IMF Reports Examine Stability of Financial System in Switzerland

The FSAP report reveals that Swiss financial institutions are well-capitalized and could withstand the severe shocks under the adverse stress test scenarios, but macro-financial vulnerabilities are deepening. Important reforms have been made since the 2014 FSAP, but several critical recommendations and emerging challenges have yet to be fully addressed. Capital buffers have increased across all categories of banks and while the two global systemically important banks have downsized and deleveraged significantly since the global financial crisis, since 2013 they have been growing again. Macro-prudential measures have not been taken since 2014. To effectively address rising risks and inaction bias, the macro-prudential toolkit should be expanded with supply- and demand-side tools and the macro-prudential policy decision-making process should be made more agile, with greater expectation to act. FINMA’s autonomy, governance, and accountability should also be strengthened, in addition to further enhancing the recovery and resolution planning. The deposit insurance system should be thoroughly reformed to secure a fully-funded public deposit insurance agency with a government backstop and the authority to use deposit insurance funds for resolution measures, subject to safeguards.

The assessment highlights that legislative work is ongoing to support fintech developments, enhance insurance business conduct regulation and policyholder protection, and introduce an insurance resolution regime. The FSAP assessment also shows that regulatory framework for the insurance sector is highly sophisticated, but oversight of operational risk management and conduct regulation should be strengthened. The regulatory framework is robust and the solvency regime is one of the most developed in the world. Some shortcomings exist in conduct regulation where a new law is expected to strengthen the legal framework and policyholder protection. FINMA is exercising its insurance supervision powers diligently, but more frequent audits on operational effectiveness could support accountability and more binding requirements are needed. The assessment highlights that the availability of timely, consistent, and granular data is necessary to avoid risks going undetected. Enhancing supervisory reporting would strengthen stress testing. Furthermore, fintech firms benefiting from sandbox initiatives should be subject to reporting requirements; better data should also inform development of fintech-related policies and legislation. 

Risks in the rapidly growing fintech space may not be well-understood due to data gaps, resource constraints, and the authorities’ liberal approach. Legislative reforms to facilitate digitization should preserve a level playing field and avoid singling out blockchain and distributed ledger technology as the technological winners. The Swiss authorities are at the global forefront of promoting blockchain and distributed ledger technology by providing legal clarity and certainty. A recent Federal Council report proposes legislative changes to embed blockchain technology and distributed ledger technology into existing laws. The authorities describe the initiative’s approach as underpinned by the principle of “technology-neutrality,” with some exceptions. In departing from this principle and creating a new blockchain and distributed ledger technology infrastructure category, the authorities should identify risks, including regarding new types of misconduct, and introduce appropriate legal safeguards to maintain a safe and stable Swiss financial system. Accordingly, legislative amendments for the new blockchain and distributed ledger technology infrastructure category should include clear and transparent eligibility standards and requirements to ensure operational safety and stability.

Related Links

• FSAP Report
• Technical Note on Stress Testing the Banking Sector
• Technical Note on Selected Issues on Banking Supervision
• Technical Note on Macro-financial Analysis and Macro-prudential Policy
• Technical Note on Insurance Regulation and Supervision
• Technical Note on Insurance Stress Testing
• Technical Note on Financial Safety Net and Crisis Management Arrangements
• Technical Note on Supervision and Oversight of FMIs
• Technical Note on Regulation and Supervision of Asset Management Activities

Keywords: Europe, Switzerland, Banking, Insurance, Securities, FMI, FSAP, Technical Notes, Macro-Prudential Policy, Fintech, Financial Stability, FINMA, IMF