland (Ilmanen)
− Record-high refinancing to Finnish banks (Tötterman)
− No credit without collateral (Hohti and Järvinen)
− The Bank of Finland manages its financial assets responsibly (Haavanlammi)
− The Bank of Finland maintains and develops Europe's common financial
market infrastructure (Peltonen)
− Market monitoring has to stay on top of market turbulence (Herrala)
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Key messages
• Crises have revolutionised monetary policy implementation in recent years.
• During the coronavirus pandemic the Bank of Finland has
− purchased over EUR 9 billion worth of bonds as part of the Eurosystem's asset
purchase programmes
− granted TLTRO-III credit at affordable rates, totalling some EUR 17 billion
− decided to adopt its own framework for Additional Credit Claims (ACC) as of 1
September 2020
− purchased Finnish commercial paper at nearly EUR 1 billion
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Thank you!
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