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June 18, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Switzerland. Directors commended the authorities for progress in enhancing the resilience of the banking sector, including through the tightening of macro-prudential policies. They saw scope for targeting macro-prudential measures to contain risk-taking in the property market and removing tax incentives that encourage leveraged acquisition of real estate. They also encouraged reforming the pension system to ensure its long-term viability.

The staff report reveals that liquidity and capital of domestically focused banks exceed regulatory minima. Capital and liquidity buffers have increased across all categories of banks, including as a result of the countercyclical capital buffer on real estate exposure. A series of macro-prudential and regulatory measures was introduced in 2012–14, which were effective at containing property prices and moderating mortgage credit growth. Reinforcing the macro-prudential framework for real estate is needed. Measures requiring banks to hold additional capital if they choose to assume more risk will help to absorb future losses but may not curtail the buildup of risk when banks have ample capital buffers or if higher risk is priced into interest rates. Greater differentiation of risk-weights will be introduced between income-generating and owner-occupied mortgages, and among different loan-to-value buckets, consistent with the new Basel III guidelines. With changes in mandatory regulation requiring legal amendments, voluntary self-regulation by banks may be more timely and, moreover, any measures must be endorsed and supervised by FINMA. In addition, FINMA exercises close oversight of activities where regulation may not fully reflect prevailing risks.

The staff advises on several measures to limit future risk buildup and increase capacity to respond if risks materialize. Stricter regulatory limits on loan-to-value and debt-to-income ratios should be adopted, with only limited exemptions allowed. Mortgages on investment property should carry a surcharge on the applicable risk-weight in a manner consistent with Basel III requirements as published in December 2017. Intensified monitoring of individual banks that share similar business models, especially in regionally concentrated markets, is advised. To prevent regulatory arbitrage, nonbank mortgage lending should be subject to similar macro-prudential standards as for banks, where it is not already the case. The strengthened supervisory focus on cyber risk in the financial sector is also welcome. Furthermore, stress testing and building defenses against cybersecurity attacks, which could be highly disruptive and impose large costs, should be stepped up. Financial sector oversight should remain vigilant and independent.

The banking sector encompasses about 260 banks, with the two global systemically important banks (G-SIBs) and three other domestic systemic banks accounting for about 58% of system-wide assets. For the G-SIBs, too-big-to-fail regulations are appropriately calibrated to the relatively small size of the economy of the home country. Nonetheless, stress tests indicate that domestically oriented banks have sufficient capital to cope with a sharp increase in interest rates or correction in house prices, although a combined shock could have significant effects on some banks. The market share of G-SIBs in the Swiss mortgage market has decreased, although risks may rise under adverse global scenarios. Switzerland exceeds global minimum standards on regulation of systemic banks, reflecting the large size of the balance sheets of these banks relative to Swiss GDP. While delineating supervisory and regulatory authority is appropriate, preserving independent and robust supervision is critical. The selected issues report examines the response of the banking sector to the negative interest rate policy. 


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Keywords: Europe, Switzerland, Banking, Pensions, Stress Testing, Article IV, G-SIBs, IMF

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