Sweden: Financial Sector Assessment Program–Technical Note on Stress Testing of the Financial Sector

SWEDEN IMFCountryReportNo.23/182 May2023 FINANCIALSECTORASSESSMENTPROGRAM TECHNICALNOTEONRISKANALYSISANDSTRESSTESTINGOFTHEFINANCIALSECTOR ThisTechnicalNoteonRiskAnalysisandStressTestingfortheSwedenFSAPwaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonMarch31,2023. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.orgPrice:$18.00perprintedcopy InternationalMonetaryFundWashington,D.C. ©2023InternationalMonetaryFund March31,2023 SWEDEN FINANCIALSECTORASSESSMENTPROGRAM TECHNICALNOTE RISKANALYSISANDSTRESSTESTINGOFTHEFINANCIALSECTOR ThisTechnicalNotewaspreparedbyIMFstaff(ElisaLetiziaandEtienneYehoue(MCM),SvetlanaVtyurina(EUR)andMassimoFerrari(short-termconsultant),underthesupervisionofTommasoMancini-Griffoli,inthecontextoftheFinancialSectorAssessmentPrograminSweden.ItcontainstechnicalanalysisanddetailedinformationunderpinningtheFSAP’sfindingsandrecommendations.FurtherinformationontheFSAPcanbefoundathttp://www.imf.org/external/np/fsap/fssa.aspx PreparedBy MonetaryandCapitalMarketsDepartment(MCM) CONTENTS Glossary4EXECUTIVESUMMARY5INTRODUCTION7 A.FinancialSystemStructure7 B.Macro-FinancialConditionsandRisks13 C.ScopeoftheFinancialStabilityAnalysisintheFSAP16 D.Macro-FinancialScenarios18 COMMERCIALREALESTATE20BANKS24 A.SolvencyStressTest24 B.LiquidityStressTests31 C.ConclusionsandRecommendations35 INVESTMENTFUNDS35 A.ObjectiveandScopeoftheLiquidityStressTest35 B.Methodology36 C.Results37 D.ConclusionsandRecommendations40 SYSTEMICRISK,INTERCONNECTEDNESSANDCONTAGIONANALYSIS41 A.Overview41 B.Analysis41 C.ConclusionsandRecommendations45 BOX 1.RiskWeightedAssets15 FIGURES 1.TotalAssetsofFinancialSector7 2.SelectedBankingIndicators11 3.BondMarketIndicatorsandInvestmentFunds12 4.SRAApproach16 2INTERNATIONALMONETARYFUND 5.SelectedCREIndicators17 6.MacroeconomicScenariosforStressTests19 7.SelectedCREFinancialRatios22 8.CREStressTestResults23 9.ResultsofScenario-BasedSolvencyStressandSensitivityTests30 10.BankLiquidityIndicators32 11.ResultsofBankLiquidityStressTest34 12.AssetsHeldbySwedishFixedIncomeandMixedFunds38 13.LiquidityShortfall39 14.InterconnectednessviaSecuritiesHoldings43 15.MarketImpactandAssetLiquidation44 TABLES 1.2022FSAP:KeyRecommendations6 2.FundsSuspendedinMarch202010 3.InvestmentFundsStressTest—SampleandApproach37 4.ResultsoftheLiquidityStressTestfortheHistoricalApproach39 APPENDICES I.StressTestingMatrix46 II.RiskAssessmentMatrix49 III.ProjectionsofProbabilityofDefaultbySegment51 IV.DataandSampleofFundsUsedinStressTests56 INTERNATIONALMONETARYFUND3 Glossary BMABayesianModelAveraging CBCentralBank CBCCounterBalancingCapacity CCBCapitalConservationBuffer CCPsCentralClearingCounterparties CET1CommonEquityTier COREPCommonReportingTemplates CRRCapitalRequirementsRegulation DEDebt-to-Equity DSRDebtServicingRatio EaDExposureatDefault EBITEarningsBeforeInterestandTaxes EDFExpectedDefaultFrequency ESRBEuropeanSystemicRiskBoard FIFinansinspektionen FSAPFinancialSectorAssessmentProgram FVTOCIFairValueThroughOtherComprehensiveIncome FVTPLFairValueThroughProfitandLoss GDPGrossDomesticProduct GFCGlobalFinancialCrisis GFMGlobalMacrofinancialModel HQLAHigh-QualityLiquidAssets ICPFInsuranceandPensionFunds ICRInterestCoverageRatio IRBInternalRiskBased IRRBBInterestRateRiskintheBankingBook LGDLossGivenDefault LMTLiquidityManagementTools MMIMoneyMarketInstruments NAVNetAssetValue NBFINon-BankFinancialInstitutions NFCNon-FinancialCorporations NIINetInvestmentIncome NPLNon-PerformingLoans NSFRNetStableFundingRatio PDProbabilityofDefault PPMPremiumPensionAuthority RAMRiskAssessmentMatrix RCRRedemptionCoverageRatio ROAReturnonAssets ROEReturnonEquity RWARisk-WeightedAssets SEKSwedishKrona SIBSystemicallyImportantBanks QEQuantitativeEasing WEOWorldEconomicOutlook EXECUTIVESUMMARY Sweden’sfinancialsystemhasweatheredtheCOVID-19pandemicwell.Strongmacro-fundamentals,regulatorycapitalbuffersexceedingminimumrequirementsbyawidemargin,ampleliquidityreservesofbanks,andpromptmarketliquiditysupportmeasuresbytheauthoritieshelpedthefinancialsystemexittheCOVID-19crisiswithoutasignificantimpactonprofitability,includingloanportfoliolosses. Tightermonetaryconditionswilltestthefinancialsystem.Highcorporateleverageandhouseholddebtcreatestructuralandcyclicalriskstothefinancialsystem.Residentialandcommercialmortgagesconstitutethelargestpartofbanks’loanportfolio,andmostloanshavevariableinterestrates.Anadversescenariowasdesignedbystafftotesttheimpactofshocksonthesystem,includingariseintermandriskpremiumsduetoade-anchoringofinflationexpectations,continuedshortagesduetosupplychainconstraints,persistentlyhighenergyandfoodprices,lowerrealestateprices,and—importantly—aperiodofnegativegrowth. Corporatesectorandbankingsystemsolvencystresstestsbasedontheadversescenarioin