Bank analysis models and stress tests

The forecast on the banking sector is used to estimate the prospects for the sector over the next few years, under normal conditions. Stress tests are used to estimate banks’ resilience in a possible economic crisis.
 
The bank forecasting model is an important tool in the Bank of Finland's macroprudential analysis. It is used to forecast the profitability, capital adequacy and efficiency of the Finnish banking sector over a two-year horizon. Construction of the bank forecasting model began at the Bank of Finland in early 1990s, to facilitate analysis of the banking crisis. The bank forecast is produced in cooperation with the Financial Supervisory Authority.
 
As part of stability assessment, calculations are made in the Bank of Finland on the effects of macroeconomic disturbances on the banking sector. These stress tests are also conducted in cooperation with the Financial Supervisory Authority, so as to enable to obtain a picture of the stress-bearing ability of the financial sector as a whole.
 
The effects of such disruptions are estimated using models in which macroeconomic factors and market interest rates are assumed to affect banks and their customers as they have, according to statistical analyses, affected in the near past. These models can also be used to estimate the impact of a possible collapse in asset prices on banks’ capital adequacy.
 
More detailed information on bank analysis models and stress tests can be obtained from the following publications: Finnish Financial Markets 2002, Bank of Finland Studies A:105, (pp. 306–307); and Bank of Finland Bulletin, Financial Stability special issue 2009 (p. 23). 
 
The Financial Supervisory Authority publishes the results of banking sector stress testing in its publication Valvottavien taloudellinen tila ja riskit (Financial position and risks of supervised entities, in Finnish only). The stress-bearing ability of banks operating in Finland has also been tested in internationally-coordinated stress tests. The European Central Bank (ECB), the European Banking Authority (EBA) and the European Commission are responsible for the consistency and development of the Europe-wide stress testing exercises. The European Banking Authority (EBA) publishes the results of all the national banking sectors.