So the message has to be not one like "we think it’s too risky to extend more credit to this sector” but instead more like “have you thought about the entire range of relevant risks in extending more credit and are your underwriting criteria in line with the riskier environment?" It’s important in publishing a financial stability report to present its findings as a range of possible outcomes which the private sector can then be encouraged to factor into its own risk management practices. Stress tests and scenario analysis provide the intellectual backbone for financial stability reports. Stress testing, in particular, has come a long way in recent years. The HKMA’s requirements on stress testing by banks have been in place for some time. Our Supervisory Policy Manual Module on Stress Testing, issued in early 2003, requires banks to have in place a stress-testing programme and to integrate stress testing into their risk management processes. For our own internal purposes we also conduct stress tests by applying a range of shocks to the supervisory data that is reported to us. These shocks take into account various adverse movements in banks’ liquidity, interest rate and market risk positions. However, the techniques of stress testing are rapidly evolving and are becoming increasingly more sophisticated. The first generation of stress tests simply took a variable and subjected it to a shock. It was basically just a matter of saying "let’s see what happens to capital if NPL’s go to 20 percent."
Mr Heikensten looks at the current economic situation in Sweden Speech by the First Deputy Governor of Sveriges Riksbank, the Swedish central bank, Mr Lars Heikensten, to Forum ’99, the Swedish Federation of Rental Property Owners, in Stockholm on 15/02/99. I should like to begin with a word of thanks for the invitation to talk here today about economic developments, inflation and the interest rate. Before taking a look at the current economic situation and saying something about our deliberations in the Riksbank, however, I feel there may be grounds for adopting a somewhat broader perspective and even for striking a slightly optimistic note. Sweden certainly has economic problems; further measures are needed, not least to improve the conditions for growth. But at times it may also be fitting to recall the things that have turned out well. Swedish economic policy was realigned in the early 1990s with the aim of establishing a regime of low inflation. Previously, Sweden had had a long tradition in this respect but in the 1970s and 80s the accepted truths were discarded, including the idea that low inflation provides a good foundation for growth and employment. Following the collapse of the Bretton Woods system, stabilisation policy no longer offered any hard and fast rules. Sweden’s external debt – both government debt and the total stock – was allowed to grow at a dramatic rate, accompanied by spiralling prices and wages. Today, Sweden is in the sixth successive year of good economic growth.