Press release 18 June 2013

Financial sector stress test 2013: Capital positions would remain resilient, but profitability would decline markedly

The results of the joint stress test conducted by the Financial Supervisory Authority (FIN-FSA) with its supervised entities indicate that the capital adequacy and solvency of the Finnish financial sector as a whole would withstand the impact of a weak operating environment. However, the implications of the stress scenario would vary significantly within the banking and insurance sector.

'The largest vulnerabilities in the Finnish financial sector are related to adverse developments in the financial markets and interest rates. Banks are able to withstand clearly higher-than-current impairment losses on loans. Nevertheless, if the profitability of an individual bank is already weak at the initial stage, growing impairment losses on loans may weigh heavily on capital adequacy,' says Anneli Tuominen, Director General.

A significant weakening of the operating environment would require adjustment measures

Banks' impairment losses on loans would increase during the assumed very weak three-year period, but they would still remain at tolerable levels relative to their respective capital positions. Overall, the banks would see a marked weakening of financial results, while remaining profitable as a whole in all three years. The banking sector's capital adequacy, albeit declining, would remain at a sound level above the minimum requirements of the upcoming capital regulation.  

Insurance companies' investment income would turn negative in the period of the stress test, which includes an instantaneous shock event. This would lower company-specific solvency levels, especially in the life and pension insurance sectors. The developments outlined in the stress test would make it necessary for many companies to adjust their investment operations significantly in order to safeguard adequate solvency.

'The FIN-FSA annually conducts a stress test of proportional severity on its supervised entities in order to assess their risk resilience and capital adequacy in as diversified and uniform a manner as possible. Taking into account the uncertainty of the operating environment and the Finnish economy's predicted weakness over the next few years, conservation of sufficient loss buffers in all financial-sector enterprises is of utmost importance,' notes Jukka Vesala, Deputy Director General. In view of tightening regulatory requirements, adequate capital positions are also a precondition for continued lending and service provision by the banks and insurance companies respectively.

Uniform test for all supervised entities

The FIN-FSA carried out the stress test this spring in collaboration with the supervised entities. Participants in the test included all deposit banks and almost the entire insurance sector as well as four financial conglomerates. The scenario covered the years 2013–2015 for banks and financial conglomerates and an instantaneous shock stress test for insurance companies. The scenario was prepared in cooperation with the Bank of Finland.

The purpose of the stress test was to assess in particular the development of financial results and capital positions in the context of a highly adverse downside scenario. Potential adjustment measures that financial-sector enterprises might take were not considered in the stress test. Such measures might have included, for example, cost cuts or, in the case of insurance companies, changes in investment portfolios.

For further information, please contact

  • Jukka Vesala, Deputy Director General, tel. +358 10 831 5374

Appendix