Large Swedish banks show resilience in EU stress test

The EBA's stress test tests the banking system's resilience in an adverse but not implausible three-year macroeconomic scenario during 2023-25. The scenario features a recession in connection with a severe worsening of geopolitical developments, higher commodity prices and a resurgence of Covid-19 contagion that results in high inflation and an increase in interest rates.

The stress test covers a sample of 70 banks, accounting for roughly 75 per cent of total banking sector assets in the EU and Norway. The exercise involves close cooperation between the EBA, the European Central Bank (ECB), the European Systemic Risk Board (ESRB) and the national supervisory authorities. The Swedish banking groups that take part in the test are Svenska Handelsbanken, Skandinaviska Enskilda Banken, Swedbank, SBAB Bank och Länsförsäkringar Bank. To estimate the effects of the scenario, banks follow a detailed methodology prescribed by the EBA. FI, as the national supervisory authority for Sweden, quality assures the Swedish banks' assumptions and outcomes to ensure that results are comparable between banks.

It should be noted that the EBA's stress test differs from the stress tests that banks themselves undertake in the framework for their capital planning. Banks use their own bank-specific data and apply their own models to project the results, under the assumption of a static balance sheet. But banks are required to adjust their results to reflect the definitions, constraints, caps and floors defined in the EBA's methodology. This is necessary to ensure a minimum degree of conservatism, consistency and comparability of the projections. A key benefit of the methodology therefore is that the impact on capital ratios of credit losses, reduced earnings and changes in risk-weighted assets is comparable between banks. The results should therefore primarily be viewed as a comparison of how much different banks in the EU could be affected in a severe economic downturn, not as an exact forecast of how banks' credit losses, earnings and risk-weighted assets would develop if the scenario materialised.

The EBA's stress test shows that the five Swedish banks have a satisfactory resilience against such an adverse scenario. In terms of the common equity tier 1 capital ratio (CET1 ratio), the stress test shows a maximum reduction of between 2.0 and 4.5 percentage points for the major Swedish banks (Svenska Handelsbanken, Skandinaviska Enskilda Banken and Swedbank) and smaller reductions for the other banks (SBAB Bank and Länsförsäkringar Bank). All the Swedish banks in the stress test are thus able to withstand the scenario without breaching the capital requirements that FI requires them to meet.

FI will take into account the results of the EBA's stress test in the assessment of the banks' total capital needs (SREP), which is finalised in September 2023 (for Länsförsäkringar Bank in 2024), but will also take into account among other things the results of other stress tests.