Results of the EU-wide stress tests: Finnish banking sector’s solvency would withstand a strong weakening in the operating environment
On 30 July 2021, at 19.00 Finnish time, the European Banking Authority (EBA) published the results of its EU-wide stress test exercise to assess the resilience of significant banks to possible changes in the operating environment. The stress tests measured the impact of an unlikely but plausible strong weakening in the operating environment on the profits and capital ratios of large European banks. In the stress tests, the banks assessed the impact on their profit and capital position in accordance with common guidelines and methodology, and based on figures at the end of 2020.Of Finnish banks subject to European Central Bank (ECB) supervision, OP Financial Group and Nordea participated in the EBA stress test. The results of the stress test show that, in the adverse scenario, Nordea’s CET1 ratio falls by 3.7 percentage points, to 13.4%, and OP Financial Group’s CET1 ratio falls by 6.2 percentage points, to 12.7%. The results show that in the case of both banks, the capital ratios remained above the capital requirements, despite the strong weakening in the operating environment.
Parallel to the EBA stress tests, the ECB conducted its own stress test for banks it supervises directly but that were not included in the EBA-led test sample. Of Finnish credit institutions, Municipality Finance participated in this test.
The ECB published a narrower set of results for the individual banks than those published by EBA on its stress tests. The results published, however, show that in the case of Municipality Finance, too, the capital ratios remain above the requirements also in the adverse scenario.
Supervisory authorities will apply the stress test results as an input to the supervisory review and evaluation process (SREP). The SREP process is designed to ensure that supervised entities have sufficient own funds to cover material risks.
Capital levels of smaller Finnish banks remained good
The Financial Supervisory Authority (FIN-FSA) conducted a stress test in Finland, covering the seven smaller banks and groups that due to their size are subject to the FIN-FSA’s direct supervision. These banks and groups were Aktia Bank, Oma Savings Bank, POP Bank Group, S-Bank, Mortgage Society of Finland Group, the Savings Banks Group and Bank of Åland.
The stress test exercise was based on the guidelines and two scenarios of EBA's EU-wide stress tests. The results show that the average capital position of the smaller Finnish banks remains good also in the adverse scenario, but the impact varied significantly across banks. All the banks exceeded the capital adequacy requirements also in the adverse scenario.
Finnish small banks’ average Common Equity Tier 1 (CET 1) ratio fell in the adverse scenario by 2.5 percentage points, to 14.0%.