Finland’s Financial Watchdog Warns of Rising Risks Amid Geopolitical Tensions & Market Volatility

Key Takeaways

• Geopolitical Risks Loom Large: Rising tensions between global powers and protectionist policies—particularly from the US—are creating volatility and elevating global financial risks.
• Housing Market Still Struggling: While some stabilization is underway, real estate and construction sectors remain under pressure, with mounting credit risks for banks and investors.
• Banks Are Strong—For Now: Finland’s banking sector is resilient but exposed to real estate cycles and high household debt; regulators urge greater macroprudential flexibility.
• Climate, Cyber, and Geopolitics Intertwined: Erosion of international cooperation, growing cyber threats, and the risk of climate inaction could converge to threaten long-term stability.
• Europe Needs Capital Market Reform: The new Savings and Investment Union strategy is key to strengthening the EU’s financial resilience—but national-level action is also essential.

Deep Dive

Amid signs of a fragile recovery, Finland’s financial watchdog is warning that stability could be at risk if aggressive global power politics, mounting geopolitical tensions, and a slower-than-expected economic rebound persist. While the financial system remains stable for now, the Financial Supervisory Authority (FIN-FSA) and the Bank of Finland urge increased resilience measures and macro-prudential reforms to brace for what may come.

At the heart of the warning is an unsettling global backdrop: tightening US trade policy, escalating geopolitical uncertainty, and a broader erosion of the international rules-based order. These, the authorities say, could rattle financial markets and derail Finland’s tentative economic recovery, particularly in the housing and real estate sectors, where stress remains acute.

Finland’s economy began to show modest signs of growth in 2024, but vulnerabilities remain pronounced. In spring 2025, labor market conditions weakened, housing prices continued their slide, and construction activity remained sluggish. Although lower interest rates have started to ease debt burdens and support a rebound in borrowing, the outlook remains clouded by heightened global uncertainty.

Key to the risk landscape is the shifting posture of the world’s superpowers. The United States, under the administration of President Trump, has reintroduced tariffs and taken a more unpredictable stance on foreign policy, rattling financial markets and amplifying investor unease. The Bank of Finland noted a spike in volatility indices (VIX and VSTOXX) this spring, highlighting market fears of a recession and potential liquidity shocks.

The housing market, for instance, has not yet shaken off its downturn. While sales of existing homes have picked up slightly, the market for new builds remains deeply depressed. Professional real estate investors have also suffered, with open-end real estate funds seeing sustained redemptions since 2023. Some funds have responded by temporarily suspending withdrawals, raising questions about investor protection and the risk of forced sales.

Banks are increasingly exposed to credit risk from loans tied to the real estate and construction sectors. Non-performing loans are rising in industries such as construction and agriculture, and bankruptcies, while slowing, are still on the rise.

Banking Sector Holding Firm, But Watchful Eyes on Credit Risks

Finland’s banking sector remains well-capitalized and profitable, even amid elevated uncertainty. Still, regulators are sounding the alarm: the concentration of bank lending in housing and real estate, coupled with high household debt levels, poses a structural risk. Should the economy falter, credit losses could mount and threaten banks’ capital buffers.

To safeguard lending capacity, authorities advocate for more flexible use of macro-prudential tools like the countercyclical capital buffer (CCyB). Adopting a “positive neutral” approach (where buffers are built up in stable periods and released during crises) would, they argue, offer a more agile response to sudden downturns.

Finland’s central bank is especially concerned about the erosion of the international rules-based order. If global cooperation on financial regulation and climate change breaks down, the risk of systemic instability rises. The Bank of Finland warns against regulatory races to the bottom, emphasizing that weakening financial oversight to gain short-term competitive advantages could trigger long-term damage.

Climate-related and geopolitical risks are also intertwined with financial stability. With growing hybrid threats, including cyberattacks against banks, the resilience of Finland’s financial infrastructure is being tested. While denial-of-service attacks have not dented public confidence, the threat landscape is evolving rapidly.

Europe’s Turn to Step Up

Finland’s regulators are calling on the European Union to push forward with integration of its financial system. The new Savings and Investment Union (SIU) strategy, introduced by the European Commission in March 2025, aims to diversify Europe’s bank-centric financial model by developing deeper, more liquid capital markets.

Progress, however, will require not just EU-level action but coordinated national efforts. Finland, already ahead of many peers in capital market development, plans to modernize its commercial paper market and enhance equity financing opportunities for growing companies.

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