European stress test shows good results for Swedish banks

”It is pleasing that we have been able to convey the traditional Swedish policy of openness and transparency. The publication of the stress test results, also for individual banks, is very important in order to restore confidence in the European banking system,” says Minister for Finance Anders Borg.

The stress test was applied to 91 banks in total, representing a aggregate market share of the European banking sector of more than 65 percent. The stress test includes a hypothetical scenario based on the assumption of a recession both in 2010 and 2011 as well as a significant increase in interest rates. In addition, banks’ exposures to sovereign risk is tested.

The objective of the stress test is to assess the banks strength and ability to manage economic chocks and to identify possible capital needs. In the interpretation of this outcome, the results of the adverse scenario should not be considered as representative of the current situation. A stress testing exercise does not provide forecasts of expected outcomes since the adverse scenarios are designed as "what-if" scenarios including plausible but extreme assumptions, which are therefore not very likely to materialize. Experience from the United States and Sweden has shown that this type of tests re-establish confidence in the banking system.

The results of the now performed test show that the four Swedish banks pass the test requirements well above margin. The Swedish banks are well capitalised and are resilient to withstand possible negative chocks.

“It is very satisfying to see how well the Swedish banks perform in this stress test. The results confirm the positive outcome of previous Swedish stress tests made by the financial supervisory authority and the central bank,” says Minister for Financial Markets Mats Odell.

The Ministry of Finance is nevertheless committed to secure financial stability, should the economic conditions worsen and private funding not be sufficient. Even though the Swedish banks are well capitalised and the dependence on Government support is low, the support measures should not be withdrawn too early. In view of the concerns regarding public finances in some countries and the contagion risk, the Government has made the assessment that the support measures should remain in place for cautionary purposes. Through the support measures that the Government has introduced since the outburst of the financial crisis, the Government can act forcefully in order to manage different situations that may arise. For this purpose, Sweden has currently in place a guarantee scheme and a recapitalisation scheme. All measures need to comply fully with EU state aid rules.

The guarantee scheme has recently been extended and is currently in place until to 31 December 2010. The total financial limit for the guarantee scheme is 1,500 billion Swedish kronor, and the outstanding guarantees by the end of June 2010 was approximately 200 billion Swedish kronor. The recapitalisation scheme has been extended and runs up until the 17th February 2011. It comprises at most SEK 50 billion, and as of June 2010 5.6 billion Swedish kronor has been utilized.

For information regarding the stress test results of individual banks see Swedish Financial Supervisory Authority website www.fi.se and CEBS website www.c-ebs.org