© 2023 International Monetary Fund IMF Country Report No. 23/61 FINLAND FINANCIAL SECTOR ASSESSMENT PROGRAM TECHNICAL NOTE ON SYSTEMIC RISK ANALYSIS AND STRESS TESTING This Technical Note on Systemic Risk Analysis and Stress Testing for the Finland FSAP was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on January 20, 2023. Copies of this report are available to the public from International Monetary Fund • Publication Services PO Box 92780 • Washington, D.C. 20090 Telephone: (202) 623-7430 • Fax: (202) 623-7201 E-mail: publications@imf.org Web: http://www.imf.org Price: $18.00 per printed copy International Monetary Fund Washington, D.C. February 2023 FINLAND FINANCIAL SYSTEM ASSESMENT PROGRAM TECHNICAL NOTE SYSTEMIC RISK ANALYSIS AND STRESS TESTING Approved By Tobias Adrian Prepared By Monetary and Capital Markets Department This report is based on the work of the Financial Sector Assessment Program (FSAP) mission that visited Finland in September 2022. The FSAP findings were discussed with the authorities during the Article IV consultation mission in consultation mission in September 2 022 (the close of the FSAP) and in November 2022 (the Article IV Consultation). January 20, 2023 FINLAND 2 INTERNATIONAL MONETARY FUND CONTENTS Glossary __________________________________________________________________________________________ 4 EXECUTIVE SUMMARY __________________________________________________________________________ 6 BACKGROUND __________________________________________________________________________________ 8 A. Financial Sector Landscape ____________________________________________________________________ 8 B. Macrofinancial Challenges ____________________________________________________________________ 10 C. Systemic Risks and Vulnerabilities ____________________________________________________________ 11 D. Scenarios _____________________________________________________________________________________ 14 SOLVENCY STRESS TEST _______________________________________________________________________ 16 A. Overview _____________________________________________________________________________________ 16 B. Balance Sheet Projections ____________________________________________________________________ 16 C. Credit Risk ____________________________________________________________________________________ 16 D. Market Risk ___________________________________________________________________________________ 19 E. Net Interest Income __________________________________________________________________________ 21 F. Non-Interest Income and Other Projections __________________________________________________ 22 G. Results ________________________________________________________________________________________ 23 H. Sensitivity Analysis ___________________________________________________________________________ 26 LIQUIDITY STRESS TEST ________________________________________________________________________ 28 A. Overview _____________________________________________________________________________________ 28 B. Liquidity Coverage Analysis __________________________________________________________________ 29 C. Cash-Flow Analysis ___________________________________________________________________________ 30 D. Net Stable Funding Analysis __________________________________________________________________ 31 E. Results and Recommendations _______________________________________________________________ 32 ACCESS TO FUNDING ANALYSIS ______________________________________________________________ 32 A. Overview _____________________________________________________________________________________ 32 B. Model ________________________________________________________________________________________ 33 C. Results and Recommendations _______________________________________________________________ 33 D. Domestic Interbank Contagion and Interconnectedness Analysis ____________________________ 35 E. Cross-Border Contagion and Interconnectedness Analysis ___________________________________ 36 References ______________________________________________________________________________________ 39 FIGURES 1. Banking Sector ________________________________________________________________________________ 10 2. Household and Corporate Indebtedness ______________________________________________________ 12 3. Cross Border Exposures and Sources of Funding ______________________________________________ 13 4. Funding Sources for Finnish Banks ____________________________________________________________ 13 5. Macroeconomic Scenario _____________________________________________________________________ 15 6. Annual NPL Projection ________________________________________________________________________ 17 7. Annual Corporate PD Projection