Finland: Financial Sector Assessment Program-Technical Note on Systemic Risk Analysis and Stress Testing

This technical note discusses Systemic Risk Analysis and Stress Testing for the Finland Financial Sector Assessment Program. The assessment is based on stress tests, which simulate the health of Finnish banks under a severe yet plausible adverse scenario. The scenario includes global and regional inflationary pressures, monetary policy tightness, financial market turmoil, and a major slowdown of economic activity. The exercises covered four significant institutions, and three less significant institutions representing more than 93 percent of total banking assets. Four types of stress test exercises have been performed. A top-down solvency stress test, a liquidity stress test, a wholesale funding cost stress test, and a contagion and interconnectedness stress test. The latter has been focused on both domestic banking interconnectedness, as well as the interconnectedness of the Finnish banking sector with cross-border counterparties. The analysis indicates that the Finnish banking system appears resilient to severe macrofinancial shocks but remains vulnerable to liquidity shocks.