Finnish Banks Pass Stress Test Simulating Three-Year Recession

Finland’s banks and insurers can withstand loan losses and weakening profitability brought on by a three-year recession, according to national stress tests conducted by the financial regulator.

The stress test showed the financial industry has enough capital to endure mounting impairments on loans and a drop in net interest income, the Financial Supervisory Authority said in a statement on its website today. Core Tier 1 capital would remain at an average of about 14 percent through a three-year recession.

Banks and insurers “as a whole withstood the impact of the scenario’s highly adverse operating environment,” the regulator said. Still, “there was significant dispersion in stress test results among individual companies.”

Finland has conducted a national stress test to gauge capital adequacy at its banks once a year since at least 2009, prompted by the global credit crunch after the 2008 collapse of Lehman Brothers Holdings Inc. No Finnish bank has failed the national or the pan-European bank stress test since then.

The northernmost euro member’s economy is in a recession, with first-quarter output contracting 0.1 percent. Industrial production slumped an annual 9.7 percent in April, the most since November 2009, as the euro-area recession hurts demand for exports such as machinery and forest-industry products.

The test measured banks’ and insurers’ ability to withstand losses in an imagined scenario in which Finland’s gross domestic product contracted 5 percent this year, 5 percent in 2014 and 3 percent in 2015. The tests also assumed a rise in unemployment to 15 percent and a 13 percent annual house price decline. The scenario for banks also included a calculation for credit risk concentration, where three large counterparties would be insolvent, the FSA said. Liquidity risks were excluded from the test.

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