Finland’s financial institutions face a “high level” of risks stemming from an economic downturn, with the real estate market particularly fraught, the industry’s watchdog warned.

Still, a strong capital position protects lenders against such hazards in the weakening operating environment, the Financial Supervisory Authority said in a statement on Tuesday.

The banking sector’s capital position improved slightly in the first half of the year, with Common Equity Tier 1 capital ratio of 17.4% at the end of June, compared with 17.2% at the end of last year. The Finnish banking sector’s non-performing assets remained among the lowest in Europe, it said.

The Finnish banking sector is very interconnected with the real estate market, as loans backed by residential and commercial real estate account for nearly 60% of banks’ stock of household and corporate loans, the FSA said.

“The financial sector has considerable exposures to the housing and real estate market,” said Tero Kurenmaa, director general. “Moreover, the debt servicing capacity of households and companies has weakened and there are early signs of a rise in credit risks.”

He underscored the need for strong capital positions to sustain resilience for banks, as well as “thorough” risk management and compliance with financial stability requirements.

--With assistance from Leo Laikola.