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

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

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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

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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.

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20 20 Yea ears s Fina Financ ncial ial Sec Secto tor r Ass Asses essme sment nt Pr Prog

  • gram

am

1999 2009 2014

Three FSAP Components

Financial System Vulnerabilities and Resilience

  • risks assessment
  • stress testing

Financial Stability Policy Framework

  • conventional: banking,

insurance, securities

  • since 2009: MaPP
  • emerging: fintech; climate

change, cyber risk

Financial Safety Net

  • liquidity support
  • deposit insurance
  • crisis preparedness and

management, including early intervention, recovery, and resolution

established after Asia Crisis mandatory for some economies “systemic risk” focus

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Switz Switzer erland land FSA FSAP P Wor

  • rks

kstr trea eams ms

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

Methodology & Workstreams

published material on IMF website: https://www.imf.org/external/np/fsap/fsap.aspx?CountryName=Switzerland#Switzerland

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Switz Switzer erland land 20 2019 19 FSA FSAP—main main fi findings ndings

1. financial institutions well capitalized, but macrofinancial vulnerabilities are deepening 2. important reforms since 2014, but several critical recommendations and emerging challenges have yet to be fully addressed 3. capital buffers increased across all banks, and the 2 GSIBs downsized and deleveraged significantly 4. MaPP framework is constrained and no measures since 2014 (until very recently) 5. FINMA has developed into a trusted supervisor, but it relies heavily on external auditors to conduct on-site supervision, needs enhanced governance and more resources, and should address data gaps 6. combination of ex-post funding, low cap on banks’ contributions, and a private deposit insurance agency run by active bankers, weakens crisis management arrangements

…for panel discussion

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Mac Macro-fi 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.

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Histo Historica ricall lly y High High Hou House se Price Prices

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Ho Hous useh ehold

  • lds

s High Highly y Ex Expo pose sed d to to R Rea eal l Es Esta tate te

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Ban Banks ks ar are st e stil ill l high highly y exp xpos

  • sed

ed to to rea eal l es esta tate te

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Dec Decli lining ning Net Net Inte Interes est t Mar Margin gin on

  • n Loa

Loans ns

Net Interest Margin on Loans /1 by domestically Focused Commercial Banks Weighted Average /2 (In percent)

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G-SIBs: SIBs: Im Impr proved ed Ca Capital pital Base, Base, lo lower er NPLs NPLs

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Can Canto tona nal l ba bank nks s

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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.

Source: IMF staff estimates.

Cumulative Impact on CET1, All Banks (In percentage points)

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Mor Mortg tgage ge risk risk se sens nsitivity itivity te test st

Mortgage default risk rises exponentially with shocks to lending rates.

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Rea eal l Est Estate te Str Stres ess s te test sts

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Liqu Liquidity: idity: Who holesa lesale le Mor More Risk e Risky y Tha han n Ret etail ail Ev Even ent

LCR Total Currency (In percent) LCR, 12 Banks (In percent)

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LCR CR in USD in USD Mor More V e Vola

  • latile

tile

LCR USD (In percent) LCR Swiss Total Currency (In percent)

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Rob

  • bus

ust t Insu Insuran ance ce Str Stres ess s Tes est t Res esults ults

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  • 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

Macr Macropr

  • pruden

udential tial Inaction Inaction Bias Bias

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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

FINM FINMA A Is Is Truste usted d (and (and Trusting) usting) Super Supervisor visor

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  • 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
  • rdinances, and improve regulatory transparency
  • increase assessment frequency of FINMA’s operational

effectiveness

  • strengthen regulation, and FINMA competencies and

staffing on business conduct supervision

Sophistica Sophisticated ted Insur Insurance ance Regime gime

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  • industry is growing but facing increasing challenges
  • constraints on data, IT system, and regulatory perimeters
  • n 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

Asset Asset Mana Management gement Gr Growi wing ng (P (Pains) ains)

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  • 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

Financial Financial Mar Market I et Infr nfrastr astructu uctures es

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  • 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

Fintec Fintech h Fli lies es Hi High gh (Under (Under the the Rada Radar) r)

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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

Depo Deposit sit Insur Insurance ance (San Sans s Ass Assur uran ance ce)

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Follo

  • llow Us o

w Us on n https://www.linkedin.com/showcase/imf-market-insights/

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Con Conta tact ct Inf Info an

  • and

d Ref efer eren ence ces

Paul Mathieu: PMathieu@IMF.org / Atilla Arda: AArda@IMF.org Switzerland 2019 FSAP—Financial System Stability Assessment https://www.imf.org/~/media/Files/Publications/CR/2019/1CHEEA2019003.ashx Switzerland 2019 FSAP—Macrofinancial Analysis & Macroprudential Supervision https://www.imf.org/~/media/Files/Publications/CR/2019/1CHEEA2019007.ashx Switzerland 2019 FSAP—Selected Issues on Banking Supervision https://www.imf.org/~/media/Files/Publications/CR/2019/1CHEEA2019004.ashx Switzerland 2019 FSAP—Financial Safety Net and Crisis Management Arrangements https://www.imf.org/~/media/Files/Publications/CR/2019/1CHEEA2019011.ashx

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Macroprudential Policies “…there is need for an expanded, mandated, and more agile and accountable macroprudential framework to address inaction bias and rising risks.”

  • full, mandated toolkit → e.g., LTV, DTI, DSI
  • greater expectation to act → SNB triggers use of tools;

FINMA calibrates the tools Prudential Supervision “…a more robust FINMA-led supervision is needed”

  • strengthen FINMA’s autonomy, governance, and

accountability

  • manage conflict of interest concerns that may affect

supervisory objectivity

  • address banks’ material risk management and control

weaknesses

Panel anel I: I: Pr Pruden udential tial Poli

  • licies

cies

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“The combination of an ex-post funding mechanism, the statutory CHF 6 billion cap on banks’ joint contribution for deposit insurance, and the lack of a formal public backstop could leave doubts that the DIS would always be able to fulfill its mandate, leaving taxpayers to pay what is required beyond the CHF 6 billion cap.”

Recovery & Resolution:

  • prioritize removing the G-SIBs’ resolvability impediments
  • enhance, expand, and expedite RRP

Deposit Insurance:

  • establish public deposit insurer without active bankers
  • allow deposit insurer to fund resolution
  • remove cap on banks’ contribution
  • ensure fully funded ex ante deposit insurance with an

effective target level, backed by government and ex post recovery from industry

Panel anel II II: Financial : Financial Saf Safety ety Net Net