Financial Stability in Switzerland: A Health Check SEPTEMBER 23, - PowerPoint PPT Presentation

Financial Stability in Switzerland: A Health Check SEPTEMBER 23, 2019 UNIVERSITY OF ZURICH Paul Mathieu and Atilla Arda Mission Chief and Deputy Mission Chief, respectively Switzerland 2019 FSAP The views expressed are those of the speakers and do not necessarily represent the views of the IMF, its Executive Board, or Management. IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 1

20 Yea 20 ears s Fina Financ ncial ial Sec Secto tor r Ass Asses essme sment nt Pr Prog ogram am mandatory established “systemic 2009 1999 2014 for some after Asia risk” focus economies Crisis Three FSAP Components Financial Safety Net Financial System Financial Stability Vulnerabilities and Policy Framework • liquidity support Resilience • deposit insurance • conventional: banking, • crisis preparedness and • insurance, securities risks assessment management, including • • since 2009: MaPP stress testing early intervention, recovery, • emerging: fintech; climate and resolution change, cyber risk INTE IN TERNATI TIONAL L MO MONET ETARY FU FUND 2

Switzer Switz erland land FSA FSAP P Wor orks kstr trea eams ms Methodology & Workstreams IMF methodology Macrofinancial / Macroprudential IMF methodology Stress Testing (banking + insurance) BCBS Core Principles Banking Supervision IAIS Core Principles Insurance Supervision CPSS/IOSCO Principles for FMIs FMI Supervision IOSCO Principles for Securities Regulation Asset Management FSB Key Attributes & IADI Core Principles Safety Net / Crisis Management IMF/WBG Bali Fintech Agenda Fintech Law, Regulation, Supervision published material on IMF website: https://www.imf.org/external/np/fsap/fsap.aspx?CountryName=Switzerland#Switzerland IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 3

Switzer Switz erland land 20 2019 19 FSA FSAP — main main fi findings ndings 1. financial institutions well capitalized, but macrofinancial vulnerabilities are deepening important reforms since 2014, but several critical recommendations and emerging 2. challenges have yet to be fully addressed capital buffers increased across all banks, and the 2 GSIBs downsized and 3. deleveraged significantly 4. MaPP framework is constrained and no measures since 2014 (until very recently) FINMA has developed into a trusted supervisor, but it relies heavily on external 5. auditors to conduct on-site supervision, needs enhanced governance and more resources, and should address data gaps combination of ex- post funding, low cap on banks’ contributions, and a private deposit 6. insurance agency run by active bankers, weakens crisis management arrangements …for panel discussion IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 4

Macro-fi Mac fina nanc ncial ial risk risks s ar are high e high A persistently rising credit to GDP ratio, high asset prices, and a prolonged external and domestic low-yield environment represent risks for the financial system. IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 5

Histo Historica ricall lly y High High Hou House se Price Prices IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 6

Ho Hous useh ehold olds s High Highly y Ex Expo pose sed d to to R Rea eal l Es Esta tate te IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 7

Banks Ban ks ar are st e stil ill l high highly y exp xpos osed ed to to rea eal l es esta tate te IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 8

Decli Dec lining ning Net Net Inte Interes est t Mar Margin gin on on Loa Loans ns Net Interest Margin on Loans /1 by domestically Focused Commercial Banks Weighted Average /2 (In percent) IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 9

G-SIBs: SIBs: Im Impr proved ed Ca Capital pital Base, Base, lo lower er NPLs NPLs IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 10

Can Canto tona nal l ba bank nks s IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 11

A A Few ew Ban Banks Br ks Breac each h Ca Capital pital Buf Buffer ers s in in Str Stress ess Tests ests The shortfall of 440 basis points in aggregate capital ratios at the low point of stress in 2020 is driven by RWA expansion, stressed earnings, operational risk, credit risk losses, and market risk. Cumulative Impact on CET1, All Banks (In percentage points) Source: IMF staff estimates. INTE IN TERNATI TIONAL L MO MONET ETARY FU FUND 12

Mortg Mor tgage ge risk risk se sens nsitivity itivity te test st Mortgage default risk rises exponentially with shocks to lending rates. IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 13

