An important tool in the Bank of Finland's macroprudential analysis is a bank forecasting model, which is used to forecast the profitability, capital adequacy and efficiency of the Finnish banking sector over a two-year horizon. Construction of the bank forecast model began at the Bank of Finland in early 1990s, to facilitate analysis of the banking crisis. The bank forecast is produced in cooperation with the Financial Supervisory Authority.
The bank forecasting model is continuously upgraded in order to improve its usability and diversity. Updates of the model pose another challenge, as the specific features of the banking sector, which is in an ongoing process of structural change, need to be taken into account.
As part of stability assessment, calculations have been made in the Bank of Finland on the effects of macroeconomic disturbances on the banking sector.
The effects of such disturbances are estimated using models in which macroeconomic factors and market interest rates are assumed to affect banks and their customers as they have, according to statistical analyses, affected in the near past.
These ‘stress tests’ are also conducted in cooperation with the Financial Supervisory Authority, so as to enable to obtain a picture of the stress-bearing ability of the financial sector as a whole. Stress tests are elaborated in the Bank of Finland in concert with the Financial Supervisory Authority.
More detailed information on bank analysis models and stress tests can be obtained from the publication Finnish Financial Markets 2002, Bank of Finland Studies A:105, p. 306–307.
For the most recent stress testing results, see Bank of Finland Bulletin, Financial Stability special issue 2006, p. 42–43.