Sweden's financial supervisory authority, Finansinspektionen (FI), use a stress testing method for the assessment of the capital planning buffer, reflecting how a firm is affected by a severe but plausible financial stress. The fundamental parts of the method is to be constant over time, while, however, a re-evaluation of the risk factor calibration is done on a yearly basis. FI recently released this years memorandum and the main changes from 2016 are:
- Altered risk parameters for net interest income stress scenarios. Scenarios under study were: a parallel displacement of the market rate of interest of 100 basis points upwards and 50 basis points downwards respectively as well as an idiosyncratic increase of 50 basis points of the company's own financing cost for market financing.
- Lowered confidence level for credit losses for IRK-companies (companies with permission of having an internal credit risk classification method) from 98% to 97%, in turn lowering the credit losses compared to calibrations carried out in 2016.
- Stress tests regarding unforeseen operational costs are now more in line with EBA's standardised approach, as FI increased the costs from 2.5% to 4.0% of the company's earnings (the standardised approach assesses the costs to be at 5%).
The resulting capital planning buffer is calculated as the sum of an eventual negative result and the highest (during the three years under study) eventual increase in the capital requirement resulting from an increase in risk-weighted assets. The buffer is to be covered entirely with Common Equity Tier 1 (CET1) capital.
Read more about the overall method used and the yearly calibration here.