Rea eal l Est Estate te Str Stres ess s te test sts IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 14

Liquidity: Liqu idity: Who holesa lesale le Mor More Risk e Risky y Tha han n Ret etail ail Ev Even ent LCR, 12 Banks (In percent) LCR Total Currency (In percent) INTE IN TERNATI TIONAL L MO MONET ETARY FU FUND 15

LCR CR in USD in USD Mor More V e Vola olatile tile LCR USD LCR Swiss Total (In percent) Currency (In percent) IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 16

Rob obus ust t Insu Insuran ance ce Str Stres ess s Tes est t Res esults ults IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 17

Macropr Macr opruden udential tial Inaction Inaction Bias Bias  despite increasing risks, no MaPP measures have been taken since 2014 (until very recently)  toolkit constrained with one mandated tool and one self- regulation agreement with banks Vulnerabilities and Recommendations …to be continued on Panel I INTE IN TERNATI TIONAL L MO MONET ETARY FU FUND 18

FINMA FINM A Is Is Truste usted d (and (and Trusting) usting) Supervisor Super visor Since the 2014 FSAP, FINMA has:  clarified expectations for risk management and corporate governance  provided greater clarity on expectations for firms and supervisory audits in risk areas  decided on improvements to strengthen supervisory effectiveness Vulnerabilities and Recommendations …to be continued on Panel I INTE IN TERNATI TIONAL L MO MONET ETARY FU FUND 19

Sophistica Sophisticated ted Insur Insurance ance Regime gime  regulatory framework highly sophisticated  SST contributed to better risk management  room for improvement in oversight of operational risk management and conduct regulation Effective supervision should complement SST  codify more key SST features in legally binding ordinances, and improve regulatory transparency increase assessment frequency of FINMA’s operational  effectiveness  strengthen regulation, and FINMA competencies and staffing on business conduct supervision IN INTE TERNATI TIONAL L MO MONET ETARY FU FUND 20

Asset Mana Asset Management gement Gr Growi wing ng (P (Pains) ains)  industry is growing but facing increasing challenges  constraints on data, IT system, and regulatory perimeters on FINMA’s cross -border activities Recommendations improve FINMA’s analytical capacity by addressing data  gaps and updating IT systems  concentration risk should be better monitored and managed  empower FINMA to impose administrative fines INTE IN TERNATI TIONAL L MO MONET ETARY FU FUND 21

Financial Financial Mar Market I et Infr nfrastr astructu uctures es  Swiss FMIs generally observe international standards  SIX Group operates in competitive environment  SIX embarking on major projects Recommendations  increase dedicated FMI resources at FINMA for supervision, recovery, and resolution, and address data gaps  improve governance of SIX x-clear and SIX SIS, and monitor effectiveness of new governance arrangements for SIC  enhance FMI crisis management INTE IN TERNATI TIONAL L MO MONET ETARY FU FUND 22

Fintech Fintec h Fli lies es Hi High gh (Under the (Under the Rada Radar) r)  globally, CH at the forefront of providing a foundation of legal clarity and certainty  globally, CH fintech has higher linkages with other financial entities (banks, asset managers)  risks in this rapidly growing space may not be well understood due to data gaps, resource constraints, and a liberal approach  potential reputation risk for the government and FINMA Recommendations  prefer tech-agnostic over tech-neutral approach  enhance monitoring of non-regulated entities and supervision of crypto activities of regulated entities  close regulatory gaps causing unacceptable risk, including appropriate regulation of crypto-brokers INTE IN TERNATI TIONAL L MO MONET ETARY FU FUND 23

Deposit Depo sit Insur Insurance ance (San Sans s Ass Assur uran ance ce) Since the 2014 FSAP, the Swiss authorities have:  enhanced the arrangements to address the potential failure of the two G-SIBs, with a new FINMA Recovery and Resolution Division;  progress on recovery and resolution planning and  emergency planning; and intensified cross-border cooperation in crisis  management groups; and  strengthened the legal framework for resolution Vulnerabilities and Recommendations …to be continued on Panel II INTE IN TERNATI TIONAL L MO MONET ETARY FU FUND 24