IMF published its staff report and selected issued report in context of the 2019 Article IV consultation with Switzerland. The IMF Directors welcomed the Financial Sector Assessment Program (FSAP) findings and endorsed its main recommendations. They supported expanding the macro-prudential toolkit to encompass additional mandated instruments. Directors also recommended strengthening the governance, autonomy, and resources of the financial sector supervisor and allowing the supervisor to directly contract and pay for outsourced supervisory audits. They encouraged further reinforcement of the financial safety net and crisis management arrangements, which includes improving recovery and resolvability of banks and establishing an effective public deposit insurance agency.
The staff report highlighted that considerable progress has been made in strengthening the banking sector resilience; however, sustained low interest rates and high real estate exposure are creating risks. Stress tests performed in the context of FSAP find financial institutions to be well-capitalized and liquid and resilient to severe shocks, although some banks would breach their capital buffers under a very adverse scenario. However, very low and flat yield curves are encouraging greater risk-taking by banks (as they pursue higher-yield lending to counter narrowing interest margins), downward pressure on lending rates from competition from non-banks with lower funding costs, and rollover of maturing mortgages at lower rates. Pension funds and insurance companies, which face high statutory payout rates, continue to invest in residential investment properties, including in regions with high vacancy rates. New targeted macro-prudential measures are needed to curtail the further buildup of risk in the banking and real estate sectors.
The complexity and large size of the Swiss financial system calls for continual upgrading of the regulatory and supervisory frameworks and capacities. Considerable progress has been made to strengthen supervision, although important deficiencies remain. To better manage the conflict of interest and objectivity concerns, FINMA should directly contract and pay audit firms for supervisory audits of banks and should conduct more on-site inspections, especially of the largest banks. Protections against cyber risk and closer oversight of fintech activity are warranted. Strengthening the governance and autonomy of FINMA and upholding its authority to set binding prudential requirements are critical to maintaining financial stability. Progress in reinforcing financial sector safety nets and crisis management arrangements has been made, but more work is needed to further improve recovery and resolvability of banks and to create a public and fully funded bank deposit insurance agency, in line with the international norms. Important data gaps, including on fintech, should also be remedied.
Keywords: Europe, Switzerland, Banking, Insurance, FSAP, Article IV, Recovery and Resolution, Governance, Fintech, Pensions, Macro-prudential Policy, FINMA, IMF
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